We Open Markets.
We are a diversified global
financial services company
providing clearing and
execution, risk management
and advisory services, and
market intelligence across
asset classes and markets
around the world.
FINANCIAL HIGHLIGHTS
SELECTED SUMMARY FINANCIAL INFORMATION
$784.0
$671.0
$624.3
$72.7
$78.1
$6,243.4
$5,950.3
$5,070.0
OPERATING REVENUES (in millions)
2017
2016
2015
2014
2013
$490.9
$468.2
INCOME FROM CONTINUING OPERATIONS, BEFORE TAX (in millions)
$15.2
2017
2016
2015
2014
2013
$26.0
$21.2
TOTAL ASSETS (in millions)
2017
2016
2015
2014
2013
STOCKHOLDERS’ EQUITY (in millions)
2017
2016
2015
2014
2013
NET ASSET VALUE PER SHARE
2017
2016
2015
2014
2013
$3,039.7
$2,848.0
$449.9
$433.8
$397.1
$345.4
$335.4
$24.02
$23.56
$21.11
$18.29
$17.46
2017 I ANNUAL REPORT SELECTED SUMMARY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2017
2016
2015
2014
2013
Operating revenues
$ 784.0
$ 671.0
$ 624.3
$ 490.9
$ 468.2
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and other expenses:
136.3
113.0
42.1
492.6
129.9
68.9
28.3
443.9
122.7
52.7
17.1
431.8
Compensation and benefits
295.7
263.9
251.1
108.5
49.9
10.5
322.0
201.9
25.8
12.3
14.9
9.9
7.3
5.5
—
18.4
296.0
—
26.0
6.4
19.6
-0.3
19.3
110.1
40.5
7.9
309.7
198.7
23.1
12.0
12.4
10.4
8.0
0.8
—
23.1
288.5
—
21.2
2.6
18.6
0.7
19.3
39.4
15.2
15.2
13.3
9.8
4.3
47.0
37.5
477.4
—
15.2
8.8
6.4
—
6.4
32.7
13.3
14.0
11.5
8.2
4.4
—
29.4
377.4
6.2
72.7
18.0
54.7
—
54.7
28.1
13.5
12.5
10.5
7.2
7.3
—
23.5
353.7
—
78.1
22.4
55.7
—
55.7
$ 0.32
$ 0.31
$ 2.94
$ 2.90
$ 2.94
$ 2.87
$ 1.01
$ 0.98
$ 1.01
$ 0.97
18,395,987
18,410,561
18,525,374
18,528,302
18,443,233
18,687,354
18,625,372
18,932,235
19,132,302
19,068,497
$6,243.4
$ 230.2
—
$ 449.9
$5,950.3
$ 182.8
$ 45.5
$ 433.8
$5,070.0
$ 41.6
$ 45.5
$ 397.1
$3,039.7
$ 22.5
$2,848.0
$ 61.0
$ 45.5
$ 45.5
$ 345.4
$ 335.4
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts
Bad debt on physical coal
Other
Total compensation and other expenses
Gain on acquisitions
Income from continuing operations, before tax
Income tax expense
Net income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income
Earnings per share:
Basic
Diluted
Number of shares:
Basic
Diluted
Selected Balance Sheet Information:
Total assets
Lenders under loans
Senior unsecured notes
Stockholders’ equity
Other Data:
Return on average stockholders’ equity
(from continuing operations) (a)
1.5%
13.2%
15.0%
5.8 %
5.7 %
EBITDA
$ 67.1
$ 109.2
$ 102.4
$ 43.8
$ 37.1
Employees, end of period
Compensation and benefits as a
percentage of operating revenues
1,607
37.7%
1,464
39.3%
1,231
40.2%
1,141
41.1 %
1,094
42.4 %
(a) For all periods presented, the return on average stockholders’ equity (from continuing operations)
excludes the effects of discontinued operations and net loss attributable to noncontrolling interests.
2017 I ANNUAL REPORT WE OPEN MARKETS
BY THE NUMBERS
We are a diversified global financial services company providing clearing
and execution, risk management and advisory services, and market
intelligence across asset classes and markets around the world. Our
global platform has a physical presence in key financial markets and has
the regulatory approvals to execute both exchange-listed contracts and
over-the-counter instruments in our chosen asset classes.
We create value for our customers by providing efficient access to global financial markets, along with
deep industry and financial expertise, extensive network relationships, and high-touch service when
desired. This philosophy has enabled us to establish leadership positions in a number of complex
fields in financial markets around the world.
With roots dating back to 1924, we specialize in serving customers in the commodities, securities,
global payments and foreign exchange markets, among others. Our customers include commercial
entities, asset managers, introducing broker-dealers, insurance companies, brokers, institutional
investors, commercial and investment banks, and both governmental and nongovernmental
organizations.
Our customer-first approach emphasizes guidance, integrity, transparency and trust. This
differentiates us from large banking institutions and often leads to deeply valued, long-term
relationships.
Well-capitalized and committed to regulatory compliance, our company is supported by our global
infrastructure of regulated operating subsidiaries, our advanced technology platforms, and our team
of more than 1,600 employees. We currently serve more than 20,000 customer accounts based in more
than 130 countries.
$450 Million Stockholders’ Equity
Access to 36 Global Exchanges
More than 1,600 Employees Globally
$67 Million EBITDA
1924
1930
1970
1978
Saul Stone, a door-to-
door egg wholesaler,
formed Saul Stone and
Company, predecessor
to FCStone.
In the 1930’s, Saul Stone and
Company became one of the
first clearing members of the
Chicago Mercantile Exchange
(CME).
In the early 1970’s, Saul Stone
and Company became one of the
major innovators on the CME’s
International Monetary Market,
bringing financial futures to the
forefront of the industry.
A new entity called Farmers
Commodities Corporation
was formed to accommodate
the grain hedging brokerage
services.
1981
International Assets
was established as an
internationally focused
boutique brokerage
firm.
BY THE NUMBERS
$450 Million Stockholders’ Equity
Access to 36 Global Exchanges
$620.9 Billion FX Prime Brokerage
1.4 Million OTC Contracts Traded
$6 Million Net Income
137 Million Gold Equivalent Ounces Traded
$2.0 Billion Average Custom Equity
$88 Billion Equity Market Making
$784 Million Operating Revenue
Managing Business in more than 130 Countries
99 Million Exchange Contracts Traded
More than 1,600 Employees Globally
$67 Million EBITDA
1983
1994
2000
2003
2004
2007
Farmers Commodities
Corporation (FCC) became a
clearing member of the Kansas
City Board of Trade in 1983 and
in 1985 purchased its first seat
on the Chicago Board of Trade.
International
Assets was listed on
NASDAQ.
FCC acquired Saul Stone
and Company to become
one of the nation’s
largest commercial grain
brokerage firms.
Current management
team take control of
International Assets
with a strategy to
focus on wholesale
execution.
International Assets
acquired global
payments business
Global Currencies,
thereby establishing a
London office.
International Assets
acquired Gainvest
group in South
America, specializing
in asset management
and asset backed
securities.
CHAIRMAN’S LETTER
In 2017, the global financial and commodities markets once again
experienced a marked lack of volatility. While such conditions create
a challenging business environment for our company, we appeared
on track to meet this challenge successfully as we improved our
performance over the course of the year. Unfortunately, we suffered
a significant reversal in the fourth quarter, due to a substantial credit
loss amounting to $39 million post-tax, or $2.13 a share after reversal of
executive incentives.
The loss was incurred by our physical coal business in Singapore. Management’s response to this
situation was prompt: We assessed our options, recognised the loss, capped any further losses, and
closed down the business. While we continue to pursue every recourse available to us for mitigation,
the prospects for success in these efforts remain uncertain.
From an internal perspective, I would like to commend our executive committee on the way they
have dealt with this setback. Apart from their prompt response, they have been transparent in their
interactions with the Board and with shareholders and, in the spirit of collective responsibility (rare
these days), they have truly behaved as a team.
Your board and management understand clearly that your company’s success depends on the
confidence of its stakeholders – banks, employees, shareholders and, perhaps most importantly,
customers. We have always run our company accordingly, and recognise that the confidence of our
stakeholders may have been undermined by this event. However, we have made every effort to limit
the financial impact of this loss and believe that we have succeeded in ensuring that it will not affect
future performance. In addition, your board feels that this event is isolated in nature, and that the
failures that led to it are in no way endemic to the company, its approach or its controls. Stakeholders
should note that our executive team received no incentive bonuses for 2017 under the Executive
Performance Plan.
I can also report that we seem to have had continuing support from a majority of our stakeholders,
based on the relative stability of our stock price following the publication of our 2017 results and the
earnings call, during which we detailed the loss. I consider that an enormous vote of confidence by the
market and by investors in our long-term potential.
I continue to believe that such confidence is well-founded. Outside of the coal business debt charge,
we continued to make progress during 2017. Despite the unfavourable market conditions mentioned
above, our ROE steadily increased during the year (excluding the coal business charge). The Sterne
Agee acquisition performed slightly ahead of our projections, and the ICAP oils business, the other
acquisition made last year, continued to meet its profitability target. Our cross-selling initiatives
continue to gain momentum and bear fruit. We have made substantial improvements to how we
communicate with our customers, and significant investments in the platforms and tools we provide
2007
2008
2009
2010
2010
FCStone acquired
Chicago-based
Downes-O’Neill, dairy
specialists.
FCStone acquired
Nashville-based
Globecot, cotton
specialists.
International Assets
Holding Corporation and
FCStone Group,
Inc. merged.
Risk Management
Incorporated, energy risk
management specialists,
was acquired by the newly
merged company.
The Company acquired Hanley
Group companies to expand the
group’s OTC trading business.
2010
The Company acquired
the futures division of
Hencorp, coffee, cocoa
and sugar specialists.
“Over the
long term,
our record
continues to
tell a story
of strong
growth.”
for their use. As just one example, our newly launched PMXecute+
platform for physical gold trading achieved 49.5 tons in volume in its
first year. Finally, our organic profitability continues to benefit from
albeit slowly rising interest rates.
Over the long term, our record continues to tell a story of strong
growth: Since 2002, operating revenue has grown from $5.2 million
to $784.0 million, market cap has increased from $1.5 million
to approximately $787 million (as of December 20, 2017), and
shareholder equity has climbed from $4.3 million to $449.9 million.
In addition, we have grown from a business dealing only in niche
markets into a company able to execute and clear financial
transactions worldwide. We are now a significant provider of liquidity
to our clients and all the markets we deal in. I am optimistic that we
will continue on this dynamic growth trajectory.
Of course, a business must be judged not only on its successes but
also on how it overcomes its failures. To quote Rudyard Kipling:
“If you can meet with Triumph and Disaster / And treat those two
impostors just the same…Yours is the Earth and everything that’s in
it…’’
While we are chastened by the loss incurred by our Singapore coal
business, and are taking the appropriate lessons to heart, we remain
undaunted in our pursuit of opportunities that we believe will deliver
increased value to our customers and shareholders alike – even
when those involve taking prudent risks.
I believe our management team have proven that they remain up to
this challenge. For this reason, your board and I remain confident and
optimistic that we will continue to deliver best-in-class results to all
our stakeholders going forward.
As always, I would point out that both management and your board
are significant shareholders, and that we truly are a company run by
shareholders for shareholders.
I thank our employees, shareholders, banks and other service
providers for their continued support and confidence, and I look
forward with optimism to the year to come.
JOHN RADZIWILL
Chairman
2011
2011
2011
2012
International Assets
Holding Corporation
changed name to INTL
FCStone Inc.
Ambrian Commodities Limited
(“ACL”), was acquired to
provide commodities execution
capabilities in the key LME
market.
The Company acquired the
business of the Metals Division
of MF Global and upgraded to
LME Category One ring dealing
membership.
The Company acquired TRX Futures Ltd.,
a London-based brokerage and clearing
firm for commercial coffee and cocoa
customers that also offers energy and
financial products.
2012
Online news and
analysis subscription
service Commodity
Network is launched.
CHIEF EXECUTIVE’S LETTER
Our company once again performed strongly in the 2017 fiscal year, but that
performance was undercut by a significant and unexpected credit loss arising
from our physical coal business based in Singapore. For the better part of 15
years the executive team has worked to run a credible, professional business
with the goal of becoming a large and meaningful financial franchise. We
have prided ourselves on using common sense, instituting strong controls
and always trying to do the right thing rather than the easy thing. We have
run our company this way because we believe it earns us trust and credibility
with all our key stakeholders – our investors, our customers, our banks and
our staff. In our business, this trust and credibility is essential for success.
Therefore, we understand the seriousness of an event like this, and we take
it very personally. As such, the executive team will redouble our efforts to
ensure that the circumstances that led to this development are not repeated.
I will also note that the executive team received no incentive bonuses under
the Executive Performance Plan for 2017.
We have now exited the physical coal business and will take a full write down of all amounts owed, including
$47 million taken in the fourth quarter of fiscal 2017 and an additional $1 million which will be recorded in the
first quarter of fiscal 2018. The net impact of this loss on the fourth quarter was $39 million, or $2.13 per share.
For the fiscal year as a whole, we remained profitable with net earnings of $6.4 million, or $0.31 per share.
Excluding the impact of this bad debt charge, we achieved solid financial results for the year in the face of
persistently adverse market conditions, while simultaneously making investments in the infrastructure necessary
to maximize our value to customers and shareholders alike.
We achieved record operating revenues of $784.0 million in fiscal 2017, an increase of 17% over fiscal 2016.
Pre-tax earnings from operations for fiscal 2017 of $57.9 million were reduced to $15.2 million by the bad debt
expense in the physical coal business, net of the reduction in executive incentives. Excluding the net effect
of this charge, we would have achieved a 10% return on equity (ROE) for fiscal 2017 and 13.2% for the fourth
quarter alone. Both of these figures are below our long-term target of 15%, although returns accelerated
throughout the fiscal year. We will continue to view ROE as a critical measure of success for the company.
Despite challenging market dynamics, our company achieved a number of noteworthy successes in
fiscal 2017.
Our Global Payments segment continued its strong growth in 2017, with segment income increasing 27% from
the prior year, due to strong growth in volumes versus modest growth in fixed costs.
2012
The institutional
accounts of Tradewire
Securities, LLC. are
acquired.
2013
2013
2013
2014
INTL FCStone Markets
LLC registers as a swap
dealer.
The Company exits
its physical base
metals business.
Accounts of First American
Capital and Trading
Corp. acquired, adding
correspondent clearing
service capabilities.
The Company completes the
consolidation of its two UK
subsidiaries, INTL FCStone Ltd
and INTL Global Currencies Ltd.
“Our core
business
accelerated
nicely during
2017, and we
believe it is
well positioned
to continue this
trend into 2018.”
Our Clearing and Execution Services segment grew segment income
by 105% over the prior year, largely due to our acquisition last year of
the Sterne Agee clearing business and the ICAP oils business, as well
as organic growth in our exchange-traded business. We merged our
securities clearing business into our U.S. broker-dealer and FCM subsidiary
in July 2017, which freed up nearly $25 million in regulatory capital.
Our progress in fully integrating these capabilities and the other Sterne
business lines into our company continues apace. For example, we re-
launched the former Sterne Agee independent wealth advisory business
as SA Stone Wealth Management in June. This unit is our largest clearing
customer, and we look forward to maximizing the value of the 100,000-
plus underlying accounts of this business as well as the nearly 50 other
correspondent clearing relationships the Sterne Agee acquisition has
brought to the company.
Our Commercial Hedging segment achieved 6% growth in fiscal 2017
following declines in fiscal 2016 driven by low volatility in the global grain
and energy markets. This segment’s growth accelerated throughout fiscal
2017, with the fourth quarter being the strongest of the fiscal year. This
performance suggests to us that this segment is on a very encouraging
growth trajectory.
These successes were tempered by a decline in our Physical Commodities
segment, which was driven by the bad debt in physical coal, and a decline
of 33% in our Securities segment, due to exceptional market conditions
in the prior year connected to the devaluation of the Argentine Peso.
Reduced revenue capture in our equity market-making business also
played a role in this segment’s decline in 2017.
Shifting from performance to strategic initiatives, the management
team increased its focus in 2017 on building an efficient and scalable
infrastructure where the marginal cost associated with incremental
transactions is negligible. This will be a key differentiator medium-term
and will help drive volumes and margins. The result of this in the short
term has been a significant increase in technology-related costs, but we
are working hard to ensure that we see a meaningful and enduring pay-off
for this investment.
Two projects in 2017 exemplify our successes in this regard. Launched
in February 2017, our PMXecute+ platform connects global buyers and
sellers of physical gold and automates the trading process in a way
that’s easy, efficient and effective. Our customers who hold inventory
for sale may post the quantity and form of their metal on the platform.
2015
2015
2016
2016
The Company completes the acquisition
of G.X. Clarke & Co., an institutional
dealer in U.S. government securities,
federal agency and mortgage-backed
securities.
INTL FCStone Inc. consolidates
its securities, rates and FCM
businesses into INTL FCStone
Financial Inc.
The Company completes acquisition
of the correspondent securities clearing
business and independent wealth
management business from Sterne Agee,
LLC.
The Company agrees to acquire the
London-based EMEA oils business of
ICAP plc, expanding the Company’s
global energy capabilities.
CHIEF EXECUTIVE’S LETTER
Commercial buyers can then access the platform and see, in one glance, all the available inventory –
automatically priced to the location of their choice. By fiscal year’s end, nearly 50 tons of gold had traded via the
platform.
In October 2017, our OTC arm launched its Structured Products Online Calculator, or SPOC, which enables our
brokers and OTC customers to view real-time OTC structured product indications and request quotes 24 hours
a day, seven days a week. Again, this automates a process that has been largely manual. Now, customers have
simple and convenient access to our products while also enjoying a level of pricing transparency that they are
unlikely to find with other providers.
Both of these platforms place the needs of our customers at their centers. This same drive to increase our
relevance with customers by providing simple and seamless solutions to their business problems has prompted
senior management to consolidate all customer experience and engagement initiatives under one entity. Doing
so will enable us to deliver an exceptional experience to our customers in ways that maximize our operational
efficiencies and enable us to capture and grow more revenue from every relationship we have.
We firmly believe that our 2017 achievements and initiatives indicate continued positive momentum for the
company overall, and set the table for stronger performance in the coming years.
PHILOSOPHY
In 2003, the current management team reconfigured the Company as a provider of financial services focused
on under-served customers in niche markets. From the outset, we have had to earn our way into relationships
by means of deep and specialized knowledge of our customers’ markets, high-touch, value-added service,
and a total and unwavering commitment to serving our customers’ best interests. As we have continued to
grow, our customer-first philosophy and culture has become deeply embedded in all that we do. Please take
the time to read our Corporate Vision statement on our website, which sets out the deeply held values and
principles our organization stands for.
In the intervening years, our practical approach has allowed us to take advantage of substantial changes
in the financial markets, outgrow our niche capabilities, and become a leading global financial services
company. From the original group of fewer than 10 professionals 13 years ago, we now employ more than
1,600 professionals serving more than 20,000 customer accounts located in nearly every country across
the globe.
FINANCIAL PERFORMANCE
In 2017, we achieved segment net income of $169.0 million, a decline from $206.0 million in fiscal 2016 as
a result of the bad debt expense in physical coal. Our Commercial Hedging, Global Payments and Clearing
and Execution Services segments achieved growth in net segment income, while Securities and Physical
Commodities lagged the prior year’s performance.
Our largest segment, Commercial Hedging, earned $72.8 million in segment income, which was up 6% from
the prior year. This was primarily driven by an increase in both exchange-traded revenues and interest income
following increases in short term interest rates during the fiscal year.
Our Global Payments business continued to grow transaction volume in 2017, while simultaneously keeping
costs relatively stable. This helped power a 27% increase in segment income. Fast growing and highly scalable,
this segment is well positioned to achieve excellent margins and grow its market share as a solutions provider
to the banking industry in the coming years.
2017 I ANNUAL REPORT “We believe our
unique and
increasingly
scalable
platform
will enable
us to grow
our existing
market share
and pursue
new market
segments as
they come
into play.”
