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 correspondent clearing and independent wealth management businesses include 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.
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.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the President of the United States signed and enacted into law H.R. 1, the Tax Cuts and Jobs Act (“the Tax Reform”). Among the significant changes to the U.S. Internal Revenue Code, the Tax Reform lowers the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. We will compute our income tax expense (benefit) for the September 30, 2018 tax year using a U.S. statutory tax rate of 24.5%. The 21% U.S. statutory tax rate will apply to fiscal years ending September 30, 2019 and thereafter. The Tax Reform also imposes a one-time mandatory repatriation transition tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain of the Company’s foreign subsidiaries.
Our accounting for certain elements of the Tax Reform is incomplete. However, as of June 30, 2018, we can determine a reasonable estimate for certain effects of the Tax Reform and have recorded an estimate as a provisional amount. The provisional remeasurement of the deferred tax assets and liabilities resulted in $8.8 million of discrete tax expense, which increased the effective tax rate by 11% during the nine months ended June 30, 2018. The provisional remeasurement amount is expected to change as data becomes available allowing more accurate scheduling of the deferred tax assets and liabilities.
To determine the amount of the transition tax, we must determine, in addition to other factors, the amount of post 1986 E&P of the relevant subsidiaries, as well as the amount of non-US income taxes paid on such earnings. We can make a reasonable estimate of the transition tax and recorded a provisional transition tax obligation of $11.3 million, which increased the effective tax rate by 14% during the nine months ended June 30, 2018. We continue to gather additional information to more precisely compute the amount of the transition tax.
While we can make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the Tax Reform may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by taxing authorities, and actions we may take.
The Tax Reform also establishes new tax laws that will affect the fiscal year ending September 30, 2019, including, but not limited to, (1) elimination of the corporate alternative minimum tax, (2) a new provision designed to tax global intangible low-taxed income (GILTI), (3) limitations on the utilization of net operating losses generated after December 31, 2017 to 80 percent of taxable income per tax year, (4) the creation of the base erosion anti-abuse tax (BEAT), (5) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries, and (6) limitations on the deductibility of certain executive compensation.
Executive Summary
We achieved another strong performance in the third quarter of fiscal 2018, with operating revenues of
$259.8 million
, representing 31% growth over the prior year. Continued market volatility in our key markets resulted in increased customer activity and a widening of spreads, which combined with increases in short term interest rates and average customer balances resulted in growth in operating revenues across all of our operating segments, including record quarterly operating revenues in both our Global Payments and Clearing and Execution Services segments (“CES”).
The growth in operating revenues was led by our CES segment, which increased $23.5 million versus the prior year, while our largest segment, Commercial Hedging added $20.8 million in operating revenues versus the prior year. The Securities segment added $9.9 million while the Global Payments and Physical Commodities segments increased operating revenues by $3.5 million and $2.9 million, respectively.
Overall, segment income increased 33%, or $17.5 million with the Commercial Hedging and CES segments adding $9.0 million and $7.2 million respectively. In addition, Global Payments segment income increased $3.1 million versus the prior year period. Our Physical Commodities increased segment income by $0.8 million versus the prior year. These gains were partially offset by a $2.6 million decline in segment income in our Securities segment versus the prior year.
Commercial Hedging segment income increased
55%
, primarily as a result of strong growth in both exchange-traded and OTC revenues as well as a $3.4 million increase in interest income. Non-variable direct expenses increased $2.7 million, primarily impacted by a $2.5 million increase in bad debt expense related to two customers in our agricultural commodities OTC business.
CES segment income increased
111%
, primarily as a result of the increase in operating revenues, most notably a 77% increase in our Exchange-traded Futures & Options business, driven by a 55% increase in exchange-traded volumes as well as a $4.9 million increase in interest income. In addition, cost savings initiatives in our FX Prime Brokerage and Correspondent Clearing businesses resulted in a $1.9 million decline in non-variable direct expenses.
Global Payments segment income increased
24%
, primarily as a result of the increase in operating revenues, driven by a 18% increase in the average revenue per trade versus the prior year period. In addition, introducing broker commissions declined $0.8 million, which was partially offset by a $0.6 million increase in non-variable direct expenses.
Segment income in our Physical Commodities segment increased
19%
, driven by the increase in operating revenues as well as a $0.3 million decline in non-variable direct expenses. While operating revenues in our Securities segment increased 25%, segment income declined $2.6 million. This decline was the result of a $4.3 million increase in transaction-based clearing expenses and a $7.8 million increase in interest expense due to the effect of an increase in short term interest rates on our institutional fixed income business and an increase in our securities lending activities. In addition, the prior year period includes a $2.5 million realized gain on the sale of exchange shares in Argentina.
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 63% of total expenses in the current period compared to 57% in the prior year period. Non-variable expenses increased 4%, or $2.9 million year-over-year, primarily as a result of a $1.5 million increase in bad debt expense as well as a $1.1 million increase in professional fees.
The third quarter results include $2.6 million in operating revenues, presented in ‘trading gains, net’, related to economic hedges in place against the effect of the devaluation of the Argentina peso on our Argentine operations. The Argentine peso has historically served as our functional currency in the Argentine operations, and as such the revaluation of the net assets of our Argentine subsidiaries is recorded as a component of accumulated other comprehensive loss, net in the condensed consolidated balance sheets. Recently, the Argentinian economy was determined to be highly inflationary and as such, beginning July 1, 2018, the functional currency for our Argentine subsidiaries will change to the U.S. dollar and prospectively the corresponding revaluations of the net assets of these subsidiaries will be recorded in earnings each quarter in the condensed consolidated income statements while the highly inflationary designation continues.
Finally, the third quarter results include a gain of $2.0 million related to a judgment received in final settlement of our claim in the Sentinel Management Group Inc. bankruptcy proceeding. Please see
Note 11 - Commitments and Contingencies
for additional information on the Sentinel litigation.
Net income nearly doubled, to a record $24.0 million in the third quarter, compared to $12.7 million in the prior year.
Selected Summary Financial Information
Results of Operations
Total revenues reported combine gross revenues for the physical commodities business and net revenues for all other businesses. In order to reflect the way that we view the results, the table below reflects the calculation of the subtotal ‘operating revenues’, which is calculated by deducting physical commodities cost of sales from total revenues. Below is a discussion of the results of our operations, as viewed by management, for the three and nine month periods ended June 30, 2018 and 2017.
Financial Information (Unaudited)
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Three Months Ended June 30,
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Nine Months Ended June 30,
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(in millions)
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2018
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%
Change
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2017
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2018
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%
Change
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2017
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Revenues:
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Sales of physical commodities
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$
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6,866.2
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29
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%
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|
$
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5,317.0
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$
|
20,836.4
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26
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%
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$
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16,486.3
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Trading gains, net
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103.4
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29
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%
|
|
79.9
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|
|
296.9
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|
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20
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%
|
|
246.9
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Commission and clearing fees
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96.6
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32
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%
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73.0
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271.6
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28
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%
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|
212.5
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Consulting, management, and account fees
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18.3
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12
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%
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16.3
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53.2
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12
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%
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47.5
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Interest income
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33.7
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72
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%
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19.6
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85.6
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79
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%
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47.7
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Other income
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0.1
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—
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0.1
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0.2
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—
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%
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0.2
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Total revenues
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7,118.3
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29
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%
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5,505.9
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21,543.9
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26
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%
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17,041.1
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Cost of sales of physical commodities
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6,858.5
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29
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%
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5,308.3
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20,811.3
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26
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%
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16,462.2
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Operating revenues
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259.8
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31
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%
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197.6
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732.6
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27
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%
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578.9
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Transaction-based clearing expenses
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49.0
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45
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%
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33.9
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136.6
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35
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%
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|
101.2
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Introducing broker commissions
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34.1
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17
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%
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29.2
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101.4
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18
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%
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86.1
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Interest expense
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22.1
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|
97
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%
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11.2
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55.4
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84
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%
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30.1
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Net operating revenues
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154.6
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25
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%
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123.3
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439.2
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21
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%
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361.5
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Compensation and benefits
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86.9
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15
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%
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75.5
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252.3
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13
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%
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222.7
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Bad debts
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1.6
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1,500
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%
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0.1
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2.9
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|
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(26
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)%
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3.9
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Other expenses
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35.2
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8
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%
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32.7
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|
105.0
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8
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%
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97.2
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Total compensation and other expenses
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123.7
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14
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%
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108.3
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360.2
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11
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%
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|
323.8
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Other gain
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2.0
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nm
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—
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2.0
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nm
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—
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Income before tax
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32.9
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|
119
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%
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15.0
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81.0
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|
115
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%
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37.7
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Income tax expense
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8.9
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|
287
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%
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2.3
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41.2
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435
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%
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7.7
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Net income
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$
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24.0
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89
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%
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$
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12.7
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$
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39.8
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33
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%
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$
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30.0
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Balance Sheet information:
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June 30, 2018
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% Change
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June 30, 2017
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Total assets
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$
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7,284.9
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18
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%
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$
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6,195.9
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Payables to lenders under loans
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$
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360.6
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47
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%
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$
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244.7
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Stockholders’ equity
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$
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487.7
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4
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%
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$
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469.1
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The selected data table below reflects key operating metrics used by management in evaluating our product lines, 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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2018
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% Change
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2017
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2018
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% Change
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2017
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Volumes and Other Data:
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Exchange-traded - futures and options (contracts, 000’s)
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35,632.6
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47
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%
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24,190.3
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98,190.8
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33
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%
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73,763.0
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OTC (contracts, 000’s)
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427.4
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12
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%
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382.8
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1,165.7
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13
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%
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1,035.5
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Global Payments (# of payments, 000’s)
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171.9
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(2
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)%
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175.8
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481.1
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1
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%
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|
476.1
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Gold equivalent ounces traded (000’s)
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72,300.6
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|
98
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%
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|
36,553.6
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|
160,802.8
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|
82
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%
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88,122.2
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Equity Market-Making (gross dollar volume, millions)
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$
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30,344.1
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42
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%
|
|
$
|
21,298.1
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|
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$
|
87,088.6
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29
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%
|
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$
|
67,284.8
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Debt Trading (gross dollar volume, millions)
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$
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29,922.2
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(7
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)%
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$
|
32,176.4
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$
|
91,615.0
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(11
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)%
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$
|
102,651.2
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FX Prime Brokerage volume (U.S. notional, millions)
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$
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93,007.8
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|
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(36
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)%
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$
|
145,679.8
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$
|
330,178.9
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(32
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)%
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$
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487,145.5
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Average assets under management in Argentina (U.S. dollar, millions)
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$
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458.4
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(30
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)%
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$
|
653.4
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$
|
467.3
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(18
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)%
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$
|
570.7
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Average customer equity - futures and options (millions)
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$
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2,244.0
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16
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%
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|
$
|
1,938.7
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|
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$
|
2,146.9
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7
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%
|
|
$
|
2,010.8
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|
Operating Revenues
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Operating revenues increased 31% to $259.8 million in
the third quarter
compared to $197.6 million in the prior year. All operating segments recorded growth in operating revenues, led by our Clearing and Execution Services and Commercial Hedging segments, which increased $23.5 million and $20.8 million, respectively. In addition, the Securities segment added$9.9 million versus the prior year, while Global Payments and Physical Commodities added $3.5 million and $2.9 million, respectively.
Operating revenues in our CES segment increased 36% to a record $88.9 million in
the third quarter
, primarily as a result of 77% growth in Exchange-traded Futures & Options revenues, to $50.8 million, driven by increases in contract volumes, the average rate per contract earned and a $4.9 million increase in interest income. Our Correspondent Clearing business added $1.7 million versus the prior year, while the FX Prime Brokerage added $0.6 million. These gains were modestly offset by $0.6 million and $0.3 million declines in our Independent Wealth Management and Derivative Voice Brokerage businesses, respectively.