Our Clearing and Execution Services business more than doubled its
segment income in 2017 – growing to $30.4 million from $14.8 million the
prior year. As expected, this performance improved over the prior year as
we completed the integration of the capabilities we gained through our
Sterne Agee business acquisitions and began to market them effectively. In
addition, the exchange-traded futures and options portion of this segment
increased both its transactional revenues and net interest income.
Our Securities business generated segment income of $46.6 million,
a decrease of 33% over the prior year. This decline resulted primarily
from weaker operating revenues in our equity market-making and
domestic debt trading businesses, where lower market volatility led to
the compression of spreads. In addition, the prior-year period included
strong performance in our Argentine debt trading and asset management
businesses following the devaluation of the Argentine Peso.
Finally, our Physical Commodities segment reported a segment loss of
$31.4 million as compared to segment income of $13.3 million in the prior
year, as the $47.0 million bad debt on physical coal more than offset the
$8.2 million growth in operating revenues.
Overall, the average customer equity in our Commercial Hedging and
Clearing and Execution Services segment increased 7% to $2.0 billion in
fiscal 2017, as compared to the prior year. In addition, the correspondent
securities clearing business ended the fiscal year with nearly $1.0 billion
of interest-rate-sensitive balances. This, combined with an increase in
short term interest rates, as well as increases in our domestic fixed income
business, led to a $14.5 million increase in interest income in fiscal 2017, as
compared to the prior year.
This year, we decided to sell the U.S. treasury notes we held in our interest
rate program that matured after the current calendar year. Over the
three year period, this program earned us approximately $15.0 million
incrementally over short term T-bill rates and utilized nearly $20.0 million
in capital in the form of incremental regulatory haircuts. We have now
released the capital used by this program to be used elsewhere and short
term interest rates are now right around the same yield we earned on the
program, so there has been minimal impact on current earnings from this
decision. On a go-forward basis we will now see any interest rate moves
have a direct impact on our earnings for the full amount of customer float
we carry.
In order to protect our bottom line, we pursue a flexible cost structure in
which more than 50% of our total costs are variable and linked to revenue.
For 2017, 53% of our total costs were variable and only 47% were fixed,
down from our fiscal 2016 ratio due to the increase in bad debt expense.
2017 I ANNUAL REPORT CHIEF EXECUTIVE’S LETTER
OFFICE LOCATIONS
Fixed compensation and other non-variable expenses were $338.7 million, up $98.7 million, or approximately
47%, from the prior year, primarily as a result of the increase in bad debt expense, as well as the acquisitions
of Sterne Agee and the ICAP voice brokerage businesses.
As fiscal 2017 closed, shareholder equity totaled $449.9 million. Over the course of the year, we increased our
book value per share to $24.02, an increase of 2% over the end of fiscal 2016.
Finally, we ended 2017 with $6.2 billion in total assets, a 5% increase over the end of fiscal 2016.
LOOKING AHEAD
Our core business accelerated nicely during 2017, and we believe it is well positioned to continue this trend
into 2018. The industry continues to consolidate, and we look to gain market share as a result.
Our business model has been to offer vertically integrated execution and clearing in all major asset classes
and markets for our customers. This enables us to create “sticky” customer relationships through which we
have increased our advisory, clearing and execution revenues while also growing our customer balances.
Until recently, however, we have seen limited revenue related to these customer balances, due to historically
low interest rates. Thus, we have been reliant only on the execution revenue generated by our clients. In many
ways, our business has been operating with one hand tied behind its back.
We believe that with synchronized global growth kicking in, the end of this era of extraordinary monetary
accommodation is now in sight, and that with the expected increase in interest rates these client balances will
produce incremental revenues for us. These incremental revenues will largely fall to the bottom line, and will
result in more stable and predictable revenues, and, in turn, provide some real ballast to our earnings.
We also continued to experience depressed volatility in 2017, which in some instances reached multi-decade
lows. In this environment, customer activity has been generally dampened and our spreads have compressed
– compounding the negative impact of low volatility. We believe that volatility will also normalize as central
banks withdraw from the markets.
The combination of the effect of rising interest rates on our growing client balances and increased
transactional revenues due to more normalized volatility should be powerful drivers for us – and unleash the
full potential of our business model.
After growing our capabilities and our customer base in recent years through acquisitions and organic growth,
we continue to focus on upgrading and more tightly integrating our offerings, platforms, marketing strategy
and customer experience. We believe this is necessary to achieving our goal of becoming a truly best-in-class
global financial franchise. We believe our unique and increasingly scalable platform will enable us to grow
our existing market share and pursue new market segments as they come into play.
On behalf of the executive management team, I want to thank all of our colleagues for their exceptional
contributions during this productive year, our Board and advisors for their guidance, our bankers for their
financial support, and our stockholders for entrusting their capital to us.
SEAN M. O’CONNOR
Chief Executive Officer
2017 I ANNUAL REPORT OFFICE LOCATIONS
HEADQUARTERS
New York (US)
708 Third Avenue, Suite 1500
New York, NY 10017, USA
Tel: +1 212 485-3500
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+1 615 234-2760
Omaha (NE)
+1 800 228-2316
Orlando (FL)
+1 800 541-1977
St. Louis (MO)
+1 800 888-4254
Twin Falls (ID)
+1 800 635-0821
West Des Moines (IA)
+1 800 422-3087
Youngstown (OH)
+1 800 589-2023
INTERNATIONAL
OFFICES
Asunción (Paraguay)
+595 21 624 197
Beijing (China)
+86 10 6513 0855
Bogota (Colombia)
+57 1 484 1650
London (United Kingdom)
+44 20 3580 6000
Maringá (Brazil)
+55 44 3033 6800
Mexico City (Mexico)
+52 55 9171 1526
Passo Fundo (Brazil)
+55 54 2103 0200
Buenos Aires (Argentina)
+54 11 4390 7595
Patrocinio (Brazil)
+55 34 3199 1550
Campinas (Brazil)
+55 19 2102 1300
Ciudad del Este
(Paraguay)
+59 59 7214 2960
Dubai
(United Arab Emirates)
+971 4 447 8500
Dublin (Ireland)
+353 1 634 9140
Goiânia (Brazil)
+55 62 3432 7912
Hong Kong (China)
+852 3469 1900
Recife (Brazil)
+55 81 3040 1900
São Paulo (Brazil)
+55 11 3509 5400
Shanghai (China)
+86 21 5108 1234
Singapore (Singapore)
+65 6309 1000
Sorriso (Brazil)
+55 66 3212 4130
Sydney (Australia)
+61 2 8094 2000
2017 I ANNUAL REPORT
Corporate Governance Statement
The Company is committed to high standards of corporate governance and has put in place a framework that fosters
good governance, is practical for a company of our size and satisfies our current listing and regulatory requirements.
The Company has instituted a Code of Ethics that demands honest and ethical conduct from all employees. Specific
topics covered are conflicts of interest, fair dealing, compliance with regulations and accurate financial reporting.
Executives
The roles of Chairman and CEO are split. The CEO and CFO make all necessary representations to satisfy regulatory and
listing requirements. Executive compensation is determined by a Compensation Committee composed exclusively of
independent directors.
Board Of Directors
The Company has a Board of Directors consisting of one executive, one non-independent, and seven non-executive
directors, all seven of whom are independent. The Chairman is a non-executive director. The Board oversees the
strategy, finances, operations and regulatory compliance of the Company through regular quarterly meetings and
additional special meetings when required. The non-executive directors regularly meet independently of the executive
directors. The Nominating & Governance, Audit, Compensation and Risk Committees are each composed of three
independent directors. The Audit Committee meets the SEC requirement that at least one of its members should be a
financial expert.
Financial Reporting And Internal Control
The Company strives to present clear, accurate and timely financial statements. Management has a system of
internal controls in place, regularly assesses the effectiveness of these controls and modifies them as necessary. Risk
management is an important aspect of this system of internal controls, and the Risk Committee monitors compliance
with risk policies.
Investor Relations
The Company seeks to provide accurate and timely information to stockholders and other stakeholders to facilitate a
better understanding of the Company and its activities. The Company seeks to distribute such information as widely as
possible through filings on Form 8-K, press releases and postings on its website, www.intlfcstone.com.
Forward-Looking Statements
This Annual Report 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 Company’s control, including adverse changes in
economic, political and market conditions, losses from the Company’s activities arising from customer or counterparty
failures, 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 laws or regulations
and the impact of changes in technology on our businesses. Although the Company believes that its forward-looking
statements are based upon reasonable assumptions regarding its businesses and future market conditions, there can
be no assurances that the Company’s actual results will not differ materially from any results expressed or implied by
the Company’s forward-looking statements. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned
that any forward-looking statements are not guarantees of future performance.
2017 I ANNUAL REPORT Stock Listing
The Company’s common stock
trades on NASDAQ under the
symbol “INTL”.
Company Information
To receive Company material,
including additional copies of this
annual report, Forms 10-K or 10-Q,
or to obtain information on other
matters of investor interest, please
contact Group Treasurer Bruce
Fields at the Stockholder Relations
address or visit our website at
www.intlfcstone.com.
Stock Transfer Agent
And Registrar
Computershare is the transfer
agent and registrar for INTL
FCStone Inc. Inquiries about
stockholders’ accounts, address
changes or certificates should be
directed to Computershare.
To contact by mail:
462 South 4th Street, Suite 1600
Louisville, KY 40202
Executive Directors
Sean O’Connor
Chief Executive Officer/President
Officers
William Dunaway
Chief Financial Officer
Xuong Nguyen
Chief Operating Officer
Brian Sephton
Chief Legal & Governance
Officer
Bruce Fields
Group Treasurer
Tricia Harrod
Chief Risk Officer
Aaron Schroeder
Chief Accounting Officer
David Bolte
Corporate Secretary
Non-Executive Directors
John Radziwill
Chairman
Private Investor
Company Director
Paul G. (Pete) Anderson
Retired Company President
Member Risk Committee
Member Compensation
Committee
Scott Branch
Retired Company President
John M. Fowler
Chairman Compensation
Committee
Member Nominating &
Governance Committee
Private Investor
Independent Consultant
Daryl Henze
Chairman Audit Committee
Member Risk Committee
Independent Consultant
Company Director
Bruce Krehbiel
Member Audit Committee
Member Nominating &
Governance Committee
Chief Executive Officer
Kanza Cooperative Association
Eric Parthemore
Chairman Nominating &
Governance
Member Compensation
Committee
Chief Executive Officer
Heritage Cooperative, Inc.
Edward J. Grzybowski
Chairman Risk Committee
Member Audit Committee
Independent Consultant
Corporate Headquarters
And Stockholder
Relations
708 Third Avenue, Suite 1500
New York, NY 10017, USA
Tel: +1 212 485 3500
2017 I ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 2017
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 000-23554
INTL FCSTONE INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
708 Third Avenue, Suite 1500
New York, NY
(Address of principal executive offices)
59-2921318
(I.R.S. Employer Identification No.)
10017
(Zip Code)
(212) 485-3500
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE ACT:
Title of each class
Common Stock, $0.01 par value
Name of each exchange on which registered
NASDAQ Global Market
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark
YES
NO
•• if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
•• if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
•• whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
•• whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files).
•• if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
•• whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
•• whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of March 31, 2017, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $496.2 million.
As of December 12, 2017, there were 18,766,085 shares of the registrant’s common stock outstanding.
DOCUMENT INCORPORATED BY REFERENCE
Certain portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Stockholders to be held on February 14, 2018 are
incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
PART I
2
ITEM 1
Business ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������2
ITEM 1A Risk Factors �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������10
ITEM 1B Unresolved Staff Comments ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������20
ITEM 2
Properties ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������20
ITEM 3
Legal Proceedings ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������20
ITEM 4 Mine Safety Disclosures �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������21
PART II
22
ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������22
ITEM 6
Selected Financial Data �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������23
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ����������������������24
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk ���������������������������������������������������������������������������������������������������������������������������������52
ITEM 8
Financial Statements and Supplementary Data ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������54
ITEM 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ���������������102
ITEM 9A Controls and Procedures �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������102
ITEM 9B Other Information ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������103
PART III
104
ITEM 10 Directors, Executive Officers and Corporate Governance �������������������������������������������������������������������������������������������������������������������������������������������104
ITEM 11 Executive Compensation ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������104
ITEM 12
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������105
ITEM 13 Certain Relationships and Related Transactions, and Director Independence �������������������������������������������������������������������105
ITEM 14 Principal Accountant Fees and Services ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������105
PART IV
106
ITEM 15 Exhibits and Financial Statement Schedules �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������106
SIGNATURES ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������109
EXHIBIT INDEX ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������E-1
ii
- Form 10-K Cautionary Statement about Forward-Looking Statements
Certain statements in this report, other than purely historical
information, including estimates, projections, statements relating to
our business plans, objectives and expected operating results, and the
assumptions upon which those statements are based, are “forward-
looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause
actual results to differ materially from the forward-looking statements.
A detailed discussion of these and other risks and uncertainties that
could cause actual results and events to differ materially from such
forward-looking statements is included in the section entitled “Risk
Factors” (refer to Part I, Item 1A). We undertake no obligation to
update or revise publicly any forward-looking statements, whether as
a result of new information, future events or otherwise.
1
- Form 10-K
PART I
Item 1 Business
PART I
Item 1 Business
Overview of Business and Strategy
We are 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.
Our global platform has a physical presence in key financial markets
with regulatory approvals to execute both exchange-listed as well as
over-the-counter instruments in the asset classes we are active in. These
businesses are supported by our global infrastructure of regulated
operating subsidiaries, our advanced technology platform and our
team of more than 1,600 employees. 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.
We serve more than 20,000 customers located in more than
130 countries on five continents. Our customers include commercial
customers, asset managers, regional, national and introducing broker-
dealers, insurance companies, brokers, institutional and professional
investors, commercial and investment banks and governmental and
non-governmental organizations. 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 liquidity in hard to
reach markets and opportunities, and our status as a well-capitalized
and regulatory-compliant organization. Our 2016 acquisition of
the Sterne Agee correspondent clearing and independent wealth
management businesses has further expanded our ability to serve
customers by providing us with a clearing capability in securities
markets and a valuable foothold in the growing independent wealth
management industry.
We believe we are well positioned to capitalize on key trends impacting
the financial services sector. Among others, these trends include the
Available Information
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 engage in direct sales efforts to seek new customers, with a strategy
of extending our services to potential customers who are similar in
size and operations to our existing customer base. In executing this
plan, we intend to both target new geographic locations and expand
the services offered in current locations, where there is an unmet
demand for our services particularly in areas where commodity price
controls have been recently lifted. In addition, in select instances
we pursue small to medium sized acquisitions in which we target
customer-centric organizations to expand our product offerings
and/or geographic presence.
Our strategy is to utilize a centralized and disciplined process for
capital allocation, risk management and cost control, while delegating
the execution of strategic objectives and day-to-day management
to experienced individuals. This requires high quality managers, a
clear communication of performance objectives and strong financial
and compliance controls. We believe this strategy will enable us to
build a scalable and significantly larger organization that embraces
an entrepreneurial approach to business, supported and underpinned
by strong central controls.
INTL FCStone Inc. is a Delaware corporation formed in October
1987.
Our internet address is www.intlfcstone.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
statements of changes in beneficial ownership and press releases are available free of charge in the Investor Relations section of this website. Our website
also includes information regarding our corporate governance, including our Code of Ethics, which governs our directors, officers and employees.
2
- Form 10-K Capabilities
Clearing and execution
We provide competitive and efficient clearing in all major futures
and securities exchanges globally, as well as prime brokerage in all
major foreign currency pairs and swap transactions. We provide “high
touch” execution as well as electronic access through a wide variety of
technology platforms in a number of critically important global markets.
Asset and product types include listed futures and options on futures,
equities, mutual funds, equity options, corporate, government and
municipal bonds and unit investment trusts. We also provide global
payments and treasury services in more than 175 countries to a broad
array of commercial customers, including financial institutions, multi-
national corporations, and governmental and charitable organizations.
Finally, we provide clearing of foreign exchange transactions as well
as for a wide range of over-the-counter products.
Advisory Services
We provide value-added advisory services across a variety of financial
markets, including commodities, foreign currencies, interest rates,
institutional asset management, and independent wealth management.
For commercial customers with exposure to commodities, foreign
currencies and interest rates, we work through our proprietary
Integrated Risk Management Program (“IRMP®”) to systematically
identify and quantify their risks and then develop strategic plans to
effectively manage these risks with a view to protecting their margins
and ultimately improving their bottom lines.
We also participate in the underwriting and trading of municipal
securities in domestic markets as well as asset-backed securities in our
Argentinean operations. Through our asset management activities, we
leverage our specialist expertise in niche markets to provide institutional
trading Revenues
PART I
Item 1 Business
investors with tailored investment products. Through our acquisition
of the Sterne Agee independent wealth management business, we
provide advisory services to the growing retail investor market.
Physical trading
We trade in a variety of physical commodities, primarily precious
metals, as well as across the commodity complex, including energy
commodities, grains, oil seeds, cotton, coffee, cocoa, edible oils and
feed products. Through these trading activities, we have the ability
to offer complex hedging structures as part of each physical contract
to provide customers with enhanced price risk mitigation. We also
offer customers efficient off-take or supply services, as well as logistics
management.
OtC / market-making
We offer customers access to the over-the-counter (“OTC”) markets
for virtually all traded commodities, foreign currencies and interest
rates, as well as for foreign securities in the U.S. For customers with
commodity price and financial risk, our customized and complex
OTC structures help mitigate those risks by integrating the processes
of product design, execution of the underlying components of the
structured risk product, transaction reporting and valuation.
By providing market-making and execution in a variety of financial
products including commodity options, unlisted American Depository
Receipts (“ADRs”) and Global Depository Receipts (“GDRs”),
foreign ordinary shares, and foreign currencies. In addition, we are an
institutional dealer in fixed income securities including United States
(“U.S.”) Treasury, U.S. government agency, agency mortgage-backed
and asset-backed securities.
In our business, we may act as principal in the purchase and sale of
individual securities, currencies, commodities, or derivative instruments
with our customers. These transactions may be offset simultaneously
with another customer or counterparty, offset with similarly but not
identical positions on an exchange, made from inventory, or aggregated
with other purchases to provide liquidity intra-day, for a number of
days, or in some cases even longer periods (during which fair value
may fluctuate). In addition, in our Clearing and Execution Services
segment, we operate a proprietary foreign exchange desk which
arbitrages the futures and cash markets.
Operating Segments
We organize our business activities into five functional areas: Commercial Hedging, Global Payments, Securities, Physical Commodities and
Clearing and Execution Services.
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 and structured
OTC products designed for customized solutions.
3
- Form 10-K PART I
Item 1 Business
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 London Metals
Exchange (“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.
Within this segment, our risk management consultants organize their
marketing efforts into customer industry product lines, and currently
serve customers in the following areas:
•• Financial Agricultural & Energy
•– Agricultural —
•■ Grain elevator operators, grain merchandisers, traders, processors,
manufacturers and end-users.
•■ Livestock production, feeding and processing, dairy and users
of agricultural commodities in the food industry.
•■ Coffee, sugar and cocoa producers, processors and end-users.
•■ Global fiber, textile and apparel industry.
Global Payments
We provide global payment solutions to banks and commercial
businesses as well as charities and 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.
•– Energy and renewable fuels —
•■ Producers, refiners, wholesalers, transportation companies,
convenience store chains, automobile and truck fleet operators,
industrial companies, railroads, and municipalities.
•■ Consumers of natural gas including some of the largest natural
gas consumers in North America, including municipalities and
large manufacturing firms, as well as major utilities.
•■ Ethanol and biodiesel producers and end-users.
•– Other —
•■ Lumber mills, wholesalers, distributors and end-users.
•■ Commercial entities seeking to hedge their foreign exchange
exposures.
•• LME Metals
•– Commercial —
•■ Producers, consumers and merchants of copper, aluminum,
zinc, lead, nickel, tin and other ferrous products.
•– Institutional —
•■ Commodity trading advisors and hedge funds seeking clearing
and execution of LME and NYMEX/COMEX base metal
products.
Additionally, as a member of the Society for Worldwide Interbank
Financial Telecommunication (“SWIFT”), we are able to offer
our services to large money center and global banks seeking more
competitive international payments 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.
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 local understanding of 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, 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.
4
- Form 10-K PART I
Item 1 Business
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.
Physical Commodities
This segment consists of our physical Precious Metals trading and
Physical Agricultural (“Ag”) and 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.
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 upon execution do not meet all the
criteria to be accounted for as product financing arrangements and
therefore are recorded as commodity inventory and purchases and sales.
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.
Clearing and execution Services (“CeS”)
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.
Through our platform, customer orders are accepted and directed to
the appropriate exchange for execution. We then facilitate the clearing
of customers’ 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.
As of September 30, 2017, we held $2.2 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.
Following our acquisition of the Sterne Agee 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
We generally mitigate the price risk associated with commodities
held in inventory through the use of derivatives. We do not elect
hedge accounting under accounting principles generally accepted in
the United States of America (“U.S. GAAP”) in accounting for this
price risk mitigation.
settlement process. Also as part of this transaction, we acquired
Sterne Agee’s 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 clearer’s in the securities
industry, with approximately 50 correspondent clearing relationships
with over $15 billion in assets under management or administration
as of September 30, 2017.
In addition, 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.
Following the October 1, 2016 acquisition of ICAP plc’s London-based
EMEA oil voice brokerage business, we employ over 30 employees
providing 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.
5
- Form 10-K PART I
Item 1 Business
Acquisition and Internal Subsidiary Consolidation during Fiscal Year 2017
ICAP’s emeA Oils Broking Business
Internal Subsidiary Consolidation
Effective October 1, 2016, our wholly owned subsidiary, INTL FCStone
Ltd (“IFL”), acquired the London-based EMEA oils business of ICAP
plc. The business included over 30 front office employees across the
fuel, crude, middle distillates, futures and options desks that have
relationships with over 200 commercial and institutional customers
throughout Europe, the Middle East and Africa. The purchase price
included cash consideration of $6.0 million paid directly to ICAP as
well as incentive amounts payable to employees acquired based upon
their continued employment.
Acquisition during Fiscal Year 2016
Effective July 1, 2017, we merged our wholly-owned regulated U.S.
subsidiary, Sterne Agee & Leach, Inc., into our wholly owned regulated
U.S. subsidiary, INTL FCStone Financial Inc. (“INTL FCStone
Financial”), which is registered as both a broker-dealer and a FCM.
As such, the assets, liabilities and equity of Sterne Agee & Leach, Inc.
were transferred into INTL FCStone Financial.
Sterne Agee
Effective July 1, 2016, we acquired all of the legacy independent
brokerage and clearing businesses of Sterne Agee, LLC, a wholly-
owned subsidiary of Stifel Financial Corp. Effective August 1, 2016,
we acquired all of the legacy Registered Investment Advisor (“RIA”)
business of Sterne Agee, LLC. Pursuant to the two stock purchase
agreements, we acquired Sterne Agee & Leach, Inc.; Sterne Agee
Clearing, Inc.; Sterne Agee Financial Services, Inc.; Sterne Agee Asset
Management, Inc. and Sterne Agee Investment Advisor Services, Inc.
for cash consideration. The purchase price of $45.0 million represents
a discount to the allocation of fair value to the net assets of the Sterne
entities acquired. The $6.2 million discount in the purchase price as
compared to the allocation of fair value to the net assets at closing has
been reflected as a bargain purchase gain on the transaction within
“gain on acquisition” in the Consolidated Income Statement for the
year ended September 30, 2016.
Acquisition and Internal Subsidiary Consolidation during Fiscal Year 2015
G.X. Clarke & Co.
Effective January 1, 2015, we acquired all of the partnership interests
of G.X. Clarke & Co. (“G.X. Clarke”), an SEC registered institutional
dealer in fixed income securities. G.X. Clarke was based in New Jersey,
transacted in U.S. Treasury, U.S. government agency and agency
mortgage-backed securities, and was a member of the Financial Industry
Regulatory Authority (“FINRA”) with an institutional customer base
consisting of asset managers, commercial bank trust and investment
departments, broker-dealers, and insurance companies. The purchase
price was equal to G.X. Clarke’s net tangible book value at closing of
$25.9 million plus a premium of $1.5 million, and up to an additional
$1.5 million over the next three years, subject to the achievement of
certain profitability thresholds. In conjunction with the acquisition,
the name of G.X. Clarke was changed to INTL FCStone Partners L.P.
Internal Subsidiary Consolidation
Effective July 1, 2015, we merged three of our wholly-owned regulated
U.S. subsidiaries into our wholly owned regulated U.S. subsidiary,
INTL FCStone Securities Inc., and the surviving entity was renamed
INTL FCStone Financial Inc. As such, the assets, liabilities and equity
of FCStone, LLC, INTL FCStone Partners L.P., and FCC Investments,
Inc. were transferred into INTL FCStone Financial.
Competition
The international commodities and financial markets are highly
competitive and rapidly evolving. In addition, these markets are
dominated by firms with significant capital and personnel resources
that are not matched by our resources. We expect these competitive
conditions to continue in the future, although the nature of the
competition may change as a result of ongoing changes in the regulatory
environment. We believe that we can compete successfully with other
commodities and financial intermediaries in the markets we seek to
serve, based on our expertise, products and quality of consulting and
execution services.
We compete with a large number of firms in the exchange-traded
futures and options on futures execution sector and in the OTC
derivatives sector. We compete primarily on the basis of diversity
and value of services offered, and to a lesser extent on price. Our
competitors in the exchange-traded futures and options sector include
international, national and regional brokerage firms as well as local
introducing brokers, with competition driven by price level and
quality of service. Many of these competitors also offer OTC trading
programs. In addition, there are a number of financial firms and
6
- Form 10-K PART I
Item 1 Business
physical commodities firms that participate in the OTC markets,
both directly in competition with us and indirectly through firms
like us. We compete in the OTC market by making specialized OTC
transactions available to our customers in contract sizes that are smaller
than those usually available from major counterparties.
Investor interest in the markets we serve impact and will continue
to impact our activities. The instruments traded in these markets
compete with a wide range of alternative investment instruments.
We seek to counterbalance changes in demand in specified markets
by undertaking activities in multiple uncorrelated markets.
Technology has increased competitive pressures on commodities and
financial intermediaries by improving dissemination of information,
making markets more transparent and facilitating the development of
alternative execution mechanisms. In certain instances, we compete by
providing technology-based solutions to facilitate customer transactions
and solidify customer relationships.
Administration and Operations
We employ operations personnel to supervise and, for certain products,
complete the clearing and settlement of transactions.
INTL FCStone Financial is a self-clearing broker-dealer which holds
customer funds and maintains deposits with the National Securities
Clearing Corporation, Inc. (“NSCC”), MBS Clearing Corporation,
Inc., Depository Trust & Clearing Corporation, Inc. (“DTCC”) and
the Options Clearing Corporation (“OCC”). In addition, it clears
a portion of its securities transactions through Broadcort, a division
of Merrill Lynch, Pierce, Fenner & Smith, Inc and Pershing LLC, a
subsidiary of The Bank of New York Mellon Corporation.
reporting to exchange clearing organizations, internal risk controls, and
reporting to government and regulatory entities, corporate managers,
risk managers and customers. A third-party service bureau located in
Hopkins, MN maintains our futures and options back office system.
It has a disaster recovery site in Salem, NH.
We hold customer funds in relation to certain of our activities.
In regulated entities, these customer funds are segregated, but in
unregulated entities they are not. For a further discussion of customer
segregated funds in our regulated entities, please see the “Customer
Segregated Assets” discussion below.
We utilize front-end electronic trading, back office and accounting
systems to process transactions on a daily basis. In some cases these
systems are integrated. The systems provide record keeping, trade
Our administrative staff manages our internal financial controls,
accounting functions, office services and compliance with regulatory
requirements.
Governmental Regulation and exchange membership
Our activities are subject to significant governmental regulation,
both in the U.S. and overseas. Failure to comply with regulatory
requirements could result in administrative or court proceedings,
censure, fines, issuance of cease-and-desist orders, or suspension or
disqualification of the regulated entity, its officers, supervisors or
representatives. The regulatory environment in which we operate
is subject to frequent change and these changes directly impact our
business and operating results.
The commodities industry in the U.S. is subject to extensive regulation
under federal law. We are required to comply with a wide range of
requirements imposed by the Commodity Futures Trading Commission
(the “CFTC”), the National Futures Association (the “NFA”) and the
Chicago Mercantile Exchange, which is our designated self-regulatory
organization. We are also a member of the Chicago Mercantile Exchange’s
divisions: the Chicago Board of Trade, the New York Mercantile Exchange
and COMEX, ICE Futures US, ICE Europe Ltd, the New Zealand
Exchange and the Minneapolis Grain Exchange. These regulatory
bodies protect customers by imposing requirements relating to capital
adequacy, licensing of personnel, conduct of business, protection of
customer assets, record-keeping, trade-reporting and other matters.
The securities industry in the U.S. is subject to extensive regulation
under federal and state securities laws. We must comply with a wide
range of requirements imposed by the Securities and Exchange
Commission (the “SEC”), state securities commissions, the Municipal
Securities Rulemaking Board (“MSRB”) and FINRA. These regulatory
bodies safeguard the integrity of the financial markets and protect the
interests of investors in these markets. They also impose minimum
capital requirements on regulated entities.
The Financial Conduct Authority (“FCA”), the regulator of the financial
services industry in the United Kingdom, regulates our subsidiary,
INTL FCStone Ltd, as a Financial Services Firm under part IV of
the Financial Services and Markets Act 2000. The regulations impose
regulatory capital, as well as conduct of business, governance, and
other requirements. The conduct of business rules include those that
govern the treatment of customer money and other assets which,
under certain circumstances for certain classes of customers must be
segregated from the firm’s own assets. INTL FCStone Ltd is a member
of the LME, ICE Europe Ltd, LCH Enclear, Euronext, the European
Energy Exchange, Eurex and Norexco ASA.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”) created a comprehensive new regulatory
regime governing over-the-counter derivatives (“swaps”) and further
regulations on listed derivatives. The Dodd-Frank Act also created a
registration regime for new categories of market participants, such
as “swap dealers”, among others. Our wholly owned subsidiary,
INTL FCStone Markets, LLC is a CFTC provisionally registered
swap dealer, whose business is overseen by the National Futures
Association (“NFA”), the self-regulatory organization for the U.S.
derivatives industry.
The Dodd-Frank Act generally introduced a framework for (i) swap data
reporting and record keeping on counterparties and data repositories;
(ii) centralized clearing for swaps, with limited exceptions for end-users;
(iii) the requirement to execute swaps on regulated swap execution
facilities; (iv) imposition on swap dealers to exchange margin on
uncleared swaps with counterparties; and (v) the requirement to
comply with new capital rules.
7
- Form 10-K PART I
Item 1 Business
Effective September 2016, CFTC margin rules came into effect,
imposing new requirements to exchange initial and variation margin,
depending upon aggregate daily notional transactions outstanding,
with an implementation period ending in 2020. CFTC capital rules
have not been finalized and therefore it is too early to predict with
any degree of certainty how we will be affected. We will continue to
monitor all applicable developments in the ongoing implementation
of the Dodd-Frank Act. The legislation and implementing regulations
affect not only us, but also our customers and counterparties.
Instruments Directive II (“MIFID II”) and the Markets in Financial
Instruments Regulation (“MIFIR”), for which implementation is
scheduled for 2018,. Principal areas of impact related to these regulatory
texts will involve emergence and oversight of organized trade facilities
(“OTF’s”) for trading OTC non-equity products, customer type
re-assessment, investor protection, enhanced conflict of interest and
execution policies, transparency obligations and extended transaction
reporting requirements. We will continue to monitor all applicable
developments in the ongoing implementation of MIFID II.
The European Markets Infrastructure Regulation (“EMIR”) is the
European regulations on OTC derivatives, central counterparties
and trade repositories. The EMIR has been implemented across the
European Economic Area member states by the European Banking
Authority (“EBA”) and Markets Authority (“ESMA”). ESMA is
continuing to evaluate and set clearing obligations for certain OTC
derivatives. We will continue to monitor all applicable developments
in the ongoing implementation of EMIR.
The EMIR has imposed new requirements on our European operations,
including (a) reporting derivatives to a trade repository; (b) putting in place
certain risk management procedures for OTC derivative transactions that
are not cleared; (c) changes to our clearing account models and increased
central counterparty margin requirements. Reporting requirements came
into effect in February 2014 and most risk mitigation procedures were set
at the end of 2013. Implementation of collateral obligations applicable to
non-cleared OTC transactions came into force during 2017. Contractual
and operational changes have been implemented to accommodate the
new requirements. ESMA is continuing to evaluate and set clearing
obligations for certain OTC derivatives. These obligations are due to
be rolled out with some complementary MiFID provisions in 2018.
We comply with the enacted provisions and will do so when pending
EMIR provisions are finalized as relevant to its activities.
In addition to the EMIR, the FCA will be enforcing additional
European Union issued regulations such as the Markets in Financial
Net Capital Requirements
INTL FCStone Financial is a dually registered broker-dealer/FCM and
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. Net
capital and the related net capital requirement may fluctuate on a daily
basis. Compliance with minimum capital requirements may limit our
operations if we cannot maintain the required levels of capital and
restrict the ability of INTL FCStone Financial to make distributions
to us. Moreover, any change in these rules or the imposition of new
rules affecting the scope, coverage, calculation or amount of capital
we are required to maintain could restrict our ability to operate our
business and adversely affect our operations.
INTL Custody & Clearing Solutions Inc. (formerly Sterne Agee
Clearing, Inc.) and SA Stone Wealth Management Inc. (formerly
8
The USA PATRIOT Act contains anti-money laundering and financial
transparency laws and mandates the implementation of various
regulations applicable to broker-dealers and other financial services
companies. The USA PATRIOT Act seeks to promote cooperation
among financial institutions, regulators and law enforcement entities
in identifying parties that may be involved in terrorism or money
laundering. Anti-money laundering laws outside of the U.S. contain
similar provisions. We believe that we have implemented, and that we
maintain, appropriate internal practices, procedures and controls to
enable us to comply with the provisions of the USA PATRIOT Act
and other anti-money laundering laws.
The U.S. maintains various economic sanctions programs administered
by the U.S. Treasury Department’s Office of Foreign Assets Control
(“OFAC”). The OFAC administered sanctions take many forms,
but generally prohibit or restrict trade and investment in and with
sanctions targets, and in some cases require blocking of the target’s
assets. Violations of any of the OFAC-administered sanctions are
punishable by civil fines, criminal fines, and imprisonment. We
established policies and procedures designed to comply with applicable
OFAC requirements. Although we believe that our policies and
procedures are effective, there can be no assurance that our policies
and procedures will effectively prevent us from violating the OFAC-
administered sanctions in every transaction in which we may engage.
Sterne Agee Financial Services, Inc.) are subject to the SEC Uniform
Net Capital Rule 15c3-1 under the Securities Exchange Act of 1934.
INTL FCStone Ltd, a Financial Services Firm regulated by the FCA
is subject to a net capital requirement.
The Australian Securities and Investment Commission regulates
INTL FCStone Pty. Ltd. It is subject to a net tangible asset capital
requirement.
The Brazilian Central Bank and Securities and Exchange Commission
of Brazil regulates INTL FCStone DTVM Ltda. (“INTL FCStone
DTVM”). It is a registered broker-dealer and is subject to a capital
adequacy requirement.
The Comision Nacional de Valores regulates INTL Gainvest S.A.
and INTL CIBSA S.A. and they are subject to net capital and capital
adequacy requirements. The Rosario Futures Exchange and the
General Inspector of Justice regulate INTL Capital, S.A. It is subject
to a capital adequacy requirement.
- Form 10-K 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.
All of our subsidiaries are in compliance with all of their capital
regulatory requirements as of September 30, 2017. Additional
information on these net capital and minimum net capital requirements
can be found in Note 13 to the Consolidated Financial Statements.
PART I
Item 1 Business
Segregated Customer Assets
INTL FCStone Financial maintains customer segregated deposits from
its customers relating to their trading of futures and options on futures
on U.S. commodities exchanges held with INTL FCStone Financial,
making it subject to CFTC regulation 1.20, which specifies that such
funds must be held in segregation and not commingled with the firm’s
own assets. INTL FCStone Financial maintains acknowledgment
letters from each depository at which it maintains customer segregated
deposits in which the depository acknowledges the nature of funds on
deposit in the account. In addition, CFTC regulations require filing
of a daily segregation calculation which compares the assets held in
customers segregated depositories (“segregated assets”) to the firm’s
total segregated assets held on deposit from customers (“segregated
liabilities”). The amount of customer segregated assets must be in
excess of the segregated liabilities owed to customers and any shortfall
in such assets must be immediately communicated to the CFTC.
As of September 30, 2017, INTL FCStone Financial maintained
$52.3 million in segregated assets in excess of its segregated liabilities.
In addition, INTL FCStone Financial is subject to CFTC regulation
1.25, which governs the acceptable investment of customer segregated
assets. This regulation allows for the investment of customer segregated
assets in readily marketable instruments including U.S. Treasury securities,
municipal securities, government sponsored enterprise securities, certificates
of deposit, commercial paper and corporate notes or bonds which are
Secured Customer Assets
guaranteed by the U.S. under the Temporary Liquidity Guarantee Program,
interest in money market mutual funds, and repurchase transactions with
unaffiliated entities in otherwise allowable securities. INTL FCStone
Financial predominately invests its customer segregated assets in U.S.
Treasury securities and money market mutual funds.
In addition, INTL FCStone Financial maintains deposits from its
customers related to its status as a self-clearing broker-dealer registered
with the SEC and FINRA making it subject to Rule 15c3-3 under the
Securities Exchange Act of 1934, which specifies that under certain
circumstances a broker-dealer must maintain cash or qualified securities
in a segregated reserve account for the exclusive benefit of its customers
and proprietary accounts of broker-dealers. As of September 30,
2017, INTL FCStone Financial maintained $20.7 million in a special
reserve bank account for the exclusive benefit of its customers and
proprietary accounts of broker-dealers.
INTL FCStone Ltd is subject to certain business rules, including
those that govern the treatment of customer money and other assets
which under certain circumstances for certain classes of customer
must be segregated from the firm’s own assets. As of September 30,
2017, INTL FCStone Ltd was in compliance with the applicable
segregated funds requirements.
INTL FCStone Financial maintains customer secured deposits from
its customers funds relating to their trading of futures and options
on futures traded on, or subject to the rules of, a foreign board of
trade held with INTL FCStone Financial, making it subject to CFTC
Regulation 30.7, which requires that such funds must be carried
in separate accounts in an amount sufficient to satisfy all of INTL
FCStone Financial’s current obligations to customers trading foreign
futures and foreign options on foreign commodity exchanges or
boards of trade, which are designated as secured customers’ accounts.
As of September 30, 2017, INTL FCStone Financial maintained
$16.4 million in secured assets in excess of its secured liabilities.
Foreign Operations
We operate in a number of foreign jurisdictions, including Canada, Ireland,
the United Kingdom, Argentina, Brazil, Colombia, Uruguay, Paraguay,
Mexico, Nigeria, Dubai, China, South Korea, Hong Kong, Australia
and Singapore. We established wholly owned subsidiaries in Uruguay
and Nigeria but do not have offices or employees in those countries.
INTL FCStone Ltd is domiciled in the United Kingdom, and subject
to regulation by the FCA.
In Argentina, the activities of INTL Gainvest S.A. and INTL CIBSA
S.A. are subject to regulation by the Comision Nacional de Valores
and the activities of INTL Capital, S.A. are subject to regulation by
the Rosario Futures Exchange and the General Inspector of Justice.
In Brazil, the activities of FCStone do Brasil are subject to regulation
by BM&F Bovespa, and the activities of INTL FCStone DTVM
Ltda. are regulated by the Brazilian Central Bank and Securities and
Exchange Commission of Brazil.
The activities of INTL Commodities DMCC are subject to regulation
by the Dubai Multi Commodities Centre.
INTL FCStone Pte. Ltd. is subject to regulation by the Monetary
Authority of Singapore.
INTL FCStone Pty. Ltd. is subject to regulation by the Australian
Securities and Investments Commission.
INTL FCStone (Hong Kong) Limited holds a type 2 derivatives license
and is subject to regulation by the Securities & Futures Commission
of Hong Kong.
9
- Form 10-K PART I
Item 1A Risk Factors
Business Risks
We seek to mitigate the market and credit risks arising from our
financial trading activities through an active risk management program.