Operating revenues in Commercial Hedging increased 36%, compared to the prior year to $77.9 million as a result of a $9.3 million increase in OTC revenues, a $7.8 million increase in exchange-traded revenues and a $3.4 million increase in interest income. OTC revenues increased as a result of a 12% increase in customer OTC volumes as well as a 39% increase in the average rate per contract, primarily driven by increased customer activity in Brazil and overall market volatility. Exchange-traded revenues increased primarily as a result of a 23% increase in exchange-traded contract volume, most notably in the domestic grain markets.
Operating revenues in our Securities segment increased 25% to $49.9 million in
the third quarter
compared to the prior year. The Equity Market-Making business increased 92%, to $24.8 million, as the gross dollar volume traded increased 42% as a result of increased market volatility, the on-boarding of new customers and increased market share. Operating revenues in our Debt Trading business declined 4%, to $22.1 million versus the prior year as higher domestic revenues were more than offset by weaker revenues in our Argentina business driven by local economic conditions. In addition, the prior year period includes a $2.5 million realized gain on the sale of exchange shares in Argentina. These same conditions drove a $0.6 million decline in Asset Management operating revenues to $2.7 million as average assets under management declined 30% driven by the decline in the Argentine Peso. Overall, the Securities segment operating revenues benefited from a $6.6 million increase in interest income, primarily in our domestic institutional fixed income and securities lending activities.
Operating revenues in our Global Payments segment increased 16% in
the third quarter
to a record $26.0 million, as the average revenue per trade increased 18% to $151.25 while the number of global payments declined modestly versus the prior year.
Our Physical Commodity segment operating revenues increased 24% to $14.9 million, as a result of a $1.1 million increase in Precious Metals operating revenues combined with a $1.8 million increase in our Physical Ag & Energy business.
Interest income increased $14.1 million to $33.7 million in
the third quarter
compared to prior year, driven by an increase in short term rates as well as a 16% increase in average customer equity in the Exchange-traded Futures & Options components of our Commercial Hedging and CES segments to $2.2 billion in
the third quarter
compared to the prior year, which resulted in an aggregate $7.0 million increase in interest income in these businesses. In addition, our Securities segment added $6.6 million in interest income as a result of increases in our domestic fixed income and securities lending businesses and our correspondent clearing business added $2.2 million in interest income versus the prior year.
Finally, operating revenues for the third quarter include gains of $2.6 million related to economic hedges in place against the effect of the devaluation of the Argentina Peso on our Argentine operations.
See Segment Information below for additional information on activity in each of the segments.
Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017
Operating revenues increased 27% to $732.6 million in
the current nine months ended
compared to $578.9 million in the prior year. All segments of our business achieved growth in operating revenues versus the prior year, with the largest growth coming in our CES segment which added $55.9 million in operating revenues. In addition, Commercial Hedging segment operating revenues increased $40.4 million, while operating revenues in our Securities segment added $33.1 million versus the prior year. Our Physical Commodities and Global Payment segments, grew $8.0 million and $6.9 million respectively.
Operating revenues for the prior year 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, while
the current nine months ended
include no unrealized gain/losses on this program as all interest rate swaps and U.S. Treasury notes had been liquidated during fiscal 2017. 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.
Operating revenues in our CES segment increased 29% to $249.1 million in
the current nine months ended
, primarily as a result of 61% growth in Exchange-traded Futures & Options revenues, to $136.3 million, driven by increases in contract volumes, the average rate per contract earned and a $7.6 million, or 135% increase in interest income. Our Derivative Voice Brokerage business added $1.6 million versus the prior year, while the Correspondent Clearing and Independent Wealth Management businesses added $1.2 million and $0.9 million in operating revenues, respectively compared to the prior year. In addition the FX Prime Brokerage business, added $0.5 million in operating revenues versus the prior year.
Operating revenues in Commercial Hedging increased 23% in
the current nine months ended
to $217.7 million, as exchange-traded revenues increased $11.7 million and OTC revenues increased $21.0 million. Customer exchange-traded volumes increased 18%, driven by increased activity from customers in the domestic grain and energy and renewable fuels markets as well as an increase in exchange-traded revenues from omnibus relationships introduced by our commercial hedging employees. OTC revenues increased as a result of both a 13% increase in OTC volumes and a 25% increase in the average rate per contract compared to the prior year. These increases were driven by increased activity from Brazil agricultural customers as well as increased activity in food service, dairy and cotton markets.
Operating revenues in our Securities segment increased 29% to $148.4 million in
the current nine months ended
compared to the prior year. The Equity Market-Making business increased 61%, to $70.8 million, as the gross dollar volume traded increased 29% as a result of increased market volatility, the on-boarding of new customers and increased market share. Operating revenues in our Debt Trading business increased 13%, to $68.4 million versus the prior year, with increases in activity in our municipal securities business as well as an increase in interest income in our domestic institutional fixed income business, partially offset by lower operating revenues in Argentina. The prior year period includes a $2.5 million realized gain on the sale of exchange shares in Argentina. Asset Management operating revenues declined 16%, to $7.5 million in
the current nine months ended
, as the average assets under management declined 18%. Overall, the Securities segment operating revenues benefited from a $17.8 million increase in interest income, primarily in our domestic institutional fixed income and securities lending activities.
Our Physical Commodity segment operating revenues increased 24% to $41.0 million in
the current nine months ended
, primarily as a result of a $4.1 million increase in Precious Metals operating revenues as well as a $3.9 million increase in Physical Ag & Energy operating revenues driven by increased customer activity.
Operating revenues in our Global Payments segment increased 10% in
the current nine months ended
to $74.0 million, as a result of a 1% increase in the number of global payments made as well as a 9% increase in the average revenue per trade.
Interest income increased $37.9 million to $85.6 million in
the current nine months ended
compared to prior year as a result of the effect of increases in short term interest rates and average customer equity as well as the $17.8 million increase in interest income in the Securities segment discussed above. Included in interest income, the prior year period includes a $4.8 million unrealized loss on U.S. Treasury notes held as part of our interest rate management strategy. Average customer equity in the Exchange-traded Futures & Options components of our Commercial Hedging and CES segments increased 7% to $2.1 billion
in
the current nine months ended
, which combined with the increases in short-term interest rates resulted in an aggregate $14.0 million increase in interest income in these businesses.
Finally, operating revenues for
the current nine months ended
include gains of $3.1 million related to economic hedges in place against the effect of the devaluation of the Argentina Peso on our Argentine operations.
See Segment Information below for additional information on activity in each of the segments.
Interest and Transactional Expenses
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Transaction-based clearing expenses:
Transaction-based clearing expenses
increase
d
45%
to
$49.0 million
in
the third quarter
compared to
$33.9 million
in
the prior year
, and were
19%
of operating revenues in
the third quarter
compared to
17%
in
the prior year
. The increase in expense is related to higher volumes in our Financial Ag & Energy, Exchange-traded Futures & Options and Equity Market-Making components.
Introducing broker commissions:
Introducing broker commissions
increase
d
17%
to
$34.1 million
in
the third quarter
compared to
$29.2 million
in
the prior year
, and were
13%
of operating revenues in
the third quarter
compared to
15%
in
the prior year
. The percentage of operating revenue is inversely impacted by the growth in interest income. The increase in expense is primarily due to increased business activity and improved performance in our Exchange-traded Futures & Options and Financial Ag & Energy components, partially offset by lower costs in Debt Trading and Global Payments.
Interest expense:
Interest expense
increase
d
97%
to
$22.1 million
in
the third quarter
compared to
$11.2 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 $3.8 million, and the increased activity of our securities lending business, started up during fiscal 2017 in our Equity Market-Making component, which resulted in higher interest expense of $3.5 million. Also, an increase in short-term rates resulted in higher costs in our Exchange-traded Futures & Options component. Additionally, higher short-term rates along with higher average borrowings outstanding on our physical commodity financing facility resulted in increased expense.
Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017
Transaction-based clearing expenses:
Transaction-based clearing expenses
increase
d
35%
to
$136.6 million
in
the current nine months ended
compared to
$101.2 million
in the prior year, and were
19%
of operating revenues in
the current nine months ended
compared to
17%
in the prior year. The increase in expense is primarily related to higher volumes in our Financial Ag & Energy, Exchange-Traded Futures & Options and Equity Market-Making components, partially offset by lower costs in our LME Metals, FX Prime Brokerage and Correspondent Clearing components.
Introducing broker commissions:
Introducing broker commissions
increase
d
18%
to
$101.4 million
in
the current nine months ended
compared to
$86.1 million
in the prior year, and were
14%
of operating revenues in
the current nine months ended
compared to
15%
in the prior year. The increase in expense is primarily due to increased business activity and improved performance in our Exchange-traded Futures & Options and Financial Ag & Energy components, partially offset by lower costs in Global Payments and Equity Market-Making.
Interest expense:
Interest expense
increase
d
84%
to
$55.4 million
in
the current nine months ended
compared to
$30.1 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 $11.5 million, and the increased activity of our securities lending business, started up during fiscal 2017 in our Equity Market-Making component, which resulted in higher interest expense of $8.4 million. Also, an increase in short-term rates resulted in higher costs in our Exchange-traded Futures & Options and Financial Ag & Energy components. Additionally, higher short-term rates along with higher average borrowings outstanding on 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, including our executive management team.
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Net operating revenues
increase
d
$31.3 million
, or
25%
, to
$154.6 million
in
the third quarter
compared to
$123.3 million
in
the prior year
.
Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017
Net operating revenues
increase
d
$77.7 million
, or
21%
, to
$439.2 million
in
the current nine months ended
compared to
$361.5 million
in the prior year.
Compensation and Other Expenses
The following table shows a summary of expenses, other than interest and transactional expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed compensation and benefits
|
$
|
40.4
|
|
|
(3
|
)%
|
|
$
|
41.5
|
|
|
$
|
122.7
|
|
|
4
|
%
|
|
$
|
118.0
|
|
Variable compensation and benefits
|
46.5
|
|
|
37
|
%
|
|
34.0
|
|
|
129.6
|
|
|
24
|
%
|
|
104.7
|
|
|
86.9
|
|
|
15
|
%
|
|
75.5
|
|
|
252.3
|
|
|
13
|
%
|
|
222.7
|
|
Other non-compensation expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Trading systems and market information
|
8.6
|
|
|
4
|
%
|
|
8.3
|
|
|
25.7
|
|
|
—
|
%
|
|
25.7
|
|
Occupancy and equipment rental
|
4.2
|
|
|
8
|
%
|
|
3.9
|
|
|
12.5
|
|
|
13
|
%
|
|
11.1
|
|
Professional fees
|
4.8
|
|
|
30
|
%
|
|
3.7
|
|
|
13.4
|
|
|
13
|
%
|
|
11.9
|
|
Travel and business development
|
3.7
|
|
|
23
|
%
|
|
3.0
|
|
|
10.2
|
|
|
6
|
%
|
|
9.6
|
|
Non-trading technology and support
|
3.8
|
|
|
19
|
%
|
|
3.2
|
|
|
10.3
|
|
|
16
|
%
|
|
8.9
|
|
Depreciation and amortization
|
2.8
|
|
|
17
|
%
|
|
2.4
|
|
|
8.4
|
|
|
17
|
%
|
|
7.2
|
|
Communications
|
1.3
|
|
|
(13
|
)%
|
|
1.5
|
|
|
4.1
|
|
|
5
|
%
|
|
3.9
|
|
Bad debts
|
1.6
|
|
|
n/m
|
|
|
0.1
|
|
|
2.9
|
|
|
(26
|
)%
|
|
3.9
|
|
Other expense
|
6.0
|
|
|
(10
|
)%
|
|
6.7
|
|
|
20.4
|
|
|
8
|
%
|
|
18.9
|
|
|
36.8
|
|
|
12
|
%
|
|
32.8
|
|
|
107.9
|
|
|
7
|
%
|
|
101.1
|
|
Total compensation and other expenses
|
$
|
123.7
|
|
|
14
|
%
|
|
$
|
108.3
|
|
|
$
|
360.2
|
|
|
11
|
%
|
|
$
|
323.8
|
|
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Compensation and Other Expenses:
Compensation and other expenses
increase
d
$15.4 million
, or
14%
, to
$123.7 million
in
the third quarter
compared to
$108.3 million
in
the prior year
.
Compensation and Benefits:
Total compensation and benefits expense
increase
d
15%
to
$86.9 million
in
the third quarter
compared to
$75.5 million
in
the prior year
. Total compensation and benefits were
33%
of operating revenues in
the third quarter
compared to
38%
in
the prior year
. The variable portion of compensation and benefits
increase
d by
37%
to
$46.5 million
in
the third quarter
compared to
$34.0 million
in
the prior year
. Variable compensation and benefits were
30%
of net operating revenues in
the third quarter
compared to
28%
in the prior year. Administrative, centralized operations and executive incentive compensation was
$7.3 million
in
the third quarter
compared to
$4.8 million
in
the prior year
, primarily due to increased incentive accruals based on higher current year performance.
The fixed portion of compensation and benefits
decrease
d
3%
to
$40.4 million
in
the third quarter
compared to
$41.5 million
in
the prior year
. Non-variable salaries
increase
d
$0.3 million
, or
1%
, primarily across operations and administrative areas. Employee benefits, excluding share-based compensation,
increase
d
$0.4 million
in
the third quarter
, primarily related to higher accruals for executive management related to a cash based-long-term incentive plan. Share-based compensation is a component of the fixed portion, and includes stock option and restricted stock expense. Share-based compensation was
$1.7 million
in
the third quarter
compared to
$2.0 million
in
the prior year
. The number of employees
increase
d
3%
to
1,646
at the end of
the third quarter
compared to
1,599
at the beginning of
the third quarter
. The number of employees at the end of
the prior year
period was
1,609
.
Other Non-Compensation Expenses:
Other non-compensation expenses
increase
d
12%
to
$36.8 million
in
the third quarter
compared to
$32.8 million
in
the prior year
. Professional fees increased 30% related to higher legal fees, and higher consulting fees primarily related to administrative system evaluations. Depreciation and amortization increased primarily due to depreciation of the new trading system for certain over-the-counter commodities business activities placed in service during the fourth quarter of 2017.
Bad debts increased $1.5 million over the prior year. During the third quarter, bad debt expense, net was $1.6 million, primarily related to $2.3 million of OTC customer deficits partially offset by the recovery of a precious metals customer account deficit. During the prior year, bad debt expense was $0.1 million.
Provision for Taxes:
The effective income tax rate was
27%
in
the third quarter
compared to
15%
in the prior year. There were no discrete adjustments related to the Tax Act recorded in the three months ended June 30, 2018. The effective tax rate decreased 0.2% due to excess tax benefits of share-based compensation recognized during the period related to the adoption of ASU 2016-09. The effective income tax rate during the prior year 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 effective tax rate during the third quarter of fiscal year 2018 was higher than the U.S. federal statutory rate primarily due to U.S. state and local taxes and foreign permanent differences.
Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017
Compensation and Other Expenses:
Compensation and other expenses
increase
d
$36.4 million
, or
11%
, to
$360.2 million
in
the current nine months ended
compared to
$323.8 million
in the prior year.
Compensation and Benefits:
Total compensation and benefits expense
increase
d
13%
to
$252.3 million
in
the current nine months ended
compared to
$222.7 million
in the prior year. Total compensation and benefits were
34%
of operating revenues in
the current nine months ended
compared to
38%
in the prior year. The variable portion of compensation and benefits
increase
d
24%
to
$129.6 million
in
the current nine months ended
compared to
$104.7 million
in the prior year. Variable compensation and benefits were
30%
of net operating revenues in
the current nine months ended
compared to
29%
in the prior year. Administrative, centralized operations and executive incentive compensation was
$18.0 million
in
the current nine months ended
compared to
$14.5 million
in the prior year, primarily due to increased incentive accruals based on higher current year performance.
The fixed portion of compensation and benefits
increase
d
4%
to
$122.7 million
in
the current nine months ended
compared to
$118.0 million
in the prior year. Non-variable salaries
increase
d
$2.3 million
, or
3%
, primarily across operations and administrative areas. Contract labor costs
increase
d
$1.0 million
. Employee benefits, excluding share-based compensation,
increase
d
$2.2 million
in
the current nine months ended
, primarily related to higher accruals for executive management related to a cash based-long-term incentive plan. Share-based compensation is a component of the fixed portion, and includes stock option and restricted stock expense. Share-based compensation was
$4.9 million
in
the current nine months ended
compared to
$4.6 million
in the prior year. The number of employees was
1,646
at the end of the second quarter compared to
1,607
at the beginning of the current fiscal year. The number of employees at the end of the prior year period was
1,609
.
Other Non-Compensation Expenses:
Other non-compensation expenses
increase
d
7%
to
$107.9 million
in
the current nine months ended
compared to
$101.1 million
in the prior year. Bad debts decreased $1.0 million over the prior year. During
the current nine months ended
, bad debt expense, net was $2.9 million, primarily related to $2.3 million of OTC customer deficits and additional bad debt expense of $1.0 million related to reimbursement due the Company from a coal supplier following our recorded charge of $47.0 million during the fourth quarter of fiscal 2017. During the prior year, bad debt expense was $3.9 million, primarily related to LME Metals customer deficits in our Commercial Hedging segment.
Provision for Taxes:
The effective income tax rate was
51%
in
the current nine months ended
compared to
20%
in the prior year. The discrete expense of $20.1 million related to the Tax Reform, increased the effective tax rate by 25%. The effective rate for
the current nine months ended
was 26%, excluding the impacts of the Tax Reform. The effective tax rate decreased 0.4% due to excess tax benefits on share-based compensation recognized during the period related to the adoption of ASU 2016-09. Our effective income tax rate during the prior year 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 effective income tax rate in the current nine months is higher than the U.S. federal statutory rate because of the impacts of the Tax Reform.
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)
|
2018
|
|
%
Change
|
|
2017
|
|
2018
|
|
%
Change
|
|
2017
|
Compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed compensation and benefits
|
$
|
15.6
|
|
|
(5
|
)%
|
|
$
|
16.4
|
|
|
$
|
47.8
|
|
|
8
|
%
|
|
$
|
44.4
|
|
Variable compensation and benefits
|
6.6
|
|
|
57
|
%
|
|
4.2
|
|
|
16.3
|
|
|
25
|
%
|
|
13.0
|
|
|
22.2
|
|
|
8
|
%
|
|
20.6
|
|
|
64.1
|
|
|
12
|
%
|
|
57.4
|
|
Other non-compensation expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Trading systems and market information
|
0.8
|
|
|
33
|
%
|
|
0.6
|
|
|
2.1
|
|
|
11
|
%
|
|
1.9
|
|
Occupancy and equipment rental
|
4.2
|
|
|
8
|
%
|
|
3.9
|
|
|
12.4
|
|
|
13
|
%
|
|
11.0
|
|
Professional fees
|
2.9
|
|
|
38
|
%
|
|
2.1
|
|
|
8.0
|
|
|
13
|
%
|
|
7.1
|
|
Travel and business development
|
0.9
|
|
|
29
|
%
|
|
0.7
|
|
|
2.4
|
|
|
—
|
%
|
|
2.4
|
|
Non-trading technology and support
|
3.0
|
|
|
20
|
%
|
|
2.5
|
|
|
8.2
|
|
|
24
|
%
|
|
6.6
|
|
Depreciation and amortization
|
2.3
|
|
|
15
|
%
|
|
2.0
|
|
|
6.7
|
|
|
12
|
%
|
|
6.0
|
|
Communications
|
1.1
|
|
|
(15
|
)%
|
|
1.3
|
|
|
3.7
|
|
|
6
|
%
|
|
3.5
|
|
Other expense
|
3.3
|
|
|
27
|
%
|
|
2.6
|
|
|
13.0
|
|
|
55
|
%
|
|
8.4
|
|
|
18.5
|
|
|
18
|
%
|
|
15.7
|
|
|
56.5
|
|
|
20
|
%
|
|
46.9
|
|
Total compensation and other expenses
|
$
|
40.7
|
|
|
12
|
%
|
|
$
|
36.3
|
|
|
$
|
120.6
|
|
|
16
|
%
|
|
$
|
104.3
|
|
Total unallocated costs and other expenses
increase
d
$4.4 million
to
$40.7 million
in
the third quarter
compared to
$36.3 million
in
the prior year
. Compensation and benefits
increase
d
$1.6 million
, or
8%
to
$22.2 million
in
the third quarter
compared to
$20.6 million
in
the prior year
.
Total unallocated costs and other expenses
increase
d
$16.3 million
to
$120.6 million
in
the current nine months ended
compared to
$104.3 million
in the prior year. Compensation and benefits
increase
d
$6.7 million
, or
12%
to
$64.1 million
in
the current nine months ended
compared to
$57.4 million
in the prior year.
During the current three and nine months ended, the increase in compensation and benefits is primarily related to accruals for executive management for incentives based on current year performance, as well as a cash based-long-term incentive plan. The increase in other expense is primarily related to our internal bi-annual global sales meeting held during January 2018.
Variable vs. Fixed Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2018
|
|
% of
Total
|
|
2017
|
|
% of
Total
|
|
2018
|
|
% of
Total
|
|
2017
|
|
% of
Total
|
Variable compensation and benefits
|
$
|
46.5
|
|
|
22
|
%
|
|
$
|
34.0
|
|
|
20
|
%
|
|
$
|
129.6
|
|
|
22
|
%
|
|
$
|
104.7
|
|
|
20
|
%
|
Transaction-based clearing expenses
|
49.0
|
|
|
24
|
%
|
|
33.9
|
|
|
20
|
%
|
|
136.6
|
|
|
23
|
%
|
|
101.2
|
|
|
20
|
%
|
Introducing broker commissions
|
34.1
|
|
|
17
|
%
|
|
29.2
|
|
|
17
|
%
|
|
101.4
|
|
|
16
|
%
|
|
86.1
|
|
|
17
|
%
|
Total variable expenses
|
129.6
|
|
|
63
|
%
|
|
97.1
|
|
|
57
|
%
|
|
367.6
|
|
|
61
|
%
|
|
292.0
|
|
|
57
|
%
|
Fixed compensation and benefits
|
40.4
|
|
|
20
|
%
|
|
41.5
|
|
|
24
|
%
|
|
122.7
|
|
|
21
|
%
|
|
118.0
|
|
|
23
|
%
|
Other fixed expenses
|
35.2
|
|
|
17
|
%
|
|
32.7
|
|
|
19
|
%
|
|
105.0
|
|
|
18
|
%
|
|
97.2
|
|
|
19
|
%
|
Bad debts
|
1.6
|
|
|
—
|
%
|
|
0.1
|
|
|
—
|
%
|
|
2.9
|
|
|
—
|
%
|
|
3.9
|
|
|
1
|
%
|
Total non-variable expenses
|
77.2
|
|
|
37
|
%
|
|
74.3
|
|
|
43
|
%
|
|
230.6
|
|
|
39
|
%
|
|
219.1
|
|
|
43
|
%
|
Total non-interest expenses
|
$
|
206.8
|
|
|
100
|
%
|
|
$
|
171.4
|
|
|
100
|
%
|
|
$
|
598.2
|
|
|
100
|
%
|
|
$
|
511.1
|
|
|
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, 2018 and 2017
, 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
63%
in
the third quarter
compared to
57%
in
the prior year
. As a percentage of total non-interest expenses, variable expenses were
61%
in the current
nine
months ended compared to
57%
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)
|
2018
|
|
% of Operating Revenues
|
|
2017
|
|
% of Operating Revenues
|
|
2018
|
|
% of Operating Revenues
|
|
2017
|
|
% of Operating Revenues
|
Sales of physical commodities
|
$
|
6,866.2
|
|
|
|
|
$
|
5,317.0
|
|
|
|
|
$
|
20,836.4
|
|
|
|
|
$
|
16,486.3
|
|
|
|
Trading gains, net
|
99.5
|
|
|
|
|
79.1
|
|
|
|
|
289.8
|
|
|
|
|
246.1
|
|
|
|
Commission and clearing fees
|
96.9
|
|
|
|
|
73.0
|
|
|
|
|
271.7
|
|
|
|
|
212.2
|
|
|
|
Consulting, management, and account fees
|
17.8
|
|
|
|
|
15.9
|
|
|
|
|
51.7
|
|
|
|
|
46.6
|
|
|
|
Interest income
|
35.6
|
|
|
|
|
20.3
|
|
|
|
|
91.8
|
|
|
|
|
56.9
|
|
|
|
Other
|
0.1
|
|
|
|
|
—
|
|
|
|
|
0.1
|
|
|
|
|
—
|
|
|
|
Total revenues
|
7,116.1
|
|
|
|
|
5,505.3
|
|
|
|
|
21,541.5
|
|
|
|
|
17,048.1
|
|
|
|
Cost of sales of physical commodities
|
6,858.5
|
|
|
|
|
5,308.3
|
|
|
|
|
20,811.3
|
|
|
|
|
16,462.2
|
|
|
|
Operating revenues
|
257.6
|
|
|
100%
|
|
197.0
|
|
|
100%
|
|
730.2
|
|
|
100%
|
|
585.9
|
|
|
100%
|
Transaction-based clearing expenses
|
49.2
|
|
|
19%
|
|
33.5
|
|
|
17%
|
|
135.7
|
|
|
19%
|
|
99.6
|
|
|
17%
|
Introducing broker commissions
|
34.0
|
|
|
13%
|
|
29.1
|
|
|
15%
|
|
101.3
|
|
|
14%
|
|
86.0
|
|
|
15%
|
Interest expense
|
21.0
|
|
|
8%
|
|
9.5
|
|
|
5%
|
|
52.7
|
|
|
7%
|
|
23.8
|
|
|
4%
|
Net operating revenues
|
153.4
|
|
|
|
|
124.9
|
|
|
|
|
440.5
|
|
|
|
|
376.5
|
|
|
|
Variable direct compensation and benefits
|
39.2
|
|
|
15%
|
|
29.2
|
|
|
15%
|
|
111.6
|
|
|
15%
|
|
90.2
|
|
|
15%
|
Net contribution
|
114.2
|
|
|
|
|
95.7
|
|
|
|
|
328.9
|
|
|
|
|
286.3
|
|
|
|
Non-variable direct expenses
|
43.8
|
|
|
17%
|
|
42.8
|
|
|
22%
|
|
128.0
|
|
|
18%
|
|
129.3
|
|
|
22%
|
Segment income
|
$
|
70.4
|
|
|
|
|
$
|
52.9
|
|
|
|
|
$
|
200.9
|
|
|
|
|
$
|
157.0
|
|
|
|
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Net contribution for all of our business segments
increased
19%
to
$114.2 million
in
the third quarter
compared to
$95.7 million
in
the prior year
. Segment income
increased
33%
to
$70.4 million
in
the third quarter
compared to
$52.9 million
in
the prior year
.
Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017
Net contribution for all of our business segments
increased
15%
to
$328.9 million
in the current nine months ended compared to
$286.3 million
in the prior year. Segment income
increased
28%
to
$200.9 million
in the current nine months ended compared to
$157.0 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.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Sales of physical commodities
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Trading gains, net
|
34.9
|
|
|
45%
|
|
24.0
|
|
|
101.5
|
|
|
25%
|
|
81.1
|
|
Commission and clearing fees
|
32.5
|
|
|
24%
|
|
26.3
|
|
|
88.6
|
|
|
16%
|
|
76.3
|
|
Consulting, management, and account fees
|
3.7
|
|
|
6%
|
|
3.5
|
|
|
11.5
|
|
|
6%
|
|
10.9
|
|
Interest income
|
6.7
|
|
|
103%
|
|
3.3
|
|
|
16.0
|
|
|
78%
|
|
9.0
|
|
Other
|
0.1
|
|
|
—%
|
|
—
|
|
|
0.1
|
|
|
—
|
|
—
|
|
Total revenues
|
77.9
|
|
|
36%
|
|
57.1
|
|
|
217.7
|
|
|
23%
|
|
177.3
|
|
Cost of sales of physical commodities
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Operating revenues
|
77.9
|
|
|
36%
|
|
57.1
|
|
|
217.7
|
|
|
23%
|
|
177.3
|
|
Transaction-based clearing expenses
|
10.1
|
|
|
31%
|
|
7.7
|
|
|
27.8
|
|
|
27%
|
|
21.9
|
|
Introducing broker commissions
|
6.3
|
|
|
26%
|
|
5.0
|
|
|
16.5
|
|
|
12%
|
|
14.7
|
|
Interest expense
|
0.5
|
|
|
150%
|
|
0.2
|
|
|
1.4
|
|
|
250%
|
|
0.4
|
|
Net operating revenues
|
61.0
|
|
|
38%
|
|
44.2
|
|
|
172.0
|
|
|
23%
|
|
140.3
|
|
Variable direct compensation and benefits
|
16.7
|
|
|
44%
|
|
11.6
|
|
|
46.5
|
|
|
24%
|
|
37.4
|
|
Net contribution
|
44.3
|
|
|
36%
|
|
32.6
|
|
|
125.5
|
|
|
22%
|
|
102.9
|
|
Non-variable direct expenses
|
19.0
|
|
|
17%
|
|
16.3
|
|
|
51.5
|
|
|
(2)%
|
|
52.5
|
|
Segment income
|
$
|
25.3
|
|
|
55%
|
|
$
|
16.3
|
|
|
$
|
74.0
|
|
|
47%
|
|
$
|
50.4
|
|
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,
|
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Transactional revenues (in millions):
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
22.1
|
|
|
18%
|
|
$
|
18.7
|
|
|
$
|
59.7
|
|
|
11%
|
|
$
|
53.7
|
|
Energy and renewable fuels
|
2.2
|
|
|
16%
|
|
1.9
|
|
|
6.5
|
|
|
35%
|
|
4.8
|
|
LME metals
|
12.1
|
|
|
22%
|
|
9.9
|
|
|
37.7
|
|
|
(3)%
|
|
39.0
|
|
Other
|
4.1
|
|
|
86%
|
|
2.2
|
|
|
11.2
|
|
|
90%
|
|
5.9
|
|
|
$
|
40.5
|
|
|
24%
|
|
$
|
32.7
|
|
|
$
|
115.1
|
|
|
11%
|
|
$
|
103.4
|
|
Selected data:
|
|
|
|
|
|
|
|
|
Futures and options (contracts, 000’s)
|
7,399.2
|
|
|
23%
|
|
6,013.8
|
|
|
20,956.5
|
|
|
18%
|
|
17,806.6
|
|
Average rate per contract
|
$
|
5.38
|
|
|
1%
|
|
$
|
5.33
|
|
|
$
|
5.41
|
|
|
(5)%
|
|
$
|
5.71
|
|
Average customer equity - futures and options (millions)
|
$
|
973.0
|
|
|
5%
|
|
$
|
922.5
|
|
|
$
|
914.5
|
|
|
(2)%
|
|
$
|
937.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Transactional revenues (in millions):
|
|
|
|
|
|
|
|
|
Agricultural
|
$
|
21.0
|
|
|
75%
|
|
$
|
12.0
|
|
|
$
|
58.2
|
|
|
62%
|
|
$
|
36.0
|
|
Energy and renewable fuels
|
4.2
|
|
|
11%
|
|
3.8
|
|
|
11.1
|
|
|
(10)%
|
|
12.3
|
|
Other
|
1.7
|
|
|
(6)%
|
|
1.8
|
|
|
5.7
|
|
|
—%
|
|
5.7
|
|
|
$
|
26.9
|
|
|
53%
|
|
$
|
17.6
|
|
|
$
|
75.0
|
|
|
39%
|
|
$
|
54.0
|
|
Selected data:
|
|
|
|
|
|
|
|
|
Volume (contracts, 000’s)
|
427.4
|
|
|
12%
|
|
382.8
|
|
|
1,165.7
|
|
|
13%
|
|
1,035.5
|
|
Average rate per contract
|
$
|
61.07
|
|
|
39%
|
|
$
|
43.89
|
|
|
$
|
62.28
|
|
|
25%
|
|
$
|
49.64
|
|
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Operating revenues
increased
36%
to
$77.9 million
in
the third quarter
compared to
$57.1 million
in the prior year. Exchange-traded revenues increased
24%
, to
$40.5 million
in
the third quarter
, resulting primarily from an increase in agricultural market revenues driven by an increase in volatility in the domestic grain markets. In addition, agricultural exchange-traded revenues benefited from increased activity from customers in both food service and dairy markets as well as in soft commodities, including coffee, cotton and sugar driven by increased market volatility. Uncertainty surrounding the effect of potential U.S. tariffs on global metals markets drove volatility and activity in our LME metals business in the third quarter. Finally, reflected
in the ‘Other” category above we saw an increase in exchange-traded revenues from omnibus relationships introduced by our commercial hedging employees in the third quarter. Overall exchange-traded contract volumes increased
23%
, while the average rate per contract increased
1%
versus the prior year to
$5.38
.
OTC revenues increased
53%
, to
$26.9 million
in
the third quarter
, driven by both a
12%
increase in OTC volumes and a
39%
increase in the average rate per contract compared to the prior year. These increases were driven by growth in OTC contract volumes in agricultural commodities, primarily with Brazilian grain customers as well as increased activity in the food service, dairy markets and energy markets.
Consulting, management, and account fees increased
6%
compared to the prior year, while interest income, increased
103%
, to
$6.7 million
compared to the prior year. The increase in interest income was primarily driven by an increase in short-term rates as well as a result of a
5%
increase versus the prior year in average customer equity to
$973.0 million
in
the third quarter
.
Segment income
increased
to
$25.3 million
in
the third quarter
compared to
$16.3 million
in the prior year, primarily as a result of the increase in operating revenues. These increases were partially offset by a $2.7 million increase in non-variable direct expenses, primarily related to a $2.2 million increase in bad debt expense versus the prior year related to two customers in our agricultural commodities OTC business. Variable expenses, excluding interest, expressed as a percentage of operating revenues were
42%
in
the third quarter
compared to
43%
in the prior year.
Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017
Operating revenues
increased
23%
to
$217.7 million
in
the current nine months ended
compared to
$177.3 million
in the prior year. Exchange-traded revenues increased
11%
, to
$115.1 million
in
the current nine months ended
, driven by increased activity from customers in the domestic grain and energy and renewable fuels markets as well as an increase in exchange-traded revenues from omnibus relationships introduced by our commercial hedging employees, which are reflected in the ‘Other’ category above. These increases were partially offset by lower LME metals revenues compared to strong performance in the prior year. Overall exchange-traded contract volume increased
18%
while the average rate per contract declined
5%
to
$5.41
.
OTC revenues increased
39%
, to
$75.0 million
in
the current nine months ended
, driven by both a
13%
increase in OTC volumes and a
25%
increase in the average rate per contract compared to the prior year. These increases were driven by growth in OTC contract volumes in agricultural commodities, primarily with Brazilian grain customers as well as increased activity in food service and dairy markets and soft commodities. These increases were offset by lower interest rate swap, coffee and energy and renewable fuels revenues.
Consulting and management fees increased $0.6 million versus the prior year, while interest income, increased
78%
, to
$16.0 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 declined
2%
versus the prior year to
$914.5 million
in
the current nine months ended
.
Segment income
increased
to
$74.0 million
in
the current nine months ended
compared to
$50.4 million
in the prior year, primarily as a result of the increase in operating revenues as well as a $1.0 million decline in non-variable direct expenses. The decline in non-variable direct expenses was primarily related to a $1.8 million decline in bad debt expense, partially offset by an increase in non-variable compensation and benefits. Variable expenses, excluding interest, expressed as a percentage of operating revenues were flat with the prior year period at
42%
.