The principal objective of this program is to limit trading risk to an
acceptable level while maximizing the return generated on the risk
assumed.
We have a defined risk policy administered by our risk management
committee, which reports to the risk committee of our board of
directors. We established specific exposure limits for inventory positions
in every business, as well as specific issuer limits and counterparty
limits. We designed these limits to ensure that in a situation of
unexpectedly large or rapid movements or disruptions in one or more
markets, systemic financial distress, the failure of a counterparty or
the default of an issuer, the potential estimated loss will remain within
acceptable levels. The risk committee of our board of directors reviews
the performance of the risk management committee on a quarterly
basis to monitor compliance with the established risk policy.
employees
As of September 30, 2017, we employed 1,607 people globally: 1,047 in the U.S., 260 in the United Kingdom, 123 in Brazil, 75 in Argentina,
54 in Singapore, 11 in Dubai, 10 in Australia, 9 in Paraguay, 10 in China, 4 in Hong Kong and 4 in Mexico. None of our employees operate
under a collective bargaining agreement, and we have not suffered any work stoppages or labor disputes. Many of our employees are subject
to employment agreements, certain of which contain non-competition provisions.
Item 1A Risk Factors
We face a variety of risks that could adversely impact our financial
condition and results of operations, including the following:
Our ability to achieve consistent profitability is subject
to uncertainty due to the nature of our businesses and
the markets in which we operate.
During the fiscal year ended September 30, 2017 we recorded net
income of $6.4 million, compared to net income of $54.7 million
in fiscal 2016 and $55.7 million in fiscal 2015.
Our revenues and operating results may fluctuate significantly in the
future because of the following factors:
•• Market conditions, such as price levels and volatility in the
commodities, securities and foreign exchange markets in which
we operate;
•• Changes in the volume of our market-making and trading activities;
•• Changes in the value of our financial instruments, currency and
commodities positions and our ability to manage related risks;
•• The level and volatility of interest rates;
•• The availability and cost of funding and capital;
•• Our ability to manage personnel, overhead and other expenses;
•• Changes in execution and clearing fees;
•• The addition or loss of sales or trading professionals;
•• Changes in legal and regulatory requirements; and
•• General economic and political conditions.
Although we continue our efforts to diversify the sources of our
revenues, it is likely that our revenues and operating results will
continue to fluctuate substantially in the future and such fluctuations
could result in losses. These losses could have a material adverse effect
on our business, financial condition and operating results.
10
The manner in which we account for certain of our
precious metals commodities inventory may increase
the volatility of our reported earnings.
Our net income is subject to volatility due to the manner in which we
report our precious metals commodities inventory held by subsidiaries
that are not broker-dealers. Our precious metals inventory held in
subsidiaries which are not broker-dealers is stated at the lower of cost or
market value. We generally mitigate the price risk associated with our
commodities inventory through the use of derivatives. We do not elect
hedge accounting under U.S. GAAP for this price risk mitigation. In
such situations, any unrealized gains in our precious metals inventory
in our non-broker-dealer subsidiaries are not recognized under U.S.
GAAP, but unrealized gains and losses in related derivative positions
are recognized under U.S. GAAP. As a result, our reported earnings
from these business segments are subject to greater volatility than the
earnings from our other business segments.
Our indebtedness could adversely affect our financial
condition.
As of September 30, 2017, our total consolidated indebtedness was
$230.2 million, and we may increase our indebtedness in the future
as we continue to expand our business. Our indebtedness could have
important consequences, including:
•• increasing our vulnerability to general adverse economic and industry
conditions;
•• requiring that a portion of our cash flow from operations be used
for the payment of interest on our debt, thereby reducing our ability
to use our cash flow to fund working capital, capital expenditures,
acquisitions and general corporate requirements;
•• limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions and general
corporate requirements;
- Form 10-K •• limiting our flexibility in planning for, or reacting to, changes in
our business and the securities industry; and
•• restricting our ability to pay dividends or make other payments.
We may be able to incur additional indebtedness in the future, including
secured indebtedness. If new indebtedness is added to our current
indebtedness levels, the related risks that we now face could intensify.
Committed credit facilities currently available to us
might not be renewed.
We currently have four committed credit facilities under which we
may borrow up to $532.0 million, consisting of:
•• a $262.0 million facility available to INTL FCStone Inc., for general
working capital requirements, committed until March 18, 2019.
•• a $75.0 million facility available to our wholly owned subsidiary,
INTL FCStone Financial, for short-term funding of margin to
commodity exchanges, committed until April 5, 2018.
•• a $170.0 million committed facility available to our wholly owned
subsidiary, FCStone Merchant Services, LLC, for commodity
financing arrangements and commodity repurchase agreements,
committed until May 1, 2018.
•• a $25.0 million facility available to our wholly owned subsidiary,
INTL FCStone Ltd, for short-term funding of margin to commodity
exchanges, committed until November 7, 2018.
During fiscal 2018, $245 million of our committed credit facilities are
scheduled to expire. There is no guarantee that we will be successful
in renewing, extending or rearranging these facilities.
It is possible that these facilities might not be renewed at the end of
their commitment periods and that we will be unable to replace them
with other facilities. If our credit facilities are unavailable or insufficient
to support future levels of business activities, we may need to raise
additional funds externally, either in the form of debt or equity. If
we cannot raise additional funds on acceptable terms, we may not
be able to develop or enhance our business, take advantage of future
opportunities or respond to competitive pressure or unanticipated
requirements, leading to reduced profitability.
Our failure to successfully integrate the operations of
businesses acquired could have a material adverse effect
on our business, financial condition and operating
results.
We have a history of making acquisitions to expand our product
offerings and /or geographic presence and may continue to do so in
the future. We will need to meet challenges to realize the expected
benefits and synergies of these acquisitions, including:
•• integrating the management teams, strategies, cultures, technologies
and operations of the acquired companies;
•• retaining and assimilating the key personnel of acquired companies;
•• retaining existing customers of the acquired companies;
•• creating uniform standards, controls, procedures, policies and
information systems; and
•• achieving revenue growth because of risks involving (1) the ability
to retain customers, (2) the ability to sell the services and products
PART I
Item 1A Risk Factors
of the acquired companies to the existing customers of our other
business segments, and (3) the ability to sell the services and products
of our other business segments to the existing customers of the
acquired companies.
The accomplishment of these objectives will involve considerable
risk, including:
•• the potential disruption of each company’s ongoing business and
distraction of their respective management teams;
•• unanticipated expenses related to technology integration; and
•• potential unknown liabilities associated with the acquisitions.
It is possible that the integration process could result in the loss of
the technical skills and management expertise of key employees, the
disruption of the ongoing businesses or inconsistencies in standards,
controls, procedures and policies due to possible cultural conflicts
or differences of opinions on technical decisions and product road
maps that adversely affect our ability to maintain relationships with
customers, counterparties, and employees or to achieve the anticipated
benefits of the acquisition.
We face risks associated with our market-making and
trading activities.
We conduct our market-making and trading activities predominantly
as a principal, which subjects our capital to significant risks. These
activities involve the purchase, sale or short sale for customers and
for our own account of financial instruments, including equity and
debt securities, commodities and foreign exchange. These activities are
subject to a number of risks, including risks of price fluctuations, rapid
changes in the liquidity of markets and counterparty creditworthiness.
These risks may limit our ability to either resell financial instruments we
purchased or to repurchase securities we sold in these transactions. In
addition, we may experience difficulty borrowing financial instruments
to make delivery to purchasers to whom we sold short, or lenders
from whom we have borrowed. From time to time, we have large
position concentrations in securities of a single issuer or issuers in
specific countries and markets. This concentration could result in
higher trading losses than would occur if our positions and activities
were less concentrated.
The success of our market-making activities depends on:
•• the price volatility of specific financial instruments, currencies and
commodities,
•• our ability to attract order flow;
•• the skill of our personnel;
•• the availability of capital; and
•• general market conditions.
To attract market-trading, market-making and trading business, we
must be competitive in:
•• providing enhanced liquidity to our customers;
•• the efficiency of our order execution;
•• the sophistication of our trading technology; and
•• the quality of our customer service.
11
- Form 10-K PART I
Item 1A Risk Factors
In our role as a market maker and trader, we attempt to derive a
profit from the difference between the prices at which we buy and
sell financial instruments, currencies and commodities. However,
competitive forces often require us to:
•• match the quotes other market makers display; and
•• hold varying amounts of financial instruments, currencies and
commodities in inventory.
By having to maintain inventory positions, we are subject to a high
degree of risk. We cannot ensure that we will be able to manage our
inventory risk successfully or that we will not experience significant
losses, either of which could materially adversely affect our business,
financial condition and operating results.
We operate as a principal in the OTC derivatives
markets which involves the risks associated with
commodity derivative instruments.
We offer OTC derivatives to our customers in which we act as a principal
counterparty. We endeavor to simultaneously offset the commodity
price risk of the instruments by establishing corresponding offsetting
positions with commodity counterparties, or alternatively we may
offset those transactions with similar but not identical positions on
an exchange. To the extent that we are unable to simultaneously offset
an open position or the offsetting transaction is not fully effective to
eliminate the commodity derivative risk, we have market risk exposure
on these unmatched transactions. Our exposure varies based on the
size of the overall positions, the terms and liquidity of the instruments
brokered, and the amount of time the positions remain open.
To the extent an unhedged position is not disposed of intra-day,
adverse movements in the commodities underlying these positions
or a downturn or disruption in the markets for these positions could
result in a substantial loss. In addition, any principal gains and losses
resulting from these positions could on occasion have a disproportionate
effect, positive or negative, on our financial condition and results of
operations for any particular reporting period.
Proposed changes to the U.S. corporate tax system may
have a significant effect on the carrying value of our
net deferred tax assets and could result in additional
U.S. corporate tax liabilities on unremitted earnings of
our foreign subsidiaries.
The current administration and members of the U.S. Congress are
currently pursuing reform of the U.S. tax system and have proposed
sweeping changes to the U.S. tax system. These reforms may include
changes to corporate tax rates, limitations on deductibility of interest
and other expenses, changes in the taxation of income earned outside
the United States and taxing previously unremitted foreign earnings
at concessional tax rates.
A decrease in the U.S. corporate tax rate could have a material adverse
effect on earnings in the quarter in which the legislation is enacted
due to our net deferred tax asset position. It also remains uncertain
as to the level of conformity and consistency to the U.S. federal
income tax changes that shall be applied by the state and local income
tax jurisdictions. Given the number of uncertainties relating to the
ultimate form any corporate tax reform may take, it is not possible
to quantify the potential negative impact to the carrying value of our
deferred tax assets or future tax liabilities.
We may have difficulty managing our growth.
We have experienced significant growth in our business. Our operating
revenues grew from $468.2 million in fiscal 2013 to $784.0 million
in fiscal 2017.
This growth required, and will continue to require, us to increase our
investment in management personnel, financial and management
systems and controls, and facilities. In the absence of continued revenue
growth, the costs associated with our expected growth would cause
our operating margins to decline from current levels. In addition,
as is common in the financial industry, we are and will continue to
be highly dependent on the effective and reliable operation of our
communications and information systems.
Transactions involving OTC derivative contracts may be adversely affected
by fluctuations in the level, volatility, correlation or relationship between
market prices, rates, indices and/or other factors. These types of instruments
may also suffer from illiquidity in the market or in a related market.
The scope of procedures for assuring compliance with applicable rules
and regulations changes as the size and complexity of our business
increases. In response, we have implemented and continue to revise
formal compliance procedures.
OTC derivative transactions are subject to unique risks.
OTC derivative transactions are subject to the risk that, as a result
of mismatches or delays in the timing of cash flows due from or to
counterparties in OTC derivative transactions or related hedging,
trading, collateral or other transactions, we or our counterparty may
not have adequate cash available to fund its current obligations.
We could incur material losses pursuant to OTC derivative transactions
because of inadequacies in or failures of our internal systems and controls
for monitoring and quantifying the risk and contractual obligations
associated with OTC derivative transactions and related transactions
or for detecting human error, systems failure or management failure.
OTC derivative transactions may be modified or terminated only by
mutual consent of the original parties and subject to agreement on
individually negotiated terms. Accordingly it may not be possible
to modify, terminate or offset obligations or exposure to the risk
associated with a transaction prior to its scheduled termination date.
It is possible that we will not be able to manage our growth successfully.
Our inability to do so could have a material adverse effect on our
business, financial condition and operating results.
Lapses in disclosure controls and procedures or internal
control over financial reporting could materially
and adversely affect our operations, profitability or
reputation.
We are committed to maintaining high standards of internal control over
financial reporting and disclosure controls and procedures. Nevertheless,
lapses or deficiencies in disclosure controls and procedures or in our
internal control over financial reporting may occur from time to time.
We reported management’s conclusion that material weaknesses existed
in our internal control over financial reporting at September 30, 2017.
This determination related to one of our physical trading businesses based
in Singapore which we subsequently closed and exited. As a result of the
material weaknesses, management also concluded that our disclosure
12
- Form 10-K controls and procedures were not effective at September 30, 2017.
Management is taking steps to remediate the internal control deficiency,
including enhancing controls and monitoring of new businesses.
There can be no assurance that our disclosure controls and procedures
will be effective in the future or that a material weakness in internal
control over financial reporting will not again exist. Any such lapses
or deficiencies may materially and adversely affect our business and
results of operations or financial condition, require us to expend
significant resources to correct the lapses or deficiencies, expose
us to regulatory or legal proceedings, subject us to fines, penalties,
judgments or losses not covered by insurance, harm our reputation,
or otherwise cause a decline in investor confidence.
Our risk management policies and procedures may
leave us exposed to unidentified or unanticipated risk,
which could harm our business.
We have devoted significant resources to develop our risk management
policies and procedures and expect to continue to do so in the
future. However, our risk management policies and procedures may
not be fully effective in mitigating our risk exposure in all market
environments or against all types of risk, including risks that are
unidentified or unanticipated. Our risk management policies and
procedures require, among other things, that we properly record and
verify many thousands of transactions and events each day, and that
we continuously monitor and evaluate the size and nature of our or
our customers’ positions and the associated risks. In light of the high
volume of transactions, it is impossible for us to review and assess
every single transaction or to monitor at every moment in time our
or our customers’ positions and the associated risks.
Our policies and procedures used to identify, monitor and control a
variety of risks, including risks related to human error, customer defaults,
market movements, fraud and money-laundering, are established and
reviewed by the Risk Committee of our Board of Directors. Some of
our methods for managing risk are discretionary by nature and are
based on internally developed controls and observed historical market
behavior, and also involve reliance on standard industry practices. These
methods may not adequately prevent losses, particularly as they relate
to extreme market movements, which may be significantly greater than
historical fluctuations in the market. Our risk management policies
and procedures also may not adequately prevent losses due to technical
errors if our testing and quality control practices are not effective in
preventing software or hardware failures. In addition, we may elect
to adjust our risk management policies and procedures to allow for
an increase in risk tolerance, which could expose us to the risk of
greater losses. Our risk management policies and procedures rely on
a combination of technical and human controls and supervision that
are subject to error and failure. These policies and procedures may not
protect us against all risks or may protect us less than anticipated, in
which case our business, financial condition and results of operations
and cash flows may be materially adversely affected.
We are exposed to the credit risk of our customers and
counterparties and their failure to meet their financial
obligations could adversely affect our business.
We have substantial credit risk in both our securities and commodities
businesses. As a market-maker of OTC and listed securities and a
dealer in fixed income securities, we conduct the majority of our
PART I
Item 1A Risk Factors
securities transactions as principal with institutional counterparties.
We clear the majority of our principal securities transactions through
unaffiliated clearing brokers. The majority of our principal equity and
debt securities are held by these clearing brokers. Our clearing brokers
have the right to charge us for losses that result from a counterparty’s
failure to fulfill its contractual obligations. We borrow securities from,
and lend securities to, other broker-dealers, and may also enter into
agreements to repurchase and agreements to resell securities. A sharp
change in the security market values utilized in these transactions may
result in losses if counterparties to these transactions fail to honor
their commitments.
In our correspondent securities clearing and independent wealth
management businesses, we permit customers to purchase securities on
margin, subject to various regulatory and internal margin requirements.
During periods of significant price declines, the value of collateral
securing the customer’s margin loan may decline below the customer’s
obligation to us. In the event, the customer is unable to deposit
additional collateral for these margin loans, we may incur credit
losses on these transactions or additional costs in attempting to secure
additional collateral. While introducing broker-dealers and independent
representatives are generally responsible for the credit losses of their
customers, we may incur losses if they do not fulfill their obligations.
As a clearing broker in futures and option transactions, we act on
behalf of our customers for all trades consummated on exchanges.
We must pay initial and variation margin to the exchanges before
we receive the required payments from our customers. Accordingly,
we are responsible for our customers’ obligations with respect to
these transactions, including margin payments, which exposes us to
significant credit risk. Customer positions which represent a significant
percentage of open positions in a given market or concentrations in
illiquid markets may expose us to the risk that we are not able to
liquidate a customer’s position in a manner which does not result in
a deficit in that customers account. A substantial part of our working
capital is at risk if customers default on their obligations to us and
their account balances and security deposits are insufficient to meet
all of their obligations.
We act as a principal for OTC commodity and foreign exchange
derivative transactions, which exposes us to both the credit risk of our
customers and the counterparties with which we offset the customer’s
position. 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. In addition, with OTC transactions, there is a risk that
a counterparty will fail to meet its obligations when due. We would
then be exposed to the risk that a settlement of a transaction which is
due a customer will not be collected from the respective counterparty
with which the transaction was offset. Customers and counterparties
that owe us money, securities or other assets may default on their
obligations to us due to bankruptcy, lack of liquidity, operational
failure or other reasons.
We act as a principal in our physical commodities trading activities
which exposes us to the credit risk of our counterparties and customers
in these activities. Any metals or other physical commodities positions
are held by third party custodians.
Although we have procedures for reviewing credit exposures to specific
customers and counterparties to address present credit concerns, default
risk may arise from events or circumstances that are difficult to detect
or foresee, including rapid changes in securities, commodity and foreign
13
- Form 10-K PART I
Item 1A Risk Factors
exchange price levels. Some of our risk management methods depend
upon the evaluation of information regarding markets, customers or
other matters that are publicly available or otherwise accessible by
us. That information may not, in all cases, be accurate, complete,
up-to-date or properly evaluated. In addition, concerns about, or a
default by, one institution could lead to significant liquidity problems,
losses or defaults by other institutions, which in turn could adversely
affect us. We may be materially and adversely affected in the event of
a significant default by our customers and counterparties.
In our securities and commodities businesses we rely on the ability
of our clearing brokers to adequately discharge their obligations on a
timely basis. We also depend on the solvency of our clearing brokers
and custodians. Any failure by a clearing broker to adequately discharge
its obligations on a timely basis, or insolvency of a clearing broker
or custodian, or any event adversely affecting our clearing brokers
or custodians, could have a material adverse effect on our business,
financial condition and operating results.
As a clearing member firm of commodities clearing houses in the
U.S. and abroad, we are also exposed to clearing member credit risk.
Commodities clearing houses require member firms to deposit cash
and/or government securities to a clearing fund. If a clearing member
defaults in its obligations to the clearing house in an amount larger than
its own margin and clearing fund deposits, the shortfall is absorbed
pro rata from the deposits of the other clearing members. Several
clearing houses of which we are members also have the authority
to assess their members for additional funds if the clearing fund is
depleted. A large clearing member default could result in a substantial
cost to us if we are required to pay such assessments.
Our net operating revenues may decrease due to
changes in market volume, prices or liquidity.
Declines in the volume of securities, commodities and foreign exchange
transactions and in market liquidity generally may result in lower
revenues from market-making and trading activities. Changes in price
levels of securities and commodities and foreign exchange rates also
may result in reduced trading activity and reduce our revenues from
market-making transactions. Changed price levels also can result in
losses from changes in the fair value of securities and commodities
held in inventory. Sudden sharp changes in fair values of securities
and commodities can result in:
•• illiquid markets;
•• fair value losses arising from positions held by us;
•• the failure of buyers and sellers of securities and commodities to
fulfill their settlement obligations,
•• redemptions from funds managed in our asset management business
segment and consequent reductions in management fees;
•• reductions in accrued performance fees in our asset management
business segment; and
•• increases in claims and litigation.