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)
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Sales of physical commodities
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Trading gains, net
|
24.9
|
|
|
14%
|
|
21.9
|
|
|
71.0
|
|
|
9%
|
|
65.3
|
|
Commission and clearing fees
|
1.1
|
|
|
83%
|
|
0.6
|
|
|
3.0
|
|
|
67%
|
|
1.8
|
|
Consulting, management, account fees
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Interest income
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Other income
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Total revenues
|
26.0
|
|
|
16%
|
|
22.5
|
|
|
74.0
|
|
|
10%
|
|
67.1
|
|
Cost of sales of physical commodities
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Operating revenues
|
26.0
|
|
|
16%
|
|
22.5
|
|
|
74.0
|
|
|
10%
|
|
67.1
|
|
Transaction-based clearing expenses
|
1.0
|
|
|
(17)%
|
|
1.2
|
|
|
3.3
|
|
|
(6)%
|
|
3.5
|
|
Introducing broker commissions
|
0.2
|
|
|
(80)%
|
|
1.0
|
|
|
1.0
|
|
|
(71)%
|
|
3.4
|
|
Interest expense
|
0.1
|
|
|
—
|
|
—
|
|
|
0.1
|
|
|
—
|
|
0.2
|
|
Net operating revenues
|
24.7
|
|
|
22%
|
|
20.3
|
|
|
69.6
|
|
|
16%
|
|
60.0
|
|
Variable direct compensation and benefits
|
4.8
|
|
|
17%
|
|
4.1
|
|
|
13.7
|
|
|
13%
|
|
12.1
|
|
Net contribution
|
19.9
|
|
|
23%
|
|
16.2
|
|
|
55.9
|
|
|
17%
|
|
47.9
|
|
Non-variable direct expenses
|
3.9
|
|
|
18%
|
|
3.3
|
|
|
11.8
|
|
|
17%
|
|
10.1
|
|
Segment income
|
$
|
16.0
|
|
|
24%
|
|
$
|
12.9
|
|
|
$
|
44.1
|
|
|
17%
|
|
$
|
37.8
|
|
Selected data:
|
|
|
|
|
|
|
|
|
Global Payments (# of payments, 000’s)
|
171.9
|
|
|
(2)%
|
|
175.8
|
|
|
481.1
|
|
|
1%
|
|
476.1
|
|
Average revenue per trade
|
$
|
151.25
|
|
|
18%
|
|
$
|
127.99
|
|
|
$
|
153.81
|
|
|
9%
|
|
$
|
140.94
|
|
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Operating revenues
increased
16%
to a record
$26.0 million
in
the third quarter
compared to
$22.5 million
in the prior year. The volume of payments made declined
2%
versus the prior year period while the average revenue per trade increased by
18%
compared to the prior year period. Similar to the prior quarters of fiscal 2018, the volume of payments has declined while the average revenue per trade has increased compared to comparable periods of fiscal 2017, as certain commercial customers who had previously transacted their individual high volume but low value payments through our platform, opened their own bank accounts in certain countries to which we had made payments into on their behalf. Although this process change may lower our number of payments, we still provide the foreign currency funding payments into these customers’ accounts on an aggregated basis in these countries. Overall, operating revenues increased in the third quarter compared to the prior year period as a result of an increase in both the number of active clients and the dollar value of the payments made versus the prior year.
Segment income
increased
24%
to
$16.0 million
in
the third quarter
compared to
$12.9 million
in the prior year. This increase primarily resulted from the increase in operating revenues and a decline in variable introducing broker commissions, partially offset by a $0.6 million increase in non-variable direct expenses versus the prior year period, driven in large part by higher non-variable compensation and trade system costs. Variable expenses, excluding interest, expressed as a percentage of operating revenues
decreased
to
23%
in
the third quarter
compared to 28% in the prior year, mainly as a result of a decrease in introducing broker commissions.
Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017
Operating revenues
increased
10%
to
$74.0 million
in
the current nine months ended
compared to
$67.1 million
in the prior year. The volume of payments made increased
1%
and the average revenue per trade increased
9%
versus the prior year to
$153.81
Segment income
increased
17%
to
$44.1 million
in
the current nine months ended
compared to
$37.8 million
in the prior year. This increase primarily resulted from the increase in operating revenues, partially offset by a $1.7 million increase in non-variable direct expenses, primarily in compensation and benefits and trade system costs. Variable expenses, excluding interest, expressed as a percentage of operating revenues decreased to
24%
compared to
28%
in the prior year, primarily as a result of a decline in introducing broker commissions.
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)
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Sales of physical commodities
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Trading gains, net
|
23.7
|
|
|
13%
|
|
20.9
|
|
|
74.0
|
|
|
16%
|
|
63.9
|
|
Commission and clearing fees
|
4.9
|
|
|
48%
|
|
3.3
|
|
|
15.4
|
|
|
97%
|
|
7.8
|
|
Consulting, management, and account fees
|
2.4
|
|
|
(31)%
|
|
3.5
|
|
|
8.0
|
|
|
(23)%
|
|
10.4
|
|
Interest income
|
18.9
|
|
|
54%
|
|
12.3
|
|
|
51.0
|
|
|
54%
|
|
33.2
|
|
Other income
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Total revenues
|
49.9
|
|
|
25%
|
|
40.0
|
|
|
148.4
|
|
|
29%
|
|
115.3
|
|
Cost of sales of physical commodities
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Operating revenues
|
49.9
|
|
|
25%
|
|
40.0
|
|
|
148.4
|
|
|
29%
|
|
115.3
|
|
Transaction-based clearing expenses
|
10.7
|
|
|
67%
|
|
6.4
|
|
|
30.9
|
|
|
65%
|
|
18.7
|
|
Introducing broker commissions
|
0.8
|
|
|
(60)%
|
|
2.0
|
|
|
4.9
|
|
|
(22)%
|
|
6.3
|
|
Interest expense
|
14.8
|
|
|
111%
|
|
7.0
|
|
|
37.9
|
|
|
130%
|
|
16.5
|
|
Net operating revenues
|
23.6
|
|
|
(4)%
|
|
24.6
|
|
|
74.7
|
|
|
1%
|
|
73.8
|
|
Variable direct compensation and benefits
|
6.1
|
|
|
39%
|
|
4.4
|
|
|
19.1
|
|
|
28%
|
|
14.9
|
|
Net contribution
|
17.5
|
|
|
(13)%
|
|
20.2
|
|
|
55.6
|
|
|
(6)%
|
|
58.9
|
|
Non-variable direct expenses
|
7.2
|
|
|
(1)%
|
|
7.3
|
|
|
21.5
|
|
|
—%
|
|
21.4
|
|
Segment income
|
$
|
10.3
|
|
|
(20)%
|
|
$
|
12.9
|
|
|
$
|
34.1
|
|
|
(9)%
|
|
$
|
37.5
|
|
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,
|
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Operating revenues by product line (in millions):
|
|
|
Equity Market-Making
|
$
|
24.8
|
|
|
92%
|
|
$
|
12.9
|
|
|
$
|
70.8
|
|
|
61%
|
|
$
|
43.9
|
|
Debt Trading
|
22.1
|
|
|
(4)%
|
|
23.1
|
|
|
68.4
|
|
|
13%
|
|
60.7
|
|
Investment Banking
|
0.3
|
|
|
(57)%
|
|
0.7
|
|
|
1.7
|
|
|
(6)%
|
|
1.8
|
|
Asset Management
|
2.7
|
|
|
(18)%
|
|
3.3
|
|
|
7.5
|
|
|
(16)%
|
|
8.9
|
|
|
$
|
49.9
|
|
|
25%
|
|
$
|
40.0
|
|
|
$
|
148.4
|
|
|
29%
|
|
$
|
115.3
|
|
Selected data:
|
|
|
Equity Market-Making (gross dollar volume, millions)
|
$
|
30,344.1
|
|
|
42%
|
|
$
|
21,298.1
|
|
|
$
|
87,088.6
|
|
|
29%
|
|
$
|
67,284.8
|
|
Equity Market-Making revenue per $1,000 traded
|
$
|
0.68
|
|
|
17%
|
|
$
|
0.58
|
|
|
$
|
0.70
|
|
|
9%
|
|
$
|
0.64
|
|
Debt Trading (principal dollar volume, millions)
|
$
|
29,922.2
|
|
|
(7)%
|
|
$
|
32,176.4
|
|
|
$
|
91,615.0
|
|
|
(11)%
|
|
$
|
102,651.2
|
|
Debt Trading revenue per $1,000 traded
|
$
|
0.74
|
|
|
3%
|
|
$
|
0.72
|
|
|
$
|
0.75
|
|
|
27%
|
|
$
|
0.59
|
|
Average assets under management in Argentina (millions)
|
$
|
458.4
|
|
|
(30)%
|
|
$
|
653.4
|
|
|
$
|
467.3
|
|
|
(18)%
|
|
$
|
570.7
|
|
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Operating revenues
increased
25%
to
$49.9 million
in
the third quarter
compared to
$40.0 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 increased
92%
in
the third quarter
compared to the prior year period. Gross dollar volume traded increased
42%
, driven by increased market volatility, the on-boarding of new customers and an increase in market share, while the average revenue per $1,000 traded increased
17%
versus the prior year. 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 condensed consolidated income statements as ‘transaction-based clearing expenses’.
Operating revenues in Debt Trading declined $1.0 million or
4%
in
the third quarter
compared to the prior year as higher operating revenues in our domestic institutional fixed income business were offset by lower operating revenues in our Argentina operations due to difficult local economic conditions including spikes in both local interest rates and deteriorating value of the local currency. Operating revenues in the prior year included a $2.5 million gain on the sale of exchange shares held in Argentina. Asset Management operating revenues declined
18%
in
the third quarter
compared to the prior year as this business faced the same headwinds as our Argentina debt trading business, resulting in the average assets under management declining
30%
to
$458.4 million
in
the third quarter
compared to
$653.4 million
in the prior year.
Segment income
decreased
20%
to
$10.3 million
in
the third quarter
compared to
$12.9 million
in the prior year. The increase in operating revenues was more than offset by an increase in interest expense in our domestic institutional fixed income and securities lending businesses as well as the prior year period inclusion of the $2.5 million gain on the sale of exchange shares in Argentina. Variable expenses, excluding interest, expressed as a percentage of operating revenues
increased
to
35%
in
the third quarter
compared to
32%
in the prior year, primarily as the result of an increase in transaction-based clearing expenses.
Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017
Operating revenues
increased
29%
to
$148.4 million
in
the current nine months ended
compared to
$115.3 million
in the prior year.
Operating revenues in Equity Market-Making increased
61%
in
the current nine months ended
compared to the prior year, primarily as a result of a
29%
increase in the gross dollar volume traded and a
9%
increase in the average revenue per $1,000 traded. Equity Market-Making operating revenues include the trading profits we earn before the related expense deduction for ADR conversion fees.
Operating revenues in Debt Trading increased
13%
in
the current nine months ended
compared to the prior year, primarily as a result of an increase in interest income in our domestic institutional fixed income business as well as increased activity in our municipal securities businesses. In addition, operating revenues in the prior year period included a $2.5 million gain on the sale of exchange shares held in Argentina. Asset Management operating revenues decreased
16%
in
the current nine months ended
compared to the prior year as the average assets under management declined
18%
to
$467.3 million
in
the current nine months ended
compared to
$570.7 million
in the prior year.
Segment income declined
9%
to
$34.1 million
in
the current nine months ended
compared to
$37.5 million
in the prior year, as the increase in operating revenues were more than offset by an increase in interest expense, primarily in our Debt Trading
business as well as in securities lending combined with an increase in transaction-based clearing expenses in Equity Market-Making. Variable expenses, excluding interest, expressed as a percentage of operating revenues increased to
37%
in
the current nine months ended
compared to
35%
in the prior year, primarily as a result of an increase in transaction-based clearing expenses.
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 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’ in the condensed consolidated income statements. INTL FCStone Ltd precious metals sales and cost of sales are presented on a net basis and included as a component of ‘trading gains, net’ in the condensed consolidated income statements. Precious metals inventory held by our subsidiaries that are not broker-dealers are valued at the lower of cost or net realizable value. Precious metals sales and cost of sales for subsidiaries that are not broker-dealers are 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 condensed 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 condensed 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Sales of physical commodities
|
$
|
6,866.2
|
|
|
29%
|
|
$
|
5,317.0
|
|
|
$
|
20,836.4
|
|
|
26%
|
|
$
|
16,486.3
|
|
Trading gains (losses), net
|
4.6
|
|
|
n/m
|
|
1.4
|
|
|
8.2
|
|
|
n/m
|
|
2.4
|
|
Commission and clearing fees
|
0.4
|
|
|
33%
|
|
0.3
|
|
|
1.5
|
|
|
114%
|
|
0.7
|
|
Consulting, management, and account fees
|
0.4
|
|
|
100%
|
|
0.2
|
|
|
0.8
|
|
|
(20)%
|
|
1.0
|
|
Interest income
|
1.8
|
|
|
29%
|
|
1.4
|
|
|
5.4
|
|
|
13%
|
|
4.8
|
|
Other income
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Total revenues
|
6,873.4
|
|
|
29%
|
|
5,320.3
|
|
|
20,852.3
|
|
|
26%
|
|
16,495.2
|
|
Cost of sales of physical commodities
|
6,858.5
|
|
|
29%
|
|
5,308.3
|
|
|
20,811.3
|
|
|
26%
|
|
16,462.2
|
|
Operating revenues
|
14.9
|
|
|
24%
|
|
12.0
|
|
|
41.0
|
|
|
24%
|
|
33.0
|
|
Transaction-based clearing expenses
|
0.2
|
|
|
—%
|
|
0.2
|
|
|
0.7
|
|
|
17%
|
|
0.6
|
|
Introducing broker commissions
|
0.1
|
|
|
n/m
|
|
—
|
|
|
0.2
|
|
|
—%
|
|
0.2
|
|
Interest expense
|
3.2
|
|
|
100%
|
|
1.6
|
|
|
7.8
|
|
|
59%
|
|
4.9
|
|
Net operating revenues
|
11.4
|
|
|
12%
|
|
10.2
|
|
|
32.3
|
|
|
18%
|
|
27.3
|
|
Variable direct compensation and benefits
|
3.3
|
|
|
27%
|
|
2.6
|
|
|
9.2
|
|
|
24%
|
|
7.4
|
|
Net contribution
|
8.1
|
|
|
7%
|
|
7.6
|
|
|
23.1
|
|
|
16%
|
|
19.9
|
|
Non-variable direct expenses
|
3.0
|
|
|
(9)%
|
|
3.3
|
|
|
10.3
|
|
|
18%
|
|
8.7
|
|
Bad debt on physical coal
|
—
|
|
|
n/m
|
|
—
|
|
|
1.0
|
|
|
n/m
|
|
—
|
|
Segment income
|
$
|
5.1
|
|
|
19%
|
|
$
|
4.3
|
|
|
$
|
11.8
|
|
|
5%
|
|
$
|
11.2
|
|
The following tables set forth operating revenue by product line and selected data for Physical Commodities for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Precious Metals
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Total revenues
|
$
|
6,620.1
|
|
|
29%
|
|
$
|
5,146.4
|
|
|
$
|
20,187.9
|
|
|
27%
|
|
$
|
15,938.6
|
|
Cost of sales of physical commodities
|
6,611.8
|
|
|
29%
|
|
5,139.2
|
|
|
20,165.4
|
|
|
27%
|
|
15,920.2
|
|
Operating revenues
|
$
|
8.3
|
|
|
15%
|
|
$
|
7.2
|
|
|
$
|
22.5
|
|
|
22%
|
|
$
|
18.4
|
|
Selected data:
|
|
|
|
|
|
|
|
|
Gold equivalent ounces traded (000’s)
|
72,300.6
|
|
|
98%
|
|
36,553.6
|
|
|
160,802.8
|
|
|
82%
|
|
88,122.2
|
|
Average revenue per ounce traded
|
$
|
0.11
|
|
|
(45)%
|
|
$
|
0.20
|
|
|
$
|
0.14
|
|
|
(33)%
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physical Ag & Energy
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Total revenues
|
$
|
253.3
|
|
|
46%
|
|
$
|
173.9
|
|
|
$
|
664.4
|
|
|
19%
|
|
$
|
556.6
|
|
Cost of sales of physical commodities
|
246.7
|
|
|
46%
|
|
169.1
|
|
|
645.9
|
|
|
19%
|
|
542.0
|
|
Operating revenues
|
$
|
6.6
|
|
|
38%
|
|
$
|
4.8
|
|
|
$
|
18.5
|
|
|
27%
|
|
$
|
14.6
|
|
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Operating revenues for Physical Commodities
increased
24%
to
$14.9 million
in
the third quarter
compared to
$12.0 million
in the prior year.
Precious Metals operating revenues increased
15%
to
$8.3 million
in
the third quarter
compared to
$7.2 million
in the prior year as a result of a
98%
increase in the number of ounces traded, which was partially offset by a
45%
decline in the average revenue per ounce traded compared to the prior year.
Operating revenues in Physical Ag & Energy increased
38%
to
$6.6 million
in
the third quarter
compared to the prior year. The increase in operating revenues is largely due to increased trading activity in our U.S. subsidiary, FCStone Merchant Services, LLC, across multiple commodities including cotton, cocoa, edible oils and energy along with an increase in its commodity financing programs with customers.
Segment income
increased
19%
to
$5.1 million
in
the third quarter
compared to
$4.3 million
in the prior year, primarily as a result of the increase in operating revenues as well as a $0.3 million decline in non-variable direct expenses. Non-variable expenses declined $0.3 million as a result of a $0.7 million recovery of a bad debt expense in our Precious Metals business
originally recorded in the second quarter of fiscal 2018, which was partially offset by a $0.4 million increase in professional fees incurred related to our exit of our physical coal business.
Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017
Operating revenues for Physical Commodities
increased
24%
to
$41.0 million
in
the current nine months ended
compared to
$33.0 million
in the prior year.
Precious Metals operating revenues increased
22%
to
$22.5 million
in
the current nine months ended
compared to
$18.4 million
in the prior year. Operating revenues increased from the prior year period as a result of a
82%
increase in the number of ounces traded, which was partially offset by a 33% decline in the average revenue per ounce traded.
Operating revenues in Physical Ag & Energy increased
27%
to
$18.5 million
in
the current nine months ended
compared to
$14.6 million
in the prior year. The increase in operating revenues is primarily due to business expansion in our U.S. subsidiary FCStone Merchant Services, LLC, resulting in increased transactions in cotton, cocoa and edible oils along with an increase in its commodity financing programs with customers from both existing and new customer relationships.
Segment income increased 5% to
$11.8 million
in
the current nine months ended
compared to
$11.2 million
in the prior year driven by the increase in operating revenues. The increase in operating revenues was partially offset by a $2.9 million increase in interest expense as well as a $1.6 million increase in non-variable direct expenses. Non-variable direct expenses increased primarily due to a $0.5 million increase in compensation and benefits, a $1.1 million increase in professional fees related to our exit of the physical coal business.
Clearing and Execution Services
We provide competitive and efficient clearing and execution in all major futures and securities exchanges globally as well as prime brokerage in all major foreign currency pairs and swap transactions.
As of June 30, 2018, we held
$2.4 billion
in required customer segregated assets, which we believe makes us the third largest independent futures commission merchant (“FCM”) in the United States not affiliated with a major financial institution or commodity intermediary, end-user or producer, as measured by required customer segregated assets. We seek to leverage our capabilities and capacity by offering facilities management or outsourcing solutions to other FCM’s. Through our platform, customer orders are accepted and directed to the appropriate exchange for execution. We then facilitate the clearing of customer transactions. Clearing involves the matching of customer trades with the exchange, the collection and management of customer margin deposits to support the transactions, and the accounting and reporting of the transactions to customers.
We believe we are one of the largest non-bank prime brokers and swap dealers in the world. Through this offering, we provide prime brokerage foreign exchange (“FX”) services to financial institutions and professional traders. We provide our customers with the full range of OTC products, including 24-hour a day execution of spot, forwards and options as well as non-deliverable forwards in both liquid and exotic currencies. We also operate a proprietary foreign exchange desk that arbitrages the exchange-traded foreign exchange markets with the cash markets.
With our correspondent securities clearing business, we are an independent full-service provider to introducing broker-dealers (“IBD’s”) of clearing, custody, research, syndicated and security-based lending products and services, including a proprietary technology platform which offers seamless connectivity to ensure a positive customer experience through the clearing and settlement process.
We have an independent wealth management business which offers a comprehensive product suite to retail customers nationwide. As a result we are one of the leading mid-market clearers in the securities industry, with approximately 60 correspondent clearing relationships with over $15 billion in assets under management or administration as of June 30, 2018.
Our London-based EMEA oil voice brokerage business provides brokerage services across the fuel, crude, and middle distillates markets with over 200 well known commercial and institutional customers throughout Europe, the Middle East and Africa.
The following table provides the financial performance and selected data for Clearing and Execution Services for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Sales of physical commodities
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Trading gains, net
|
11.4
|
|
|
5%
|
|
10.9
|
|
|
35.1
|
|
|
5%
|
|
33.4
|
|
Commission and clearing fees
|
58.0
|
|
|
36%
|
|
42.5
|
|
|
163.2
|
|
|
30%
|
|
125.6
|
|
Consulting, management, and account fees
|
11.3
|
|
|
30%
|
|
8.7
|
|
|
31.4
|
|
|
29%
|
|
24.3
|
|
Interest income
|
8.2
|
|
|
148%
|
|
3.3
|
|
|
19.4
|
|
|
96%
|
|
9.9
|
|
Other
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Total revenues
|
88.9
|
|
|
36%
|
|
65.4
|
|
|
249.1
|
|
|
29%
|
|
193.2
|
|
Cost of physical commodities sold
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Operating revenues
|
88.9
|
|
|
36%
|
|
65.4
|
|
|
249.1
|
|
|
29%
|
|
193.2
|
|
Transaction-based clearing expenses
|
27.2
|
|
|
51%
|
|
18.0
|
|
|
73.0
|
|
|
33%
|
|
54.9
|
|
Introducing broker commissions
|
26.6
|
|
|
26%
|
|
21.1
|
|
|
78.7
|
|
|
28%
|
|
61.4
|
|
Interest expense
|
2.4
|
|
|
243%
|
|
0.7
|
|
|
5.5
|
|
|
206%
|
|
1.8
|
|
Net operating revenues
|
32.7
|
|
|
28%
|
|
25.6
|
|
|
91.9
|
|
|
22%
|
|
75.1
|
|
Variable direct compensation and benefits
|
8.3
|
|
|
28%
|
|
6.5
|
|
|
23.1
|
|
|
26%
|
|
18.4
|
|
Net contribution
|
24.4
|
|
|
28%
|
|
19.1
|
|
|
68.8
|
|
|
21%
|
|
56.7
|
|
Non-variable direct expenses
|
10.7
|
|
|
(15)%
|
|
12.6
|
|
|
31.9
|
|
|
(13)%
|
|
36.6
|
|
Segment income
|
$
|
13.7
|
|
|
111%
|
|
$
|
6.5
|
|
|
$
|
36.9
|
|
|
84%
|
|
$
|
20.1
|
|
The following table sets forth operating revenues by product line and selected data for Clearing and Execution Services for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Nine Months Ended June 30,
|
(in millions)
|
2018
|
|
% Change
|
|
2017
|
|
2018
|
|
% Change
|
|
2017
|
Operating revenues by product line (in millions):
|
|
|
|
|
|
|
|
|
Exchange-traded Futures & Options
|
$
|
50.8
|
|
|
77%
|
|
$
|
28.7
|
|
|
$
|
136.3
|
|
|
61%
|
|
$
|
84.6
|
|
FX Prime Brokerage
|
5.1
|
|
|
13%
|
|
4.5
|
|
|
14.8
|
|
|
3%
|
|
14.3
|
|
Correspondent Clearing
|
8.1
|
|
|
27%
|
|
6.4
|
|
|
20.9
|
|
|
6%
|
|
19.7
|
|
Independent Wealth Management
|
18.3
|
|
|
(3)%
|
|
18.9
|
|
|
55.6
|
|
|
2%
|
|
54.7
|
|
Derivative Voice Brokerage
|
6.6
|
|
|
(4)%
|
|
6.9
|
|
|
21.5
|
|
|
8%
|
|
19.9
|
|
Operating revenues
|
$
|
88.9
|
|
|
36%
|
|
$
|
65.4
|
|
|
$
|
249.1
|
|
|
29%
|
|
$
|
193.2
|
|
Selected data:
|
|
|
|
|
|
|
|
|
Exchange-traded - futures and options (contracts, 000’s)
|
28,233.5
|
|
|
55%
|
|
18,176.5
|
|
|
77,234.3
|
|
|
38%
|
|
55,956.4
|
|
Exchange-traded - futures and options average rate per contract
|
$
|
1.51
|
|
|
12%
|
|
$
|
1.35
|
|
|
$
|
1.51
|
|
|
16%
|
|
$
|
1.30
|
|
Average customer equity - futures and options (millions)
|
$
|
1,271.0
|
|
|
25%
|
|
$
|
1,016.2
|
|
|
$
|
1,232.4
|
|
|
15%
|
|
$
|
1,073.4
|
|
FX Prime Brokerage volume (U.S. notional, millions)
|
$
|
93,007.8
|
|
|
(36)%
|
|
$
|
145,679.8
|
|
|
$
|
330,178.9
|
|
|
(32)%
|
|
$
|
487,145.5
|
|
Three Months Ended June 30, 2018 Compared to Three Months Ended June 30, 2017
Operating revenues
increased
36%
to
$88.9 million
in
the third quarter
compared to
$65.4 million
in the prior year.