Any change in market volume, price or liquidity or any other of these
factors could have a material adverse effect on our business, financial
condition and operating results.
14
Our net operating revenues may decrease due to
changes in customer trading volumes which are
dependent in large part on commodity prices and
commodity price volatility.
Customer trading volumes are largely driven by the degree of volatility—
the magnitude and frequency of fluctuations—in prices of commodities.
Higher volatility increases the need to hedge contractual price risk and
creates opportunities for arbitrage trading. Energy and agricultural
commodities markets periodically experience significant price volatility.
In addition to price volatility, increases in commodity prices generally
lead to increased trading volume. As prices of commodities rise,
especially energy prices, new participants enter the markets to address
their growing risk-management needs or to take advantage of greater
trading opportunities. Sustained periods of stability in the prices of
commodities or generally lower prices could result in lower trading
volumes and, potentially, lower revenues. Lower volatility and lower
volumes could lead to lower customer balances held on deposit,
which in turn may reduce the amount of interest revenue based on
these deposits.
Factors that are particularly likely to affect price volatility and price
levels of commodities include:
•• supply and demand of commodities;
•• weather conditions affecting certain commodities;
•• national and international economic and political conditions;
•• perceived stability of commodities and financial markets;
•• the level and volatility of interest rates and inflation; and
•• financial strength of market participants.
Any one or more of these factors may reduce price volatility or price
levels in the markets for commodities trading, which in turn could
reduce trading activity in those markets. Moreover, any reduction in
trading activity could reduce liquidity which in turn could further
discourage existing and potential market participants and thus
accelerate any decline in the level of trading activity in these markets.
Our net operating revenues may be impacted by
diminished market activity due to adverse economic,
political and market conditions.
The amount of our revenues depends in part on the level of activity
in the securities, foreign exchange and commodities markets in which
we conduct business. The level of activity in these markets is directly
affected by numerous national and international factors that are
beyond our control, including:
•• economic, political and market conditions;
•• the availability of short-term and long-term funding and capital;
•• the level and volatility of interest rates;
•• legislative and regulatory changes; and
•• currency values and inflation.
- Form 10-K Any one or more of these factors may reduce the level of activity in
these markets, which could result in lower revenues from our market-
making and trading activities. Any reduction in revenues or any loss
resulting from these factors could have a material adverse effect on
our business, financial condition and operating results.
We depend on our management team.
Our future success depends, in large part, upon our management
team who possess extensive knowledge and management skills with
respect to securities, commodities and foreign exchange businesses
we operate. The unexpected loss of services of any of our executive
officers could adversely affect our ability to manage our business
effectively or execute our business strategy. Although some of these
officers have employment contracts with us, they are generally not
required to remain with us for a specified period of time.
We depend on our ability to attract and retain key
personnel.
Competition for key personnel and other highly qualified management,
sales, trading, compliance and technical personnel is significant. It
is possible that we will be unable to retain our key personnel and to
attract, assimilate or retain other highly qualified personnel in the
future. The loss of the services of any of our key personnel or the
inability to identify, hire, train and retain other qualified personnel
in the future could have a material adverse effect on our business,
financial condition and operating results.
From time to time, other companies in the financial sector have
experienced losses of sales and trading professionals. The level of
competition to attract these professionals is intense. It is possible
that we will lose professionals due to increased competition or other
factors in the future. The loss of a sales and trading professional,
particularly a senior professional with broad industry expertise, could
have a material adverse effect on our business, financial condition
and operating results.
In the event of employee misconduct or error, our
business may be harmed.
There have been a number of highly publicized cases involving fraud
or other misconduct by employees of financial services firms in recent
years. Employee misconduct or error could subject us to legal liability,
financial losses and regulatory sanctions and could seriously harm our
reputation and negatively affect our business. Misconduct by employees
could include engaging in improper or unauthorized transactions or
activities, failing to properly supervise other employees or improperly
using confidential information. Employee errors, including mistakes
in executing, recording or processing transactions for customers, could
cause us to enter into transactions that customers may disavow and
refuse to settle, which could expose us to the risk of material losses
even if the errors are detected and the transactions are unwound or
reversed. If our customers are not able to settle their transactions on
a timely basis, the time in which employee errors are detected may
be increased and our risk of material loss could be increased. The risk
of employee error or miscommunication may be greater for products
that are new or have non-standardized terms. It is not always possible
to deter employee misconduct or error, and the precautions we take
to detect and prevent this activity may not be effective in all cases.
PART I
Item 1A Risk Factors
Internal or third party computer systems failures,
capacity constraints and breaches of security could
increase our operating costs and/or credit losses, decrease
net operating revenues and cause us to lose customers.
We are heavily dependent on the capacity and reliability of the
computer and communications systems supporting our operations,
whether owned and operated internally or by third parties, including
those used for execution and clearance of our customer’s trades
and our market making activities. We receive and process a large
portion of our trade orders through electronic means, such as through
public and private communications networks. These computer and
communications systems and networks are subject to performance
degradation or failure from any number of reasons, including loss of
power, acts of war or terrorism, human error, natural disasters, fire,
sabotage, hardware or software malfunctions or defects, computer
viruses, intentional acts of vandalism, customer error or misuse,
lack of proper maintenance or monitoring and similar events. Our
systems, or those of our third party providers, may fail or operate
slowly, causing one or more of the following:
•• unanticipated disruptions in service to our customers;
•• slower response times;
•• delays in our customers’ trade execution;
•• failed settlement of trades;
•• decreased customer satisfaction with our services;
•• incomplete, untimely or inaccurate accounting, recording, reporting
or processing of trades;
•• financial losses;
•• litigation or other customer claims; and
•• regulatory sanctions.
The occurrence of degradation or failure of the communications
and computer systems on which we rely may lead to financial losses,
litigation or arbitration claims filed by or on behalf of our customers
and regulatory investigations and sanctions, including by the CFTC,
which require that our trade execution and communications systems
be able to handle anticipated present and future peak trading volumes.
Any such degradation or failure could also have a negative effect on
our reputation, which in turn could cause us to lose existing customers
to our competitors or make it more difficult for us to attract new
customers in the future. Further, any financial loss that we suffer as
a result of such degradations or failures could be magnified by price
movements of contracts involved in transactions impacted by the
degradation or failure, and we may be unable to take corrective action
to mitigate any losses we suffer.
We are subject to extensive government regulation.
The securities and commodities futures industries are subject to
extensive regulation under federal, state and foreign laws. In addition,
the SEC, the CFTC, FINRA, MSRB, the FCA, the NFA, the CME
Group and other self-regulatory organizations, commonly referred to
as SROs, state securities commissions, and foreign regulators require
compliance with their respective rules and regulations. These regulatory
bodies are responsible for safeguarding the integrity of the financial
markets and protecting the interests of participants in those markets.
15
- Form 10-K PART I
Item 1A Risk Factors
As participants in various financial markets, we may be subject to
regulation concerning certain aspects of our business, including:
•• trade practices;
•• the way we communicate with, and disclose risks to customers;
•• financial and reporting requirements and practices;
•• customer identification and anti-money laundering requirements;
•• capital structure;
•• record retention; and
•• the conduct of our directors, officers and employees.
Failure to comply with any of these laws, rules or regulations could
result in adverse consequences. We and certain of our officers and
employees have, in the past, been subject to claims arising from acts
that regulators asserted were in contravention of these laws, rules
and regulations. These claims resulted in the payment of fines and
settlements. It is possible that we and our officers and other employees
will be subject to similar claims in the future. An adverse ruling
against us or our officers and other employees could result in our or
our officers and other employees being required to pay a substantial
fine or settlement and could result in a suspension or revocation of
required registrations or memberships. Such sanctions could have
a material adverse effect on our business, financial condition and
operating results.
The regulatory environment in which we operate is subject to change. In
November 2013, the CFTC finalized new rules known as “Enhancing
Customer Protections Rules”. These provisions, among other things,
require enhanced customer protections, risk management programs,
internal monitoring and controls, capital and liquidity standards, customer
disclosures, and auditing and examination programs for FCMs. These
rule changes, additional legislation or regulations, changes required
under the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the “Dodd-Frank Act”) and any new or revised regulation by
the SEC, the CFTC, other U.S. or foreign governmental regulatory
authorities, SROs, MSRB or FINRA could have a material adverse effect
on our business, financial condition and operating results. Changes in
the interpretation or enforcement of existing laws and rules by these
governmental authorities, SROs, MSRB and FINRA could also have
a material adverse effect on our business, financial condition and
operating results. Failure to comply with current or future legislation
or regulations that apply to our operations could subject us to fines,
penalties, or material restrictions on our business in the future.
Additional regulation, changes in existing laws and rules, or changes
in interpretations or enforcement of existing laws and rules often
directly affect financial services firms. We cannot predict what effect
any such changes might have. Our business, financial condition and
operating results may be materially affected by both regulations that
are directly applicable to us and regulations of general application.
Our level of trading and market-making activities can be affected not
only by such legislation or regulations of general applicability, but
also by industry-specific legislation or regulations.
16
We have incurred significant additional operational
and compliance costs to meet the requirements of recent
legislation and related regulations. This legislation
and the related regulations may significantly affect our
business in the future.
Recent market and economic conditions have led to legislation and
regulation affecting the financial services industry. These changes could
eventually have an effect on our revenue and profitability, limit our
ability to pursue certain business opportunities, impact the value of assets
that we hold, require us to change certain business practices, impose
additional costs on us, and otherwise adversely affect our business.
Accordingly, we cannot provide assurance that new legislation and
regulation will not eventually have an adverse effect on our business,
results of operations, cash flows and financial condition.
The principal legislation is the Dodd-Frank Act which creates 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.” The Dodd-Frank Act grants regulatory
authorities, such as the CFTC and the SEC, broad rule-making
authority to implement various provisions of the Dodd-Frank Act,
including comprehensive regulation of the OTC derivatives market.
These regulators will continue to exercise, their expanded rule-making
powers in ways that will affect how we conduct our business.
We have incurred and expect to continue to incur significant costs to
comply with these regulatory requirements. We have also incurred and
expect to continue to incur significant costs related to the development,
operation and enhancement of our technology relating to trade
execution, trade reporting, surveillance, record keeping and data
reporting obligations, compliance and back-up and disaster recovery
plans designed to meet the requirements of the regulators.
Changes that will be required in our OTC and clearing businesses may
adversely impact our results of operations. Following the implementation
of all of the rules contemplated by the Dodd-Frank Act, the markets
for cleared and non-cleared swaps may be less robust, there may be less
volume and liquidity in these markets and there may be less demand
for our services. Certain banks and other institutions will be limited
in their conduct of proprietary trading and will be further limited or
prohibited from trading in certain derivatives. The new rules, including
the restrictions on the trading activities for certain banks and large
institutions, could impact transaction volumes and liquidity in these
markets and our revenues would be adversely impacted as a result.
Changes that will be required in our OTC and clearing businesses may
also adversely impact our cash flows and financial condition. Registration
will impose substantial new requirements upon these entities including,
among other things, capital and margin requirements, business conduct
standards and record keeping and data reporting obligations. Increased
regulatory oversight could also impose administrative burdens on us
related to, among other things, responding to regulatory examinations
or investigations. Effective September 2016, CFTC margin rules
came into effect, imposing new requirements to exchange initial and
- Form 10-K variation margin, depending upon aggregate daily notional transactions
outstanding, with an implementation period ending in 2020. CFTC
Capital rules have not been finalized and therefore it is too early to
predict with any degree of certainty how we will be affected.
The EMIR is the European regulations on OTC derivatives, central
counterparties and trade repositories. The EMIR has been implemented
across the European Economic Area member states by the EBA and
ESMA. ESMA is continuing to evaluate and set clearing obligations
for certain OTC derivatives. We will continue to monitor all applicable
developments in the ongoing implementation of EMIR. The EMIR has
imposed new requirements on our European operations, including (a)
reporting derivatives to a trade repository; (b) putting in place certain
risk management procedures for OTC derivative transactions that are
not cleared; (c) changes to our clearing account models and increased
central counterparty margin requirements. Reporting requirements
came into effect in February 2014 and most risk mitigation procedures
were set at the end of 2013. Implementation of collateral obligations
applicable to non-cleared OTC transactions came into force during
2017. ESMA is continuing to evaluate and set clearing obligations for
certain OTC derivatives, and these obligations are due expected to be
rolled with some complementary MiFID provisions in 2018. INTL
FCStone Ltd complies with the enacted provisions and will do so when
pending EMIR provisions are finalized as relevant to its activities.
In addition to the EMIR, the FCA will be enforcing additional
European Union issued regulations such as MIFID II, for which
implementation and MIFIR for which implementation is scheduled
for 2018. Principal areas of impact related to these regulatory texts will
involve oversight and emergence of OTFs for trading OTC non-equity
products, customer type re-assessment, investor protection, enhanced
conflict of interest and execution policies, transparency obligations
and extended transaction reporting requirements.
The increased costs associated with compliance, and the changes that
will be required in our OTC and clearing businesses, may adversely
impact our results of operations, cash flows, and/or financial condition.
We are subject to net capital requirements.
The SEC, FINRA and the CFTC require our dually registered broker-
dealer/FCM subsidiary, INTL FCStone Financial to maintain specific
levels of net capital. Failure to maintain the required net capital may
subject this subsidiary to suspension or revocation of registration by
the SEC, and suspension or expulsion by FINRA and other regulatory
bodies and may subject this subsidiary to limitations on its activities,
including suspension or revocation of its registration by the CFTC
and suspension or expulsion by the NFA and various exchanges of
which it is a member.
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.
The FCA requires our U.K. subsidiary, INTL FCStone Ltd to maintain
specific levels of net capital. Failure to maintain the required net
capital may subject INTL FCStone Ltd to suspension or revocation
of its registration by the FCA.
Ultimately, any failure to meet capital requirements by our dually
registered broker-dealer/FCM subsidiary, our broker-dealer subsidiaries
or our U.K. subsidiary could result in liquidation of the subsidiary.
PART I
Item 1A Risk Factors
Failure to comply with the net capital rules could have material and
adverse consequences such as limiting their operations, or restricting
us from withdrawing capital from these subsidiaries.
In addition, a change in the net capital rules, the imposition of new
rules or any unusually large charge against net capital could limit
our operations that require the intensive use of capital. They could
also restrict our ability to withdraw capital from these subsidiaries.
Any limitation on our ability to withdraw capital could limit our
ability to pay cash dividends, repay debt and repurchase shares of our
outstanding stock. A significant operating loss or any unusually large
charge against net capital could adversely affect our ability to expand
or even maintain our present levels of business, which could have an
adverse effect on our business, financial condition and operating results.
We are subject to margin funding requirements on
short notice.
Our business involves establishment and carrying of substantial
open positions for customers on futures exchanges and in the OTC
derivatives markets. We are required to post and maintain margin
or credit support for these positions. Although we collect margin or
other deposits from our customers for these positions, significant
adverse price movements can occur which will require us to post
margin or other deposits on short notice, whether or not we are able
to collect additional margin or credit support from our customers.
We maintain borrowing facilities for the purpose of funding margin
and credit support and have systems to endeavor to collect margin
and other deposits from customers on a same-day basis, there can
be no assurance that these facilities and systems will be adequate to
eliminate the risk of margin calls in the event of severe adverse price
movements affecting open positions of our customers. Generally, if
a customer is unable to meet its margin call, we promptly liquidate
the customer’s account. However, there can be no assurance that in
each case the liquidation of the account will not result in a loss to us
or that liquidation will be feasible, given market conditions, size of
the account and tenor of the positions.
Low short-term interest rates negatively impact our
profitability.
The level of prevailing short-term interest rates affects our profitability
because we derive a portion of our revenue from interest earned from
the investment of funds deposited with us by our customers. As of
September 30, 2017, we had $2.2 billion in customer segregated assets,
the majority of which are generally invested in U.S. Treasury securities
and money market mutual funds. In addition, in our correspondent
securities clearing business, we earn interest on customer cash held
in money market mutual funds and FDIC sweep accounts. Our
financial performance generally benefits from rising interest rates.
Higher interest rates increase the amount of interest income earned
from these customer deposits. If short-term interest rates remain low
or continue to fall, our revenues derived from interest will decline
which would negatively impact our profitability.
Short-term interest rates are highly sensitive to factors that are beyond
our control, including general economic conditions and the policies
of various governmental and regulatory authorities. In particular,
decreases in the federal funds rate by the Board of Governors of the
Federal Reserve System usually lead to decreasing interest rates in the
U.S., which generally lead to a decrease in short-term interest rates.
17
- Form 10-K PART I
Item 1A Risk Factors
We may issue additional equity securities.
The issuance of additional common stock or securities convertible into
our common stock could result in dilution of the ownership interest in
us held by existing stockholders. We are authorized to issue, without
stockholder approval, a significant number of additional shares of
our common stock and securities convertible into either common
stock or preferred stock.
We are subject to risks relating to litigation and
potential securities and commodities law liability.
We face significant legal risks in our businesses, including risks
related to currently pending litigation involving the Company. Many
aspects of our business involve substantial risks of liability, including
liability under federal and state securities and commodities laws, other
federal, state and foreign laws and court decisions, as well as rules and
regulations promulgated by the SEC, the CFTC, FINRA, MSRB, the
NFA, the FCA and other regulatory bodies. Substantial legal liability
or significant regulatory action against us and our subsidiaries could
have adverse financial effects or cause significant reputational harm
to us, which in turn could seriously harm our business prospects.
Any such litigation could lead to more volatility of our stock price.
For a further discussion of litigation risks, see Item 3—Legal
Proceedings below and Note 12 - Commitments and Contingencies
in the Consolidated Financial Statements.
We are subject to intense competition.
We derive a significant portion of our revenues from market-making
and trading activities involving securities and commodities. The
market for these services, particularly market-making services through
electronic communications gateways, is rapidly evolving and intensely
competitive. We expect competition to continue and intensify in the
future. We compete primarily with wholesale, national, and regional
broker-dealers and FCMs, as well as electronic communications
networks. We compete primarily on the basis of our expertise and
quality of service.
We also derive a significant portion of our revenues from commodities
risk management services. The commodity risk management industry
is very competitive and we expect competition to continue to intensify
in the future. Our primary competitors in this industry include both
large, diversified financial institutions and commodity-oriented
businesses, smaller firms that focus on specific products or regional
markets and independent FCMs.
A number of our competitors have significantly greater financial,
technical, marketing and other resources than we have. Some of
them may:
•• offer alternative forms of financial intermediation as a result of
superior technology and greater availability of information;
•• offer a wider range of services and products than we offer;
•• be larger and better capitalized;
•• have greater name recognition; and
•• have more extensive customer bases.
18
These competitors may be able to respond more quickly to new or
evolving opportunities and customer requirements. They may also
be able to undertake more extensive promotional activities and offer
more attractive terms to customers. Recent advances in computing
and communications technology are substantially changing the means
by which market-making services are delivered, including more direct
access on-line to a wide variety of services and information. This has
created demand for more sophisticated levels of customer service.
Providing these services may entail considerable cost without an
offsetting increase in revenues. In addition, current and potential
competitors have established or may establish cooperative relationships
or may consolidate to enhance their services and products. New
competitors or alliances among competitors may emerge and they
may acquire significant market share.
We cannot assure you that we will be able to compete effectively with
current or future competitors or that the competitive pressures we face
will not have an adverse effect on our business, financial condition
and operating results.
Our business could be adversely affected if we are unable
to retain our existing customers or attract new customers.
The success of our business depends, in part, on our ability to maintain
and increase our customer base. Customers in our market are sensitive
to, among other things, the costs of using our services, the quality
of the services we offer, the speed and reliability of order execution
and the breadth of our service offerings and the products and markets
to which we offer access. We may not be able to continue to offer the
pricing, service, speed and reliability of order execution or the service,
product and market breadth that customers desire. In addition, once our
risk management consulting customers have become better educated
with regard to sources of risk and the tools available to facilitate the
management of this risk and we have provided them with recommended
hedging strategies, they may no longer continue paying monthly fees
for these services. Furthermore, our existing customers, including
IRMP customers, are not generally obligated to use our services and
can switch providers of clearing and execution services or decrease
their trading activity conducted through us at any time. As a result,
we may fail to retain existing customers or be unable to attract new
customers. Our failure to maintain or attract customers could have an
adverse effect on our business, financial condition and operating results.