Operating revenues in our Exchange-traded Futures & Options business increased
77%
to
$50.8 million
in
the third quarter
compared to
$28.7 million
in the prior year as a result of a
55%
increase in exchange-traded volumes and a
12%
increase in the average rate per contract compared to the prior year period. In addition, interest income in the Exchange-traded Futures & Options business increased $3.9 million to $5.9 million in
the third quarter
due to an increase in short-term rates and a
25%
increase in average customer equity to
$1.3 billion
.
Operating revenues in our FX Prime Brokerage increased
13%
compared to the prior year to
$5.1 million
in
the third quarter
, despite a
36%
decline in foreign exchange volumes, as market volatility drove a widening of spreads in this business.
Correspondent Clearing operating revenues increased
27%
compared to the prior year to
$8.1 million
in
the third quarter
, while operating revenues in Independent Wealth Management declined
3%
versus the prior year to
$18.3 million
. Included within these operating revenues, Correspondent Clearing and Independent Wealth Management businesses had interest income of $2.2 million and $0.1 million, respectively. Operating revenues in Derivative Voice Brokerage declined
4%
to
$6.6 million
in
the third quarter
compared to the prior year.
Segment income
increased
to
$13.7 million
in
the third quarter
compared to
$6.5 million
in the prior year, primarily as a result of the increase in operating revenues as well as a $1.9 million decline in non-variable direct expenses, including a $1.2 million reduction in compensation and benefits, resulting from a cost savings initiative in the FX Prime Brokerage and Correspondent Clearing businesses. Segment income in
the third quarter
includes a $0.9 million quarterly charge to compensation and benefits per the terms of the acquisition of the Derivative Voice Brokerage business which will continue to be expensed through the end of fiscal 2018 based upon the employees’ continued employment. Variable expenses, excluding interest, as a percentage of operating revenues were
70%
in both
the third quarter
and the prior year.
Nine Months Ended June 30, 2018 Compared to Nine Months Ended June 30, 2017
Operating revenues
increased
29%
to
$249.1 million
in
the current nine months ended
compared to
$193.2 million
in the prior year.
Operating revenues in our Exchange-traded Futures & Options business increased
61%
to
$136.3 million
in
the current nine months ended
compared to
$84.6 million
in the prior year as a result of a
38%
increase in exchange-traded volumes and a
16%
increase in the average rate per contract compared to the prior year period. Interest income in the Exchange-traded Futures & Options business increased $7.6 million to $13.3 million in
the current nine months ended
primarily as a result of an increase in short-term rates and a
15%
increase in average customer equity to
$1.2 billion
.
Operating revenues in our FX Prime Brokerage increased 3% to
$14.8 million
in
the current nine months ended
compared to
$14.3 million
in the prior year despite a
32%
decrease in foreign exchange volumes as market volatility drove a widening of spreads in this business.
Operating revenues in the Correspondent Clearing increased
6%
to
$20.9 million
in
the current nine months ended
, while Independent Wealth Management operating revenues increased
2%
versus the prior year period to
$55.6 million
. Included within these operating revenues, Correspondent Clearing and Independent Wealth Management businesses had interest income of $5.5 million and $0.3 million, respectively. Operating revenues in the Derivative Voice Brokerage business increased
8%
versus the prior year to
$21.5 million
in
the current nine months ended
.
Segment income
increased
to
$36.9 million
in
the current nine months ended
compared to
$20.1 million
in the prior year, primarily as a result of the increase in operating revenues as well as a $4.7 million decline in non-variable direct expenses compared to the prior year period. This decline in non-variable direct expenses, was primarily a result of cost savings initiatives in the FX prime brokerage and Correspondent Clearing businesses. Segment income in
the current nine months ended
includes a quarterly charge, aggregating to $2.7 million, to compensation and benefits per the terms of the acquisition of the oil voice brokerage business which will continue to be expensed through the end of fiscal 2018 based upon the employees continued employment. Variable expenses, excluding interest, as a percentage of operating revenues were
70%
in both
the current nine months ended
and the prior year.
Liquidity, Financial Condition and Capital Resources
Overview
Liquidity is defined as our ability to generate sufficient amounts of cash to meet all of our cash needs. Liquidity is of critical importance to us and imperative to maintain our operations on a daily basis. Our senior management establishes liquidity and capital policies, and monitors liquidity on a daily basis. Senior management reviews business performance relative to these policies and monitors the availability of our internal and external sources of financing. Liquidity and capital matters are reported regularly to our board of directors.
INTL FCStone Financial is registered as a broker-dealer with the Securities and Exchange Commission (“SEC”) and is a member of the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking Board (“MSRB”). In addition, INTL FCStone Financial is registered as a futures commission merchant with the CFTC and NFA, and a member of various commodities and futures exchanges in the U.S. and abroad. INTL FCStone Financial has a responsibility to meet margin calls at all exchanges on a daily basis and intra-day basis, if necessary. We require our customers to make any required margin deposits the next business day, and we require our largest customers to make intra-day margin payments during periods of significant price movement. Margin required to be posted to the exchanges is a function of the net open positions of our customers and the required margin per contract. INTL FCStone Financial is subject to minimum capital requirements under Section 4(f)(b) of the Commodity Exchange Act, Part 1.17 of the rules and regulations of the CFTC and the SEC Uniform Net Capital Rule 15c3-1 under the Securities Exchange Act of 1934. These rules specify the minimum amount of capital that must
be available to support our customers’ open trading positions, including the amount of assets that INTL FCStone Financial must maintain in relatively liquid form, and are designed to measure general financial integrity and liquidity. INTL FCStone Financial is also subject to the Rule 15c3-3 of the Securities Exchange Act of 1934, as amended (“Customer Protection Rule”).
INTL FCStone Ltd, our U.K. regulated subsidiary, is required to be compliant with the U.K.’s Individual Liquidity Adequacy Standards (“ILAS”). To comply with these standards, we have implemented daily liquidity procedures, conduct periodic reviews of liquidity by stressed scenarios, and have created liquidity buffers.
Our wholly owned subsidiaries, INTL Custody & Clearing Solutions Inc. (formerly Sterne Agee Clearing, Inc.) and SA Stone Wealth Management Inc. (formerly Sterne Agee Financial Services, Inc.) are subject to the SEC Uniform Net Capital Rule 15c3-1 under the Securities Exchange Act of 1934.
In addition, in our physical commodities trading, commercial hedging OTC, securities and foreign exchange trading activities, we may be called upon to meet margin calls with our various trading counterparties based upon the underlying open transactions we have in place with those counterparties.
We continuously review our overall credit and capital needs to ensure that our capital needs to ensure that our capital base, both stockholders’ equity and debt, as well as available credit facilities can appropriately support the anticipated financing needs of our operating subsidiaries.
As of
June 30, 2018
, we had total equity capital of
$487.7 million
and outstanding bank loans of
$360.6 million
.
A substantial portion of our assets are liquid. As of
June 30, 2018
, approximately
98%
of our assets consisted of cash; securities purchased under agreements to resell; securities borrowed; deposits with and receivables from exchange-clearing organizations, broker-dealers, clearing organizations and counterparties; customer receivables, marketable financial instruments and investments, and physical commodities inventory. All assets that are not customer and counterparty deposits are financed by our equity capital, bank loans, short-term borrowings from financial instruments sold, not yet purchased and under repurchase agreements, securities loaned, and other payables.
Customer and Counterparty Credit and Liquidity Risk
Our operations expose us to credit risk of default of our customers and counterparties. The risk includes liquidity risk to the extent our customers or counterparties are unable to make timely payment of margin or other credit support. These risks expose us indirectly to the financing and liquidity risks of our customers and counterparties, including the risks that our customers and counterparties may not be able to finance their operations.
As a clearing broker, we act on behalf of our customers for all trades consummated on exchanges. We must pay initial and variation margin to the exchanges, on a net basis, before we receive the required payments from our customers. Accordingly, we are responsible for our customers’ obligations with respect to these transactions, which exposes us to significant credit risk. Our customers are required to make any required margin deposits the next business day, and we require our largest customers to make intra-day margin payments during periods of significant price movement. Our customers are required to maintain initial margin requirements at the level set by the respective exchanges, but we have the ability to increase the margin requirements for customers based on their open positions, trading activity, or market conditions.
With OTC derivative transactions, we act as a principal, which exposes us to the credit risk of both our customers and the counterparties with which we offset our customer positions. As with exchange-traded transactions, our OTC transactions require that we meet initial and variation margin payments on behalf of our customers before we receive the required payment from our customers. OTC customers are required to post sufficient collateral to meet margin requirements based on Value-at-Risk models as well as variation margin requirement based on the price movement of the commodity or security in which they transact. Our customers are required to make any required margin deposits the next business day, and we may require our largest customers to make intra-day margin payments during periods of significant price movement. We have the ability to increase the margin requirements for customers based on their open positions, trading activity, or market conditions. On a limited basis, we provide credit thresholds to certain customers, based on internal evaluations and monitoring of customer creditworthiness.
In addition, with OTC transactions, we are at risk that a counterparty will fail to meet its obligations when due. We would then be exposed to the risk that the settlement of a transaction which is due a customer will not be collected from the respective counterparty with which the transaction was offset. We continuously monitor the credit quality of our respective counterparties and mark our positions held with each counterparty to market on a daily basis.
We enter 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. In connection with these agreements and transactions, it is our policy 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 we may require counterparties to deposit additional collateral or return collateral pledged, when appropriate.
In our Physical Commodities business we act as a principal, which exposes us to the credit risk of both our customers and our suppliers with which we offset our customer positions as well as provide financing to commercial commodity-related companies against physical inventories. We mitigate this risk by securing warehouse receipts and or insurance against potential default by either party.
Information related to bad debt expense for the three and
nine months ended June 30, 2018 and 2017
can be found in
Note 5
of the Condensed Consolidated Financial Statements.
Primary Sources and Uses of Cash
Our assets and liabilities may vary significantly from period to period due to changing customer requirements, economic and market conditions and our growth. Our total assets as of
June 30, 2018
and
September 30, 2017
, were
$7.3 billion
and
$6.2 billion
, respectively. Our operating activities generate or utilize cash as a result of net income or loss earned or incurred during each period and fluctuations in our assets and liabilities. The most significant fluctuations arise from changes in the level of customer activity, commodities prices and changes in the balances of financial instruments and commodities inventory. INTL FCStone Financial and INTL FCStone Ltd occasionally utilize their margin line credit facilities, on a short-term basis, to meet intraday settlements with the commodity exchanges prior to collecting margin funds from their customers.