We rely on relationships with introducing brokers for
obtaining some of our customers.
The failure to maintain these relationships could adversely affect our
business. We have relationships with introducing brokers who assist
us in establishing new customer relationships and provide marketing
and customer service functions for some of our customers. These
introducing brokers receive compensation for introducing customers
to us. Many of our relationships with introducing brokers are non-
exclusive or may be canceled on relatively short notice. In addition,
our introducing brokers have no obligation to provide new customer
relationships or minimum levels of transaction volume. Our failure
to maintain these relationships with these introducing brokers or
the failure of these introducing brokers to establish and maintain
customer relationships would result in a loss of revenues, which could
adversely affect our business.
- Form 10-K Certain provisions of Delaware law and our charter
may adversely affect the rights of holders of our common
stock and make a takeover of us more difficult.
We are organized under the laws of the State of Delaware. Certain
provisions of Delaware law may have the effect of delaying or preventing
a change in control. In addition, certain provisions of our certificate of
incorporation may have anti-takeover effects and may delay, defer or
prevent a takeover attempt that a stockholder might consider in its best
interest. Our certificate of incorporation authorizes the board to determine
the terms of our unissued series of preferred stock and to fix the number
of shares of any series of preferred stock without any vote or action by
our stockholders. As a result, the board can authorize and issue shares
of preferred stock with voting or conversion rights that could adversely
affect the voting or other rights of holders of our common stock. In
addition, the issuance of preferred stock may have the effect of delaying
or preventing a change of control, because the rights given to the holders
of a series of preferred stock may prohibit a merger, reorganization, sale,
liquidation or other extraordinary corporate transaction.
Our stock price is subject to volatility.
The market price of our common stock has been and can be expected
to be subject to fluctuation as a result of a variety of factors, many of
which are beyond our control, including:
•• actual or anticipated variations in our results of operations;
•• announcements of new products by us or our competitors;
•• technological innovations by us or our competitors;
•• changes in earnings estimates or buy/sell recommendations by
financial analysts;
•• the operating and stock price performance of other companies;
•• general market conditions or conditions specific in specific markets;
•• conditions or trends affecting our industry or the economy generally;
•• announcements relating to strategic relationships or acquisitions; and
•• risk factors and uncertainties set forth elsewhere in this Form 10-K.
Because of this volatility, we may fail to meet the expectations of our
stockholders or of securities analysts, and the trading prices of our
common stock could decline as a result. In addition, any negative
change in the public perception of the securities industry could depress
our stock price regardless of our operating results.
Future sales by existing stockholders could depress the market price
of our common stock. If our stockholders sell substantial amounts
of our common stock in the public market, the market price of our
common stock could fall. Such sales also might make it more difficult
for us to sell equity securities in the future at a time and price that
we deem appropriate.
Our international operations involve special challenges
that we may not be able to meet, which could adversely
affect our financial results.
We engage in a significant amount of business with customers in the
international markets. Certain additional risks are inherent in doing
business in international markets, particularly in a regulated industry.
These risks include:
•• the inability to manage and coordinate the various regulatory
requirements of multiple jurisdictions that are constantly evolving
and subject to unexpected change;
PART I
Item 1A Risk Factors
•• tariffs and other trade barriers;
•• difficulties in recruiting and retaining personnel, and managing
international operations;
•• difficulties of debt collection in foreign jurisdictions;
•• potentially adverse tax consequences; and
•• reduced protection for intellectual property rights.
Our operations are subject to the political, legal and
economic risks associated with politically unstable and
less developed regions of the world, including the risk
of war and other international conflicts and actions by
governmental authorities, insurgent groups, terrorists
and others.
Specifically, we conduct business in countries whose currencies may
be unstable. Future instability in such currencies or the imposition
of governmental or regulatory restrictions on such currencies could
impede our foreign business and our ability to collect on collateral
held in such currencies.
Our operations are required to comply with the laws
and regulations of foreign governmental and regulatory
authorities of each country in which we conduct
business, and if we violate these regulations, we may be
subject to significant penalties.
The financial services industry is subject to extensive laws, rules
and regulations in every country in which we operate. Firms that
engage in commodity futures brokerage, securities and derivatives
trading and investment banking must comply with the laws, rules
and regulations imposed by the governing country, state, regulatory
bodies and self-regulatory bodies with governing authority over such
activities. Such laws, rules and regulations cover all aspects of the
financial services business, including, but not limited to, sales and
trading methods, trade practices, use and safekeeping of customers’
funds and securities, capital structure, anti-money laundering and
anti-bribery and corruption efforts, recordkeeping and the conduct
of directors, officers and employees.
Each of our regulators supervises our business activities to monitor
compliance with such laws, rules and regulations in the relevant
jurisdiction. In addition, if there are instances in which our regulators
question our compliance with laws, rules, and regulations, they may
investigate the facts and circumstances to determine whether we
have complied. At any moment in time, we may be subject to one or
more such investigation or similar reviews. At this time, we believe
all such investigations, and similar reviews are insignificant in scope
and immaterial to us. However, there can be no assurance that, in
the future, the operations of our businesses will not violate such laws,
rules, and regulations and that related investigations and similar
reviews could result in adverse regulatory requirements, regulatory
enforcement actions and/or fines.
Additional legislation, changes in rules, changes in the interpretation or
enforcement of existing laws and rules, or the entering into businesses
that subject us to new rules and regulations may directly affect our
business, results of operations and financial condition.
19
- Form 10-K PART I
Item 1B Unresolved Staff Comments
FCA will be enforcing additional European Union issued regulations
such as MIFID II and MIFIR for which implementation is scheduled
for 2018. Principal areas of impact related to these regulatory texts
will involve emergence and oversight of OTF’s for trading OTC
non-equity products, customer type re-assessment, investor protection,
enhanced conflict of interest and execution policies, transparency
obligations and extended transaction reporting requirements. We
will continue to monitor all applicable developments in the ongoing
implementation of MIFID II.
In accordance with these regulations we have applied for a license
to operate an OTF to continue arranging OTC trades for energy
contracts, and we are updating trading interfaces adding additional
information to ensure continuity of trading on all trading venues we
are a member of, enhancing the content of databases to comply with
new transaction reporting, trade publication and position reporting
obligations, liaising with clients to communicate upcoming changes
and modifying policies and procedures to adjust/align them with the
new upcoming regulatory environment.
The U.K.’s proposed withdrawal from the European
Union could have an adverse effect on our business and
financial results.
On March 29, 2017, the U.K. government triggered the article 50 of
the E.U. Treaty of Lisbon. This officially confirmed the U.K. intention
withdraw its membership to the E.U. and the start for a two years
negotiation process where the U.K. and the E.U. need to agree the
terms of the withdrawal and potentially give consideration to the
future of the relationship between the parties. Current uncertainty over
whether the U.K. will ultimately leave the E.U., as well as the final
outcome of the negotiations between the U.K. and E.U., could have
an adverse effect on our business and financial results. The long-term
effects of Brexit will depend on the terms negotiated between the U.K.
and the E.U., which may take years to complete. Our operations in
the U.K. as well as our global operations could be impacted by the
global economic uncertainty caused by Brexit.
If we are unable to manage any of these risks effectively, our business
could be adversely affected.
Item 1B Unresolved Staff Comments
We have received no written comments regarding our periodic or current reports from the staff of the SEC that were issued 180 days or more
preceding the end of our fiscal year 2017 that remain unresolved.
Item 2 Properties
The Company maintains offices in New York, New York; Winter
Park, Florida; West Des Moines, Iowa; Chicago, Illinois; Kansas
City, Missouri; St. Louis, Missouri; Bloomfield, Nebraska; Omaha,
Nebraska; Minneapolis, Minnesota; Champaign, Illinois; Miami,
Florida; Indianapolis, Indiana; Bowling Green, Ohio; Nashville,
Tennessee; Lawrence, Kansas; Mobile, Alabama; Boca Raton, Florida;
Twin Falls, Idaho; Birmingham, Alabama; Charlotte, North Carolina;
Youngstown, Ohio; Atlanta, Georgia; Houston, Texas; Mexico City,
Mexico; Buenos Aires, Argentina; Campinas, Brazil; Sao Paulo, Brazil;
Maringa, Brazil; Passo Fundo, Brazil; Goiania, Brazil; Recife, Brazil;
Sorriso, Brazil; Patrocinio, Brazil; Asuncion and Ciudad del Este,
Paraguay; Bogota, Colombia; London, United Kingdom; Dublin,
Ireland; Dubai, United Arab Emirates; Singapore, Singapore; Beijing
and Shanghai, China; Hong Kong, and Sydney, Australia. All of our
offices and other principal business properties are leased, except for
the space in Buenos Aires, which we own. We believe that our leased
and owned facilities are adequate to meet anticipated requirements
for our current lines of business.
Item 3 Legal Proceedings
In addition to the matters discussed below, from time to time and
in the ordinary course of business, we are involved in various legal
actions and proceedings, including tort claims, contractual disputes,
employment matters, workers’ compensation claims and collections.
We carry insurance that provides protection against certain types of
claims, up to the policy limits of our insurance. In the opinion of
management, possible exposure from loss contingencies in excess of
the amounts accrued, and in addition to the possible losses discussed
below, is not material to our earnings, financial position or liquidity.
The following is a summary of a significant legal matter.
20
- Form 10-K Sentinel Litigation
Prior to the July 1, 2015 merger into INTL FCStone Financial, our
subsidiary, FCStone, LLC, had a portion of its excess segregated funds
invested with Sentinel Management Group Inc. (“Sentinel”), a registered
futures commission merchant (“FCM”) and an Illinois-based money
manager that provided cash management services to other FCMs.
In August 2007, Sentinel halted redemptions to customers and sold
certain of the assets it managed to an unaffiliated third party at a
significant discount. On August 17, 2007, subsequent to Sentinel’s sale
of certain assets, Sentinel filed for bankruptcy protection. In aggregate,
$15.5 million of FCStone, LLC’s $21.9 million in invested funds
were returned to it before and after Sentinel’s bankruptcy petition.
In August 2008, the bankruptcy trustee of Sentinel filed adversary
proceedings against FCStone, LLC, and a number of other FCMs
in the Bankruptcy Court for the Northern District of Illinois. The
case was subsequently reassigned to the U.S. District Court, for the
Northern District of Illinois. In the complaint, the trustee sought
avoidance of alleged transfers or withdrawals of funds received by
FCStone, LLC and other FCMs within 90 days prior to the filing of
the Sentinel bankruptcy petition, as well as avoidance of post-petition
distributions and disallowance of the proof of claim filed by FCStone,
LLC. The trustee sought recovery of pre- and post-petition transfers
totaling approximately $15.5 million.
The trial of this matter took place, as a test case, during October
2012. The trial court entered a judgment against FCStone, LLC on
January 4, 2013. On January 17, 2013, the trial court entered an
agreed order, staying execution and enforcement, pending an appeal
of the judgment. On March 19, 2014, the appeal court ruled in
favor of FCStone, LLC. In April 2014, the trustee filed a petition
for rehearing of the appeal. In May 2014, the U.S. Court of Appeals
for the Seventh Circuit denied the petition. The trustee did not file
a writ for certiorari with the U.S. Supreme Court during the time
allotted to do so.
On February 10, 2015, based on a new theory, the trustee filed a
motion for judgment against FCStone, LLC in the U.S. District
Court, for the Northern District of Illinois, seeking to claw back the
post-petition transfer of $14.5 million and to recover the funds held
in reserve in the name of FCStone, LLC. FCStone, LLC filed its
opposition brief and an associated motion for judgment on March 17,
2015. The trustee filed its reply briefs on April 7, 2015 and we filed
our reply briefs on April 22, 2015.
On March 28, 2016, the U.S. District Court for the Northern
District of Illinois entered an order in favor of FCStone, LLC (now
INTL FCStone Financial Inc.) and against the trustee on the trustee’s
post-petition claim, in light of the Seventh Circuit’s opinion. The
PART I
Item 4 mine Safety Disclosures
same court ruled against INTL FCStone Financial and in favor of the
trustee with respect to the funds held in reserve accounts.
On April 25, 2016, INTL FCStone Financial filed a notice of appeal
to the U.S. Court of Appeals for the Seventh Circuit relating to
the portion of the final judgment dated March 28, 2016 of the
district court and INTL FCStone Financial’s claim to funds in reserve
accounts. On April 26, 2016, the trustee filed its notice of appeal
from the March 28, 2016 final judgment of the district court. On
April 27, 2016, the court consolidated the two appeals and directed
the trustee to file an opening brief. On June 27, 2016 the trustee
filed his appellate brief. On August 31, 2016, the Futures Industry
Association, Inc. filed an amicus curiae brief in support of INTL
FCStone Financial’s cross-appeal.
Oral argument was heard in the Seventh Circuit on June 7, 2017. On
August 14, 2017, the Seventh Circuit ruled in favor of all of INTL
FCStone Financial’s arguments. The trustee petitioned the Seventh
Circuit for a rehearing on September 11, 2017, seeking reconsideration
of the court’s prior ruling. On October 2, 2017 that petition was
denied. With the Seventh Circuit having issued a mandate requiring
the U.S. District Court for the Northern District of Illinois to enter
a judgment in favor of INTL FCStone Financial on all counts on the
issue of liability, INTL FCStone Financial filed a motion in the District
Court on October 13, 2017 for an order directing the distribution
of reserve funds in the approximate amount of $2.0 million. This
motion was argued in the District Court on October 19, 2017, and
the District Court directed the parties to file proposed orders relating
to the distribution of the reserve funds.
On October 24, 2017, INTL FCStone Financial Inc. submitted a
judgment order and an order directing the trustee to carry out the
requirements of the judgment. On October 24, 2017, the trustee
filed an objection to INTL FCStone Financial’s motion, and on
November 8, 2017, INTL FCStone Financial filed its reply. The
parties appeared before the District Court on November 28, 2017
to address all pending motions. INTL FCStone Financial requested
immediate payment of funds due based on the August 14, 2017
ruling in its favor, however the trustee requested that the distribution
of those reserve funds be held in abeyance pending his final appeal
to the United States Supreme Court.
We have determined that losses related to the trustee’s appeal are
neither probable nor reasonably possible.
Our assessments are based on estimates and assumptions that
have been deemed reasonable by management, but that may later
prove to be incomplete or inaccurate, and unanticipated events
and circumstances may occur that might cause us to change those
estimates and assumptions.
Item 4 mine Safety Disclosures
Not applicable.
21
- Form 10-K PART II
ITEM 5 Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities
Our common stock is listed on The NASDAQ Stock Market LLC (“NASDAQ”) under the symbol ‘INTL’. Our common stock trades on
the NASDAQ Global Select Market. As of September 30, 2017, there were approximately 334 registered holders of record of our common
stock. The high and low sales prices per share of our common stock for each full quarterly period during fiscal 2017 and 2016 were as follows:
Price Range
High
Low
$
$
$
$
$
$
$
$
39.71 $
39.37 $
41.10 $
44.71 $
39.48 $
28.64 $
32.67 $
36.02 $
33.11
33.45
35.75
34.61
26.38
25.17
24.87
25.15
Value over 5 years of $100 invested on September 30, 2012 in each
of the company’s stock (“INTL”), S&P 500 Index and NYSE/Arca Securities Broker/Dealer Index
2017:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
350
300
250
200
150
100
50
0
2012
2013
INTL
2014
2015
2016
2017
S&P 500 Index
NYSE/Arca Securities Broker/Dealer Index
We have never declared any cash dividends on our common stock, and do not currently have any plans to pay dividends on our common stock.
The payment of cash dividends in the future is subject to the discretion of the Board of Directors and will depend on our earnings, financial
condition, capital requirements, contractual restrictions and other relevant factors. Our credit agreements currently prohibit the payment of
cash dividends by us.
22
- Form 10-K
PART II
ITEM 6 Selected Financial Data
On August 17, 2017, our Board of Directors authorized for fiscal 2018, the repurchase of up to 1.0 million shares of our outstanding common
stock from time to time in open market purchases and private transactions, commencing on October 1, 2017 and ending on September 30,
2018, subject to the discretion of the senior management team to implement our stock repurchase plan, and subject to market conditions and
as permitted by securities laws and other legal, regulatory and contractual requirements and covenants.
Our common stock repurchase program activity for the three months ended September 30, 2017 was as follows:
Period
July 1, 2017 to July 31, 2017
August 1, 2017 to August 31, 2017
September 1, 2017 to September 30, 2017
Total
Total Number
of Shares
Purchased
— $
—
—
— $
Average Price
Paid per Share
—
—
—
—
Total Number of Shares
Purchased as Part of Publicly
Announced Program
Maximum Number of Shares
Remaining to be Purchased
Under the Program
—
—
—
—
1,000,000
1,000,000
1,000,000
Information relating to compensation plans under which our equity securities are authorized for issuance is set forth in Part III, Item 12 of
our Annual Report on Form 10-K.
ITEM 6 Selected Financial Data
The following selected financial and operating data are derived from our consolidated financial statements and should be read in conjunction
with Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in Item 7 and our Consolidated
Financial Statements included in Item 8.
SELECTED SUMMARY FINANCIAL INFORMATION
(in millions, except share and per share amounts)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other income
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and other expenses:
Compensation and benefits
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts and impairments
Bad debt on physical coal
Other
Total compensation and other expenses
Gain on acquisition
Income from continuing operations, before tax
Income tax expense
Net income from continuing operations
(Loss) income from discontinued operations, net of tax
Net income
2017
2016
2015
2014
2013
Year Ended September 30,
28,673.3
332.2
283.4
64.8
69.7
0.2
29,423.6
28,639.6
784.0
136.3
113.0
42.1
492.6
295.7
39.4
15.2
15.2
13.3
9.8
4.3
47.0
37.5
477.4
—
15.2
8.8
6.4
—
6.4
$
$
14,112.0
321.2
224.3
42.0
55.2
0.2
14,754.9
14,083.9
671.0
129.9
68.9
28.3
443.9
263.9
32.7
13.3
14.0
11.5
8.2
4.4
—
29.4
377.4
6.2
72.7
18.0
54.7
—
54.7
$
$
34,089.9
328.6
192.5
42.5
39.4
0.3
34,693.2
34,068.9
624.3
122.7
52.7
17.1
431.8
251.1
28.1
13.5
12.5
10.5
7.2
7.3
—
23.5
353.7
—
78.1
22.4
55.7
—
55.7
$
$
33,546.4
244.5
180.7
42.1
8.0
0.7
34,022.4
33,531.5
490.9
108.5
49.9
10.5
322.0
201.9
25.8
12.3
14.9
9.9
7.3
5.5
—
18.4
296.0
—
26.0
6.4
19.6
(0.3)
19.3
$
$
42,031.2
244.0
173.3
35.1
8.9
0.9
42,493.4
42,025.2
468.2
110.1
40.5
7.9
309.7
198.7
23.1
12.0
12.4
10.4
8.0
0.8
—
23.1
288.5
—
21.2
2.6
18.6
0.7
19.3
$
$
23
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
(in millions, except share and per share amounts)
Earnings per share:
Basic
Diluted
Number of shares:
Basic
Diluted
Selected Balance Sheet Information:
Total assets
Lenders under loans
Senior unsecured notes
Stockholders’ equity
Other Data:
Return on average stockholders’ equity
(from continuing operations)(a)
EBITDA(b) (in millions)
Employees, end of period
Compensation and benefits as a percentage of operating revenues
$
$
$
$
$
$
$
2017
2016
2015
2014
2013
Year Ended September 30,
0.32
0.31
$
$
2.94
2.90
18,395,987
18,687,354
18,410,561
18,625,372
6,243.4
230.2
$
$
— $
$
449.9
5,950.3
182.8
44.5
433.8
$
1.5%
67.1
1,607
37.7%
13.2%
109.2
1,464
39.3%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2.94
2.87
18,525,374
18,932,235
5,070.0
41.6
45.5
397.1
15.0%
102.4
1,231
40.2%
1.01
0.98
$
$
1.01
0.97
18,528,302
19,132,302
18,443,233
19,068,497
$
$
$
$
$
3,039.7
22.5
45.5
345.4
5.8%
43.8
1,141
41.1%
2,848.0
61.0
45.5
335.4
5.7%
37.1
1,094
42.4%
(a) For all periods presented, the return on average stockholders’ equity (from continuing operations) excludes the effects of discontinued operations, if any.