The majority of the assets of INTL FCStone Financial and INTL FCStone Ltd are restricted from being transferred to its parent or other affiliates due to specific regulatory requirements. This restriction has no impact on our ability to meet our cash obligations, and no impact is expected in the future.
We have liquidity and funding policies and processes in place that are intended to maintain significant flexibility to address both company-specific and industry liquidity needs. The majority of our excess funds are held with high quality institutions, under highly-liquid reverse repurchase agreements, U.S. government obligations, interest earning cash deposits and AA-rated money market investments. We do not hold any direct investments in the general obligations of any sovereign nations.
As of
June 30, 2018
, we had $277.2 million in undistributed foreign earnings. As a result of the Tax Reform, the Company now has the ability to repatriate these funds tax free. While the majority of these undistributed earnings have been reinvested in our foreign regulated subsidiaries, in particular our London-based subsidiary INTL FCStone Ltd, we intend to repatriate available funds to our U.S. operations which will be placed into our central treasury, and available for funding.
As of
June 30, 2018
,
$31.1 million
of financial instruments owned and
$31.2 million
of financial instruments sold, not yet purchased, are exchangeable foreign equities, ADRs and GDRs.
As of
June 30, 2018
, we had four committed bank credit facilities, totaling
$594.5 million
, of which
$311.2 million
was outstanding. Additional information regarding our bank credit facilities can be found in
Note 9
of the Condensed Consolidated Financial Statements. The credit facilities include:
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A three-year syndicated loan facility, committed until
March 18, 2019
, under which INTL FCStone Inc. is entitled to borrow up to
$262.0 million
, subject to certain terms and conditions of the credit agreement. The loan proceeds are used to finance our working capital needs of us and certain subsidiaries.
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An unsecured syndicated loan facility, committed until
April 4, 2019
, under which our subsidiary, INTL FCStone Financial is entitled to borrow up to
$75.0 million
, subject to certain terms and conditions of the credit agreement. This facility is intended to provide short-term funding of margin to commodity exchanges as necessary.
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A syndicated loan facility, committed until
November 1, 2019
, under which our subsidiary, FCStone Merchant Services, LLC is entitled to borrow up to $232.5 million, subject to certain terms and conditions of the credit agreement. The loan proceeds are used to finance traditional commodity financing arrangements and commodity repurchase agreements.
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An unsecured syndicated loan facility, committed until
November 7, 2018
, under which our subsidiary, INTL FCStone Ltd is entitled to borrow up to
$25.0 million
, subject to certain terms and conditions of the credit agreement. This facility is intended to provide short-term funding of margin to commodity exchanges as necessary.
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As reflected above,
$362.0 million
of our committed credit facilities are scheduled to expire within twelve months of this filing. We intend to renew or replace these facilities as they expire, and based on our liquidity position and capital structure, we believe we will be able to do so.
Additionally, we have a secured, uncommitted loan facility, under which our subsidiary, INTL FCStone Financial may borrow up to $75.0 million, collateralized by commodities warehouse receipts, to facilitate U.S. commodity exchange deliveries of its customers, subject to certain terms and conditions of the credit agreement.
We also have a secured uncommitted loan facility, under which our subsidiary, INTL FCStone Ltd may borrow up to approximately $25.0 million, collateralized by commodities warehouse receipts, to facilitate financing of commodities under repurchases agreement services to its customers, subject to certain terms and conditions of the credit agreement.
We also have a secured uncommitted loan facility, under which our subsidiary, INTL FCStone Financial may borrow requested amounts for short term funding of firm and customer margin requirements. 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. The borrowings are secured by first liens on firm owned marketable securities or customer owned securities which have been pledged to us under a clearing arrangement.
In addition, we have a secured uncommitted loan facility under which our subsidiary INTL FCStone Financial may borrow up to $100.0 million for short term funding of firm and customer margin requirements. The borrowings are secured by first liens on firm owned marketable securities or customer owned securities which have been pledged to us under a clearing arrangement.
Our facility agreements contain certain 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 any such covenants could result in the debt becoming payable on demand. As of
June 30, 2018
, we and our subsidiaries are in compliance with all of our financial covenants under the outstanding facilities.
Other Capital Considerations
Our activities are subject to various significant governmental regulations and capital adequacy requirements, both in the U.S. and in the international jurisdictions in which we operate. Certain of our other non-U.S. subsidiaries are also subject to capital adequacy requirements promulgated by authorities of the countries in which they operate.
Our subsidiaries are in compliance with all of their capital regulatory requirements as of
June 30, 2018
. Additional information on these net capital and minimum net capital requirements can be found in
Note 12
of the Condensed Consolidated Financial Statements.
The Dodd-Frank Act created a comprehensive new regulatory regime governing the OTC and listed derivatives markets and their participants by requiring, among other things: centralized clearing of standardized derivatives (with certain stated exceptions); the trading of clearable derivatives on swap execution facilities or exchanges; and registration and comprehensive regulation of new categories of market participants as “swap dealers” and swap “introducing brokers.” Our subsidiary, INTL FCStone Markets, LLC, is a provisionally registered swap dealer. Some important rules, such as those setting capital and margin requirements,
have not been finalized or fully implemented, and it is too early to predict with any degree of certainty how we will be affected.
Cash Flows
Our cash and cash equivalents
increase
d from
$314.9 million
as of
September 30, 2017
to
$347.8 million
as of
June 30, 2018
, a net
increase
of
$32.9 million
. Net cash of
$87.1 million
was used in operating activities,
$9.3 million
was used in investing activities and net cash of
$126.3 million
was provided by financing activities, of which
$131.0 million
was
borrowed from
lines of credit and
increase
d the amounts payable to lenders under loans. Fluctuations in exchange rates
increase
d our cash and cash equivalents by
$3.0 million
.
In the commodities industry, companies report trading activities in the operating section of the statement of cash flows. Due to the daily price volatility in the commodities market, as well as changes in margin requirements, fluctuations in the balances of deposits held at various exchanges, marketable securities and customer commodity accounts may occur from day-to-day. A use of cash, as calculated on the consolidated statement of cash flows, includes unrestricted cash transferred and pledged to the exchanges or guarantee funds. These funds are held in interest-bearing deposit accounts at the exchanges, and based on daily exchange requirements, may be withdrawn and returned to unrestricted cash. Additionally, in our unregulated OTC and foreign exchange operations, cash deposits received from customers are reflected as cash provided from operations. Subsequent transfer of these cash deposits to counterparties or exchanges to margin their open positions will be reflected as an operating use of cash to the extent the transfer occurs in a different period than the cash deposit was received.
We continuously evaluate opportunities to expand our business. Investing activities include
$9.3 million
in capital expenditures for property, plant and equipment in
the current nine months ended
compared to
$8.6 million
in
the prior year
. Fluctuations in capital expenditures are primarily due to the timing of purchases of IT equipment and trade system software as well as the timing on leasehold improvement projects.
Apart from what has been disclosed above, there are no known trends, events or uncertainties that have had or are likely to have a material impact on our liquidity, financial condition and capital resources. Based upon our current operations, we
believe that cash flows from operations, available cash and available borrowings under our credit facilities will be adequate to meet our future liquidity needs.
Commitments
Information about our commitments and contingent liabilities is contained in
Note 11
of the Condensed Consolidated Financial Statements.
Off Balance Sheet Arrangements
We are party to certain financial instruments with off-balance sheet risk in the normal course of business as a registered securities broker-dealer, futures commission merchant, U.K. based Financial Services Firm, provisionally registered swap dealer and from our market-making and proprietary trading in the foreign exchange and commodities trading activities. These financial instruments include futures, forward and foreign exchange contracts, exchange-traded and OTC options, mortgage-backed TBAs, and interest rate swaps. Derivative financial instruments involve varying degrees of off-statement of financial condition 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 statement of financial condition. Exposure to market risk is influenced by a number of factors, including the relationships between the financial instruments and our 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 commodity pricing and foreign exchange rates. We attempt to manage our exposure to market risk through various techniques. Aggregate market limits have been established and market risk measures are routinely monitored against these limits. Derivative contracts are traded along with cash transactions because of the integrated nature of the markets for such products. We manage the risks associated with derivatives on an aggregate basis along with the risks associated with our proprietary trading and market-making activities in cash instruments as part of our firm-wide risk management policies.
As part of the activities discussed above, we carry short positions. We sell financial instruments that we do not own, borrow the financial instruments to make good delivery, and therefore are obliged to purchase such financial instruments at a future date in order to return the borrowed financial instruments. We recorded these obligations in the condensed consolidated financial statements as of
June 30, 2018
and
September 30, 2017
, at fair value of the related financial instruments, totaling
$1,007.2 million
and
$717.6 million
, respectively. These positions are held to offset the risks related to financial assets owned, and reported in our condensed consolidated balance sheets in ‘financial instruments owned, at fair value’, and ‘physical commodities inventory, net’. We will incur losses if the fair value of the financial instruments sold, not yet purchased, increases subsequent to
June 30, 2018
, which might be partially or wholly offset by gains in the value of assets held as of
June 30, 2018
. The totals of
$1,007.2 million
and
$717.6 million
include a net liability of
$305.8 million
and
$317.0 million
for derivatives, based on their fair value as of
June 30, 2018
and
September 30, 2017
, respectively.
Except as discussed above, there have been no material changes to the off balance sheet arrangements discussed in the Management’s Discussion and Analysis of our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
Effects of Inflation
Because our assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. Increases in our expenses, such as compensation and benefits, transaction-based clearing expenses, occupancy and equipment rental, due to inflation, may not be readily recoverable from increasing the prices of our services. While rising interest rates are generally favorable for us, to the extent that inflation has other adverse effects on the financial markets and on the value of the financial instruments held in inventory, it may adversely affect our financial position and results of operations.
Critical Accounting Policies
See our critical accounting policies discussed in the Management’s Discussion and Analysis of the most recent annual report filed on Form 10-K. There have been no material changes to these policies.
Accounting Development Updates
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 completes the joint effort by the FASB and International Accounting Standards Board (IASB) to improve financial reporting by creating common revenue recognition guidance for GAAP and International Financial Reporting Standards (IFRS). In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs apply to all companies that
enter into contracts with customers to transfer goods or services. These ASUs are effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company expects to adopt this guidance starting with the first quarter of fiscal year 2019. Entities have the choice to apply these ASUs either retrospectively to each reporting period presented or by recognizing the cumulative effect of applying these standards at the date of initial application and not adjusting comparative information. The Company plans to adopt the new standard using the modified retrospective method which will result in a cumulative effect adjustment as of the date of adoption. By selecting this adoption method, the Company will disclose the amount, if any, by which each financial statement line item is affected by the standard in the current reporting period compared with the guidance that was in effect before adoption. Our implementation efforts include identifying revenues and costs within the scope of the ASU, reviewing contracts, and analyzing any changes to its existing revenue recognition policies. As a result of the initial evaluation performed, the Company does not expect that there will be material changes to the timing of revenue, but do anticipate certain changes to the classification of revenue in the consolidated income statements. The Company also expects additional disclosures to be provided in our consolidated financial statements after adoption of the new standard. The Company is continuing to assess the impact of the new standard as we progress through the implementation process and as industry interpretations are resolved.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes ASC 840, Leases. The Company will adopt this guidance starting with the first quarter of fiscal year 2020 using a modified retrospective transition approach. This accounting update will require the Company as a lessee to recognize on the consolidated balance sheet all leases with terms exceeding one year, which results in the recognition of a right of use asset and corresponding lease liability, including for those leases that we currently classify as operating leases. The right of use asset and lease liability will initially be measured using the present value of the remaining rental payments.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU provides that the stranded tax effects from the Tax Reform on the balance of other comprehensive earnings may be reclassified to retained earnings. The ASU is effective for periods beginning after December 15, 2018, with an election to adopt early. The Company expects to adopt this guidance starting with the first quarter of fiscal year 2020. The Company does not expect the adoption of this ASU to have a material impact on our consolidated financial statements.