(b) See “Non-GAAP Financial Measure” below.
Non-GAAP Financial Measure
EBITDA consists of net income from continuing operations before
interest expense, income tax expense and depreciation and amortization.
We have included EBITDA in our Form 10-K because we use it as
an important supplemental measure of our performance and believe
that it is frequently used by securities analysts, investors and other
interested persons in the evaluation of companies in our industry,
some of which present EBITDA when reporting their financial results.
EBITDA is a financial measure that is not recognized by U.S. GAAP,
and should not be considered as an alternative to operating revenues,
net operating revenues, net income from continuing operations, net
income or stockholders’ equity calculated under U.S. GAAP or as an
alternative to any other measures of performance derived in accordance
with U.S. GAAP. The following table reconciles EBITDA with our
net income from continuing operations.
(in millions)
Net income from continuing operations
Plus: interest expense
Plus: depreciation and amortization
Plus: income taxes
EBITDA
Year Ended September 30,
2017
2016
2015
2014
2013
$
$
6.4
42.1
9.8
8.8
67.1
$
$
54.7
28.3
8.2
18.0
109.2
$
$
55.7
17.1
7.2
22.4
102.4
$
$
19.6 $
10.5
7.3
6.4
43.8 $
18.6
7.9
8.0
2.6
37.1
ITEM 7 Management’s Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion should be read together with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this
Annual Report on Form 10-K. Certain statements in “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” are forward-looking statements that involve known and
unknown risks and uncertainties, many of which are beyond our
control. Words such as “may”, “will”, “should”, “would”, “anticipates”,
“expects”, “intends”, “plans”, “believes”, “seeks”, “estimates” and
similar expressions identify such forward-looking statements. The
forward-looking statements contained herein are based on current
expectations and entail various risks and uncertainties that could cause
actual results to differ materially from those expressed in such forward-
looking statements. Factors that might cause such a difference include,
among other things, those set forth under “Risk Factors” and those
appearing elsewhere in this Form 10-K. Readers are cautioned not
to place undue reliance on these forward-looking statements, which
reflect management’s analysis only as of the date hereof. We assume
no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting forward-
looking statements. Readers are cautioned that any forward-looking
statements are not guarantees of future performance.
24
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
INTL FCStone Inc. is a diversified global financial services organization
providing execution, risk management and advisory services, market
intelligence, and clearing services across assets 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 that
fulfill our customers’ real needs and provide bottom-line benefits
to their businesses. We 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. 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 customers,
located in more than 130 countries on five continents. Our recent
acquisition of the Sterne Agee correspondent clearing and independent
wealth management businesses added approximately 50 correspondent
clearing relationships with more than 120,000 accounts of which 65,000
are related to the independent wealth management business acquired.
Our customers include producers, processors and end-users of nearly
all widely traded physical commodities; commercial counterparties
who are end-users of our products and services; governmental and non-
governmental organizations; and commercial banks, asset managers,
introducing broker-dealers, insurance companies, brokers, institutional
investors and major investment banks. We believe our customers value us
for our focus on their needs, our expertise and flexibility, our global reach,
our ability to provide access to hard-to-reach markets and opportunities,
and our status as a well-capitalized and regulatory-compliant organization.
We believe we are well positioned to capitalize on key trends impacting
the financial services sector. Among others, these trends include the
impact of increased regulation on banking institutions and other
financial services providers; increased consolidation, especially of
smaller sub-scale financial services providers and independent securities
clearing firms; the growing importance and complexity of conducting
secure cross-border transactions; and the demand among financial
institutions to transact with well-capitalized counterparties.
We focus on mitigating exposure to market risk, ensuring adequate
liquidity to maintain daily operations and making non-interest
expenses variable, to the greatest extent possible. We report our
operating segments based on services provided to customers. Our
business activities are managed as operating segments and organized
into reportable segments consisting of Commercial Hedging, Global
Payments, Securities, Physical Commodities, and Clearing and
Execution Services (“CES”). See Segment Information for a listing
of our operating segment components.
Recent Events Affecting the Financial Services Industry
The Dodd-Frank Act created a comprehensive new regulatory regime
governing the over-the-counter (“OTC”) and listed derivatives
markets. Most of the rules related to this regime have came into
effect, however some important rules, such as those setting capital and
margin requirements, have not been finalized or fully implemented.
Effective September 2016, CFTC margin rules came into effect,
imposing new requirements to exchange initial and variation margin,
depending upon aggregate daily notional transactions outstanding,
with an implementation period ending in 2020. CFTC capital rules
have not been finalized and therefore it is too early to predict with
any degree of certainty how we will be affected. We will continue to
monitor all applicable developments in the ongoing implementation
of the Dodd-Frank Act. The legislation and implementing regulations
affect not only us, but also our customers and counterparties.
The European Markets Infrastructure Regulation (“EMIR”) is the
European regulations on OTC derivatives, central counterparties
and trade repositories. The EMIR has been implemented across the
European Economic Area member states by the European Banking
Authority (“EBA”) and Markets Authority (“ESMA”). ESMA is
continuing to evaluate and set clearing obligations for certain OTC
derivatives. We will continue to monitor all applicable developments
in the ongoing implementation of EMIR.
The EMIR has imposed new requirements on our European operations,
including (a) reporting derivatives to a trade repository; (b) putting
in place certain risk management procedures for OTC derivative
transactions that are not cleared; (c) changes to our clearing account
models and increased central counterparty margin requirements.
Reporting requirements came into effect in February 2014 and most
risk mitigation procedures were set at the end of 2013. Implementation
of collateral obligations applicable to non-cleared OTC transactions
came into force this year. Contractual and operational changes have
been implemented to accommodate the new requirements. ESMA is
continuing to evaluate and set clearing obligations for certain OTC
derivatives. These obligations are due to be rolled out with some
complementary Markets in Financial Instruments Directive (“MIFID”)
provisions in 2018 complies with the enacted provisions and will do so
when pending EMIR provisions are finalized as relevant to its activities.
In addition to the EMIR, the Financial Conduct Authority (“FCA”)
will be enforcing additional European Union issued regulations such
as the MIFID II, and the Markets in Financial Instruments Regulation
(“MIFIR”) for which implementation is scheduled for 2018. Principal
areas of impact related to these regulatory texts will involve emergence
and oversight of organized trade facilities (“OTF’s”) for trading OTC
non-equity products, customer type re-assessment, investor protection,
enhanced conflict of interest and execution policies, transparency
obligations and extended transaction reporting requirements. We
will continue to monitor all applicable developments in the ongoing
implementation of MIFID II.
25
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Fiscal 2017 Highlights
•• Record annual operating revenues, grew 17% to $784.0 million.
•• Acquired the ICAP plc Europe, Middle East and Africa (“EMEA”)
oil voice brokerage business in the first quarter.
•• Expanded our parent company syndicated committed loan facility
to $262.0 million.
•• Redeemed our 8.5% Senior Notes on October 15, 2016.
Executive Summary
We achieved operating revenues growth of 17%, or $113.0 million, in
fiscal 2017 compared to the prior year, with increases in our Clearing
and Execution Services (“CES”), Global Payments, Commercial
Hedging and Physical Commodities segments, partially offset by
lower operating revenues in our Securities segment. Our CES segment
increased operating revenues by $108.7 million, primarily related
to contributions from our recent acquisitions of the correspondent
securities clearing and independent wealth management businesses of
Sterne Agee and ICAP plc’s London-based EMEA oil voice brokerage
business of $75.3 million and $26.7 million, respectively.
Overall segment income decreased 18%, as Physical Commodities
decreased $44.7 million and Securities decreased $22.8 million, partially
offset by increases in CES, Global Payments and Commercial Hedging
adding $15.6 million, $10.8 million, and $4.1 million, respectively.
The decline in Physical Commodities segment income was primarily
the result of the charge to earnings related to a bad debt in our physical
coal business discussed further below, which resulted in a $45.3 million
decrease in Physical Ag & Energy segment income partially offset by
the $0.6 million increase in Precious Metals.
The decline in Securities segment income was primarily driven by
weaker operating revenues in our Debt Trading and Asset Management
businesses compared to prior year’s strong results in Argentina in
those businesses. In addition, Equity Market-Making segment income
declined as well, driven by lower market volatility which led to spread
compression in these businesses.
CES segment income increased, primarily as a result of the acquisition
of the correspondent securities clearing and independent wealth
management businesses of Sterne Agee in the fourth quarter of fiscal
2016 as well as the acquisition of ICAP plc’s London-based EMEA
oil voice brokerage business at the beginning of our current year first
quarter. The Sterne Agee businesses contributed $13.9 million in
segment income in fiscal 2017 while the Derivative Voice Brokerage
business contributed $4.6 million.
Global Payment segment income increased 27% as a result of a
46% increase in the number of payments made. That increase was
partially offset by higher non-variable direct expenses. Commercial
Hedging segment income increased primarily as a result of higher
interest income as exchange-traded and OTC transactional revenues
increased modestly.
•• Introduced Automated Clearing House (ACH) connectivity in
our Global Payments to enhance our solutions for high-volume,
low-value cross-border payments.
•• Precious Metals business became a Direct Participant to the London
Bullion Market Association (LBMA) Gold Auction and launched
its web-based Gold trading platform, PMXecute+.
•• On August 1, 2017, we implemented the first phase of a new trade
system related to our OTC commodities business.
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 53% of total expenses in the
current period compared to 58% in the prior year. Non-variable
expenses increased 41%, or $98.7 million year-over-year, primarily
as a result of the bad debt on physical coal discussed further below
and $37.8 million in incremental expenses, including non-variable
compensation, trade system costs, equipment and office space rental,
professional fees and market information, from the acquisition of the
Sterne Agee and ICAP businesses.
Net income decreased 88% to $6.4 million in fiscal 2017 compared
to fiscal 2016, primarily related to the bad debt on physical coal and a
decline in our Securities segment, as well the increase in non-variable
Corporate unallocated expenses. While the acquired correspondent
securities clearing and independent wealth management business
added $12.4 million in incremental segment income, the additional
Corporate unallocated expenses in these acquired businesses, resulted
in a $1.0 million pre-tax net loss in the current year. The acquired oil
voice brokerage business, recognized segment income of $4.6 million
in fiscal 2017 with $1.2 million of acquired Corporate unallocated
expenses.
Bad Debt on Physical Coal
During the fourth quarter of fiscal 2017, we recorded a charge
to earnings of $47.0 million, to record an allowance for doubtful
accounts related to a bad debt incurred in our physical coal business,
conducted solely in our Singapore subsidiary, INTL Asia Pte. Ltd.,
with a coal supplier. Components of the bad debt on physical coal
include allowances on amounts due to us from our supplier related
to: coal paid for but not delivered to customers; reimbursement of
demurrage claims, dead freight and other charges paid by INTL Asia
Pte. Ltd. to its customers; reimbursement due for deficiencies in the
quality of coal delivered to customers; and losses incurred related to
the cancellation of open sales contracts.
We purchased coal delivered onto barges and paid 80% of the value
against bills of lading and purchase invoices, with the remaining
20% payable following inspection upon delivery to customers’ vessels.
We took title of the coal when it was loaded onto barges and maintained
title until it was offloaded onto customers’ vessels. The logistics related
to the delivery of coal to the customers’ vessels was out-sourced to our
26
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
We have exited the physical coal business. All remaining open
sales contracts have been canceled. In our first quarter ending
December 31, 2017, we expect to record an additional bad debt
expense of $1.0 million related to reimbursement due to us from
the supplier for demurrage and other charges related to contracts
with delivery dates subsequent to September 30, 2017. We do not
anticipate any additional bad debt expense in connection with the
physical coal business. We have no long-lived or intangible assets
related to the physical coal business, and accordingly have recorded
no impairment charges. We do not believe that the loss will adversely
affect our on-going profitability as the physical coal business had
not contributed significantly to income from operations. We believe
any additional exit costs will not be material to our consolidated
financial statements. INTL Asia Pte. Ltd. has been recapitalized
following the bad debt in order for its other businesses to operate
in normal course.
coal supplier, and we determined that certain purchased coal was not
delivered to our customers’ vessels during the fourth quarter ended
September 30, 2017. Furthermore, we determined that our supplier
was unable to deliver such purchased coal to our customers. Demurrage
claims, dead freight, and other penalty charges paid by INTL Asia Pte.
Ltd. to its customers were due to be reimbursed by our supplier based
on transaction agreements with our supplier. Subsequent to the end
of the fourth quarter ended September 30, 2017, we determined our
supplier was unable to make this reimbursement.
We received an acknowledgment of debt and a note from the supplier
in our first quarter ending December 31, 2017. However, there is
substantial uncertainty as to whether the supplier will be able to meet
its financial obligations to us and as to the timing of any recovery.
We are continuing our investigation into this matter and will pursue
all legal avenues available to us. We have presented the bad debt on
physical coal separately as a component of income from operations
in our consolidated income statements.
Selected Summary Financial Information
Results of Operations
Set forth below is our discussion of the results of our operations, as viewed by management, for the fiscal years ended September 30, 2017,
2016, and 2015.
Financial Overview
The following table shows an overview of our financial results:
FINANCIAL OVERVIEW (UNAUDITED)
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other income
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and other expenses
Bad debts
Bad debt on physical coal
Other expenses
Total compensation and other expenses
Gain on acquisition
Income from operations, before tax
2017
$ 28,673.3
332.2
283.4
64.8
69.7
0.2
29,423.6
28,639.6
784.0
136.3
113.0
42.1
492.6
295.7
4.3
47.0
130.4
477.4
—
15.2
$
Year Ended September 30,
2016
% Change
% Change
2015
103% $
3%
26%
54%
26%
—%
99%
103%
17%
5%
64%
49%
11%
12%
(2)%
n/m
20%
26%
(100)%
(79)% $
14,112.0
321.2
224.3
42.0
55.2
0.2
14,754.9
14,083.9
671.0
129.9
68.9
28.3
443.9
263.9
4.4
—
109.1
377.4
6.2
72.7
(59)% $ 34,089.9
328.6
192.5
42.5
39.4
0.3
34,693.2
34,068.9
624.3
122.7
52.7
17.1
431.8
251.1
7.3
—
95.3
353.7
—
78.1
(2)%
17%
(1)%
40%
(33)%
(57)%
(59)%
7%
6%
31%
65%
3%
5%
(40)%
n/m
14%
7%
n/m
(7)% $
27
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The selected data table below reflects key operating metrics used by management in evaluating our product lines, for the periods indicated:
Volumes and Other Data:
Exchange-traded - futures and options (contracts, 000’s)
OTC (contracts, 000’s)
Global Payments (# of payments, 000’s)
Gold equivalent ounces traded (000’s)
Equity Market-Making (gross dollar volume, millions)
Debt Trading (gross dollar volume, millions)
FX Prime Brokerage volume (U.S. notional, millions)
Average assets under management in Argentina (U.S. dollar, millions)
Average customer equity - futures and options (millions)
2017
99,148.4
1,410.0
648.9
137,235.3
$
87,789.8
$ 133,352.3
$ 620,917.8
564.9
$
2,015.9
$
Year Ended September 30,
2016
% Change
% Change
2015
99,667.4
(1)%
1,380.8
2%
444.9
46%
92,073.7
49%
(1)% $
88,518.8
24% $ 107,747.4
7% $ 580,426.9
562.4
—% $
1,878.7
7% $
99,879.2
—%
1,670.0
(17)%
325.4
37%
126,365.5
(27)%
98,604.3
(10)% $
70% $
63,502.6
29% $ 449,344.1
572.1
(2)% $
1,788.2
5% $
Operating Revenues
Year Ended September 30, 2017 Compared to
Year Ended September 30, 2016
Operating revenues increased approximately 17% to $784.0 million
in fiscal 2017 compared to $671.0 million in the prior year. Operating
revenue growth was driven by a $108.7 million increase in our CES
segment, primarily as a result of incremental operating revenues
from our recent acquisitions. In addition, Global Payments and
Commercial Hedging operating revenues increased $16.0 million and
$8.5 million, respectively. Physical Commodities segment operating
revenues increased $8.2 million versus the prior year. Offsetting this
revenue growth was a $23.5 million decline in operating revenues
within our Securities segment.
Operating revenues for fiscal 2017 include a $5.9 million pre-tax
unrealized loss on interest rate swaps and U.S. Treasury notes held as
part of our interest rate management strategy. The prior year period
included a $0.7 million pre-tax unrealized loss on interest rate swaps
and U.S. Treasury notes held as part of our interest rate management
strategy. On a segment basis, these unrealized losses are reported in
the Corporate unallocated segment, while the amortized earnings on
these investments are included in the Commercial Hedging and CES
segments. During fiscal 2017, we liquidated our interest rate swap
and U.S. Treasury note positions, held as part of the strategy, due to
scheduled maturities as well as the close-outs of profitable positions
as we determined there was no longer a sufficient interest rate spread
between short-term and medium term rates.
Operating revenues in our CES segment increased 72% to
$259.8 million in fiscal 2017, primarily as a result of the acquisition
of the Sterne Agee Correspondent Clearing and Independent Wealth
Management businesses at the beginning of the fourth quarter of
fiscal 2016, which added an incremental $75.3 million in operating
revenues in fiscal 2017. Also contributing to the revenue growth was
the acquisition of ICAP plc’s London-based EMEA oil voice brokerage
business, at the beginning of the first quarter of fiscal 2017, which
contributed $26.7 million to fiscal 2017 operating revenues. The
Exchange-traded Futures & Options business added $8.8 million in
operating revenues primarily as a result of an increase in the average
rate per contract, while the FX Prime Brokerage business declined
$2.3 million, despite a 7% increase in customer volumes as spreads
narrowed in this business.
Operating revenues in our Global Payments segment increased
22% in fiscal 2017 to $89.2 million, as a result of a 46% increase in
the number of global payments made which was partially offset by
a narrowing of spreads in this business due to an increase in volume
of smaller transactions from financial institutions.
Operating revenues in Commercial Hedging increased 4% in fiscal
2017 to $244.6 million, primarily driven by a $4.8 million increase
in interest income. In addition exchange-traded revenues increased
$4.3 million, while OTC revenues declined $1.5 million. An increase
in agricultural and energy and renewable fuels revenues drove the
increase in exchange-traded revenues.
Our Physical Commodity segment operating revenues increased 22% to
$44.8 million, as a result of a $6.0 million increase in Physical Ag &
Energy operating revenues, while Precious Metals added $2.2 million
in operating revenues.
Operating revenues in our Securities segment declined 13% to
$151.7 million in fiscal 2017 compared to the prior year. The Debt
Trading and Asset Management businesses declined $10.2 and
$6.3 million, respectively, as the prior year period reflected strong
performance in our Argentina operations in these businesses following
the devaluation of the Argentine Peso in December 2015. In addition,
Equity Market-Making operating revenues declined $5.7 million
as a result of a narrowing of spreads due to lower market volatility.
Investment Banking operating revenues declined $1.0 million due
both to weaker results in Argentina and management’s decision to
exit our domestic investment banking business.
Interest income increased $14.5 million to $69.7 million in fiscal 2017
compared to prior year, primarily driven a $6.4 million increase in
Debt Trading interest income. In addition, average customer equity in
the Financial Ag & Energy and Exchange-traded Futures & Options
components of our Commercial Hedging and CES segments increased
7% to $2.0 billion in fiscal 2017 compared to the prior year, which
combined with an increase in short term interest rates resulted in an
aggregate $8.1 million increase in interest income in these businesses.
In addition, the acquisition of the Sterne Agee Correspondent Clearing
business added an incremental $3.9 million in interest income. These
increases in interest income were partially offset by a $5.5 million
decline in the mark-to-market valuation on U.S. Treasury notes.
See Segment Information below for additional information on activity
in each of the segments.
28
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Operating revenues for fiscal 2016 and fiscal 2015 were $671.0 million
and $624.3 million, respectively. Operating revenue growth was
driven by strong growth in our Securities segment, which added
$45.4 million over the prior year, while the CES segment added
$27.7 million in operating revenue, driven by the acquisition of the
Sterne Agee businesses which added an incremental $24.1 million.
In addition, the Physical Commodities segment added $13.5 million
over the prior year. This growth was partially offset by $26.3 million
and $3.9 million declines in operating revenues in our Commercial
Hedging and Global Payments segments, respectively.
Operating revenues in our Commercial Hedging segment decreased
10% in fiscal 2016 to $236.1 million with a $2.2 million increase in
exchange-traded revenues to $131.6 million being more than offset
by a $28.8 million decline in OTC revenues to $82.2 million in fiscal
2016. Growth in the domestic grain markets and in our London
operations drove a 10% increase in exchange-traded volumes. Lower
OTC revenues were a result of a 17% decline in volumes, primarily
as a result of lower customer volumes in the domestic and Latin
American agricultural markets as well as the effect of lower energy
prices and volatility.
Operating revenues in our Securities segment increased 35% in fiscal
2016 to $175.2 million, primarily as a result of a $42.3 million
increase in our Debt Trading product line, primarily as a result of the
acquisition of G.X. Clarke which was effective January 1, 2015 and
thus only contributed operating revenues beginning in the second
quarter of fiscal 2015. In addition, the business acquired showed
strong growth in fiscal 2016, outperforming the similar period in
the prior year. Strong performance in our Argentine operations also
contributed to growth in debt trading operating revenues as well as in
asset management. Investment banking operating revenues declined
$5.8 million following management’s decision to exit the domestic
investment banking business.
Operating revenues in our Global Payments segment declined 5%
in fiscal 2016 to $73.2 million compared to the prior year, as a 37%
increase in the number of global payments made was more than offset
by a narrowing of spreads as a result of a continuing increase in lower
dollar value per payment transaction volume from financial institutions.
Physical Commodity segment operating revenues increased 58% to
$36.6 million in fiscal 2016 as a result of a $9.7 million increase in
Precious Metals operating revenues, as well as a $3.6 million increase
in Physical Ag & Energy operating revenues.
Operating revenues in our CES segment increased 22% in fiscal 2016
to $151.1 million. Exchange-traded Futures & Options operating
revenues increased $4.2 million to $106.1 million, while Foreign
Exchange Prime Brokerage operating revenues declined $0.6 million
to $20.9 million. The addition of the Sterne Agee correspondent
clearing and independent wealth management businesses added
$24.1 million in incremental operating revenues.
Interest income increased $15.8 million to $55.2 million in fiscal
2016 compared to fiscal 2015, primarily driven by a $14.9 million
increase in our Debt Trading business. In addition, average customer
equity in the exchange traded futures and options portions of our
Commercial Hedging and CES segments increased 5% to $1.9 billion
in fiscal 2016 compared to fiscal 2015, which combined with an
increase in short term interest rates and the continued implementation
of our interest rate management program, resulted in an aggregate
$2.9 million increase in interest income in the exchange traded futures
and options portions of these segments.
On July 1, 2015, we merged three of our wholly owned U.S. subsidiaries
into our wholly owned subsidiary, INTL FCStone Financial Inc. In
connection with the merger, we transferred our remaining available-
for-sale investments, at fair value, to the trading category in accordance
with the accounting requirements for broker-dealers. The July 1, 2015
transfer of securities resulted in $5.4 million of pre-tax unrealized gains
not previously recognized in earnings being included in operating
revenues during the fourth quarter of fiscal 2015. In addition, operating
revenues for fiscal 2015 included a $1.2 million pre-tax gain on the
sale of common stock held in the Intercontinental Exchange, Inc.
Interest and Transactional Expenses
Year Ended September 30, 2017 Compared to
Year Ended September 30, 2016
Transaction-based clearing expenses: Transaction-based clearing
expenses increased 5% to $136.3 million in fiscal 2017 compared to
$129.9 million in fiscal 2016, and were 17% of operating revenues in
fiscal 2017 compared to 19% in fiscal 2016. The increase in expense
is primarily related to the activity of the Sterne Agee correspondent
clearing and independent wealth management businesses, acquired
during the fourth quarter of fiscal 2016 and thus only three months
of expenses were included in fiscal 2016, resulting in higher expense
of $4.7 million. Additionally, increased activity across our Exchange-
traded Futures & Options and Financial Ag & Energy components
contributed to the higher costs, partially offset by lower ADR conversion
fees in our Equity Market-Making component and lower Debt Trading
transactional fees. The decrease in transaction-based clearing expenses
as a percentage of operating revenue is primarily related to the impact
of the incremental revenues from these acquired businesses, as well as
the acquired oil voice brokerage business.
Introducing broker commissions: Introducing broker commissions
increased 64% to $113.0 million in fiscal 2017 compared to
$68.9 million in fiscal 2016, and were 14% of operating revenues in
fiscal 2017 compared to 10% in fiscal 2016. The increase in expense is
primarily related to the activity of the Sterne Agee independent wealth
management business, acquired during the fourth quarter of fiscal 2016
and thus only three months of expenses were included in fiscal 2016,
resulting in higher expense of $42.1 million. Also, we experienced an
increase in introducing broker commissions in our Exchange-traded
Futures & Options and Financial Ag & Energy components, partially
offset by decreased in our Debt Trading business in Argentina, and
lower broker commissions in our Investment Banking component as
we exited the domestic investment banking business during fiscal 2016.
Interest expense: Interest expense increased 49% to $42.1 million in fiscal
2017 compared to $28.3 million in fiscal 2016. The increase in interest
expense is primarily related to the trading activities of our institutional
dealer in fixed income securities, which resulted in higher interest expense
of $8.0 million. Additionally, increased credit line capacity and higher
average borrowings outstanding on our corporate credit facility, available
for working capital needs, and our physical commodity financing facility
resulted in increased expense. Also, an increase in short-term rates resulted
in higher costs in our Exchange-Traded Futures & Options component,
as well as incremental interest related to our stock lending business started
up during fiscal 2017 in our Equity Market-Making component.
29
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Transaction-based clearing expenses: Transaction-based clearing
expenses increased 6% to $129.9 million in fiscal 2016 compared to
$122.7 million in fiscal 2015, and were 19% of operating revenues in
fiscal 2016 compared to 20% in fiscal 2015. The increase in expense
is primarily related to increased activity across our Exchange-traded
Futures & Options, Debt Trading, LME Metals and Global Payments
components, as well as higher operational costs associated with required
regulatory transactional reporting.
Introducing broker commissions: Introducing broker commissions
increased 31% to $68.9 million in fiscal 2016 compared to $52.7 million
in fiscal 2015, and were 10% of operating revenues in fiscal 2016
compared to 8% in fiscal 2015. The increase in expense is primarily
related to our acquisition of the independent wealth management
business of Sterne Agee at the beginning of our fourth fiscal quarter,
which added an incremental $14.7 million. Also, introducing broker
commissions increased in our Debt Trading business in Argentina,
and we had higher broker commissions in our Investment Banking
component as we completed our exit of the domestic investment
banking business. These increases were partially offset by lower costs
in our Global Payments segment activity.
Interest expense: Interest expense increased 65% to $28.3 million
in fiscal 2016 compared to $17.1 million in fiscal 2015. The increase
in interest expense is primarily related to the fixed income trading
activities from our institutional dealer in fixed income securities,
acquired on January 1, 2015, which resulted in higher interest expense
of $7.4 million. Additionally, higher average borrowings outstanding
on the credit facilities available for working capital needs and financing
of physical commodities 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.
Year Ended September 30, 2017 Compared to
Year Ended September 30, 2016
Net operating revenues increased $48.7 million, or 11%, to
$492.6 million in fiscal 2017 compared to $443.9 million in fiscal 2016.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Net operating revenues increased $12.1 million, or 3%, to
$443.9 million in fiscal 2016 compared to $431.8 million in fiscal 2015.
Compensation and Other Expenses
The following table shows a summary of expenses, other than interest and transactional expenses.
(in millions)
COMPENSATION AND BENEFITS:
Fixed compensation and benefits
Variable compensation and benefits
OTHER NON-COMPENSATION EXPENSES:
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts
Bad debt on physical coal
Other expense
Total compensation and other expenses
Year Ended September 30,
2017
% Change
2016
% Change
2015
$
$
157.0
138.7
295.7
39.4
15.2
15.2
13.3
9.8
4.3
47.0
37.5
181.7
477.4
24% $
1%
12%
20%
14%
9%
16%
20%
(2)%
n/m
28%
60%
26% $
126.5
137.4
263.9
32.7
13.3
14.0
11.5
8.2
4.4
—
29.4
113.5
377.4
10% $
1%
5%
16%
(1)%
12%
10%
14%
(40)%
n/m
25%
11%
7% $
115.3
135.8
251.1
28.1
13.5
12.5
10.5
7.2
7.3
—
23.5
102.6
353.7
30
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Year Ended September 30, 2017 Compared to
Year Ended September 30, 2016
Compensation and Other Expenses: Compensation and other
expenses increased $100.0 million, or 26%, to $477.4 million in
fiscal 2017 compared to $377.4 million in fiscal 2016.
Compensation and Benefits: Total compensation and benefits
expenses increased 12% to $295.7 million in fiscal 2017 compared
to $263.9 million in fiscal 2016. Total compensation and benefits
were 38% of operating revenues in fiscal 2017 compared to 39% of
operating revenues in fiscal 2016. The variable portion of compensation
and benefits increased 1% to $138.7 million in fiscal 2017 compared
to $137.4 million in fiscal 2016. Variable compensation and benefits
were 28% of net operating revenues in fiscal 2017 compared to 31%
in fiscal 2016. Administrative, centralized operations and executive
incentive compensation was $16.7 million in fiscal 2017 compared
to $28.7 million in fiscal 2016, primarily due to the lower current
year performance impacting executive incentive compensation, as
well as declines among certain business lines.
The fixed portion of compensation and benefits increased 24%
to $157.0 million in fiscal 2017 compared to $126.5 million in
fiscal 2016. Non-variable salaries increased $20.2 million, or 22%,
primarily due to the activity of the Sterne Agee correspondent clearing
and independent wealth management businesses, acquired during
the fourth quarter of fiscal 2016 and thus only three months of
expenses were included in fiscal 2016, and our acquisition of ICAP
plc’s London-based EMEA oil voice brokerage business, resulting in
an aggregate addition of $12.5 million. Additionally, we increased
headcount across several growing business lines as well as across several
administrative departments. Employee benefits, excluding share-based
compensation, increased $8.0 million in fiscal 2017, primarily due
to higher employer payroll, health care and retirement costs, as well
as higher temporary personnel costs. Share-based compensation is
a component of the fixed portion, and includes stock option and
restricted stock expense. Share-based compensation was $6.3 million
in fiscal 2017 compared to $5.1 million in fiscal 2016. The number of
employees increased 10% to 1,607 at the end of fiscal 2017 compared
to 1,464 at the end of fiscal 2016.
Other Non-Compensation Expenses: Other non-compensation
expenses increased by 60% to $181.7 million in fiscal 2017 compared
to $113.5 million in fiscal 2016. Communication and data services
expenses increased $6.7 million, primarily related to incremental
trade systems and market information costs associated with the
acquired businesses discussed above. Occupancy and equipment rental
increased $1.9 million, primarily as a result of the incremental costs
from the leased office space of the acquired Sterne Agee correspondent
clearing and independent wealth management businesses. Travel and
business development fees increased $1.8 million, primarily related
to incremental costs from the acquired businesses, as well as higher
costs across certain administrative departments. Depreciation and
amortization increased $1.6 million, primarily related to the increase
in the amortization of intangible assets identified as part of our recent
acquisition of ICAP plc’s London-based EMEA oil voice brokerage
business. Other expense increased $8.1 million, primarily due to
incremental costs from our acquisitions discussed above, including
non-trading hardware and software licensing costs, insurance, and
office expenses. Additionally, we experienced greater losses from trade
errors in fiscal 2017 compared to fiscal 2016.
Excluding the bad debt on physical coal discussed below, bad debts
decreased $0.1 million year-over-year. During fiscal 2017, bad debts
were $4.3 million, primarily related to $3.9 million in LME Metals
customer deficits in our Commercial Hedging segment and $0.2 million
of uncollectible customer receivables in our Physical Ag & Energy
and Derivative Voice Brokerage components. During fiscal 2016,
bad debts were $4.4 million, primarily related to $3.6 million of
customer deficits in our Commercial Hedging segment, $0.4 million
of uncollectible customer receivables in our Physical Ag & Energy
component and $0.4 million of uncollectible service fees and notes
in our Securities segment.
Bad Debt on Physical Coal: During the fourth quarter of fiscal
2017, we recorded a charge to earnings of $47.0 million, to record an
allowance for doubtful accounts related to a bad debt incurred in our
physical coal business, conducted solely in our Singapore subsidiary,
INTL Asia Pte. Ltd., with a coal supplier. Components of the bad
debt on physical coal include allowances on amounts due to us from
our supplier related to: coal paid for but not delivered to customers;
reimbursement of demurrage claims, dead freight and other charges
paid by INTL Asia Pte. Ltd. to its customers; reimbursement due for
deficiencies in the quality of coal delivered to customers; and losses
incurred related to the cancellation of open sales contracts.
We purchased coal delivered onto barges and paid 80% of the value
against bills of lading and purchase invoices, with the remaining 20%
payable following inspection upon delivery to customers’ vessels. We
took title of the coal when it was loaded onto barges and maintained
title until it was offloaded onto customers’ vessels. The logistics related
to the delivery of coal to the customers’ vessels was out-sourced to our
coal supplier, and we determined that certain purchased coal was not
delivered to our customers’ vessels during the fourth quarter ended
September 30, 2017. Furthermore, we determined that our supplier
was unable to deliver such purchased coal to our customers. Demurrage
claims, dead freight, and other penalty charges paid by INTL Asia
Pte. Ltd. to its customers were due to be reimbursed by our supplier
based on transaction agreements with our supplier. Subsequent to the
end of the fourth quarter ended September 30, 2017, we determined
our supplier was unable to make this reimbursement.
We received an acknowledgment of debt and a note from the supplier
in our first quarter ending December 31, 2017. However, there is
substantial uncertainty as to whether the supplier will be able to meet
its financial obligations to us and as to the timing of any recovery.
We are continuing our investigation into this matter and will pursue
all legal avenues available to us. We have presented the bad debt on
physical coal separately as a component of income from operations
in our consolidated income statements.
We have exited the physical coal business. All remaining open sales
contracts have been canceled. In our first quarter ending December 31,
2017, we expect to record an additional bad debt expense of $1.0 million
related to reimbursement due to us from the supplier for demurrage
and other charges related to contracts with delivery dates subsequent
to September 30, 2017. We do not anticipate any additional bad debt
expense in connection with the physical coal business. We have no
long-lived or intangible assets related to the physical coal business,
and accordingly have recorded no impairment charges. We do not
believe that the loss will adversely affect our on-going profitability
as the physical coal business had not contributed significantly to
income from operations. We believe any additional exit costs will
31
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
not be material to our consolidated financial statements. INTL Asia
Pte. Ltd. has been recapitalized following the bad debt in order for
its other businesses to operate in normal course.
Gain on Acquisition: See the discussion of Gain on Acquisition for the
Year Ended September 30, 2016 Compared to Year Ended September 30,
2016 for details of the amount recorded during fiscal 2016.
Provision for Taxes: The effective income tax rate on income from
operations was 58% in fiscal 2017 compared to 25% in fiscal 2016.
Our effective income tax rate during fiscal 2017 was significantly
higher than the U.S. federal statutory rate primarily due to the bad
debt on our physical coal business in Singapore being taxed at a lower
rate resulting in less of a benefit to offset taxable earnings in other
jurisdictions. Excluding the impact of the bad debt on physical coal,
our effective tax rates was 20.7% in fiscal 2017. Our effective income
tax rate in fiscal 2016 was lower than the U.S federal statutory rate
primarily due to a higher mix of earnings taxed at lower rates in foreign
jurisdictions as well as the impact of the bargain purchase gain on the
acquired businesses from Sterne Agee. The effective income tax rate
can vary from period to period depending on, among other factors,
the geographic and business mix of our earnings. Generally, when
the percentage of pretax earnings generated from the U.S. increases,
our effective income tax rate increases.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Compensation and Other Expenses: Compensation and other
expenses increased $23.7 million, or 7%, to $377.4 million in fiscal
2016 compared to $353.7 million in fiscal 2015.
Compensation and Benefits: Total compensation and benefits
expenses increased 5% to $263.9 million in fiscal 2016 compared
to $251.1 million in fiscal 2015. Total compensation and benefits
were 39% of operating revenues in fiscal 2016 compared to 40% of
operating revenues in fiscal 2015. The variable portion of compensation
and benefits increased 1% to $137.4 million in fiscal 2016 compared
to $135.8 million in fiscal 2015. Variable compensation and benefits
were 31% of net operating revenues in fiscal 2016 compared to 31%
in fiscal 2015. Administrative, centralized operations and executive
incentive compensation was $28.7 million in fiscal 2016 compared
to $25.1 million in fiscal 2015, primarily related to incremental
expense from a full year of cost in regard to the acquisition of the
Rates Division in January 2015 and one quarter of cost related to the
acquired correspondent clearing and independent wealth management
businesses of Sterne Agee in July 2016.
The fixed portion of compensation and benefits increased 10% to
$126.5 million in fiscal 2016 compared to $115.3 million in fiscal
2015. Non-variable salaries increased $6.4 million, or 7%, primarily
due to incremental costs from the acquisitions of the Rates Division
and businesses of Sterne Agee, and additional headcount increases
across certain front office and administrative departments. Employee
benefits, excluding share-based compensation, increased $3.2 million
in fiscal 2016, primarily due to higher employer payroll, health care
and retirement costs, as well as higher temporary personnel costs.
Share-based compensation is a component of the fixed portion,
and includes stock option and restricted stock expense. Share-based
compensation was $5.1 million in fiscal 2016 compared to $3.6 million
in fiscal 2015. The number of employees increased 19% to 1,464 at
the end of fiscal 2016 compared to 1,231 at the end of fiscal 2015.
Other Non-Compensation Expenses: Other non-compensation
expenses increased by 11% to $113.5 million in fiscal 2016 compared
to $102.6 million in fiscal 2015. Communication and data services
expenses increased $4.6 million, primarily due to increases in market
information and trade system expenses across various business
activities, as well as incremental costs from the acquisition of the
Sterne businesses. Professional fees increased $1.5 million, primarily
due to higher consultancy costs related to direct business, operational
and administrative activities, partially offset by lower legal service
costs. Travel and business development fees increased $1.0 million,
primarily within our Commercial Hedging and Securities segments as
well as incremental costs from the acquired businesses. Depreciation
and amortization increased $1.0 million, primarily related to higher
software depreciation. Other expense increased $5.9 million, primarily
as a result of the costs of holding our internal bi-annual global sales
meeting in fiscal 2016 as well as higher non-trading hardware costs,
hosted customer conference costs, recruiting costs and incremental
costs from the acquired businesses.
Bad debts decreased $2.9 million year-over-year. During fiscal 2016,
bad debts were $4.4 million, primarily related to $3.6 million of
customer deficits in our Commercial Hedging segment, $0.4 million
of uncollectible customer receivables in our Physical Ag & Energy
component of our Physical Commodities segment and $0.4 million
of uncollectible service fees and notes in our Securities segment.
During fiscal 2015, bad debts were $7.3 million, primarily related
to $2.8 million of customer receivables in our Physical Ag & Energy
component, $2.3 million of OTC customer deficits and $0.6 million
of LME Metals customer deficits in our Commercial Hedging segment,
$0.5 million of uncollectible service fees and notes in our Securities
segment, and $1.1 million of notes receivable related to loans pertaining
to a former acquisition.
Gain on Acquisition: In the fiscal fourth quarter of 2016, we
acquired the correspondent securities clearing and independent
wealth management businesses of Sterne Agee. The purchase price
of $45.0 million represented a discount to the preliminary allocation
of fair value to the net assets of the Sterne entities. The $6.2 million
discount in the purchase price as compared to the preliminary allocation
of fair value to the net assets at closing was reflected as a gain on
acquisition in the Consolidated Income Statement for fiscal 2016.
Provision for Taxes: The effective income tax rate on income from
operations was 25% in fiscal 2016 compared to 29% in fiscal 2015, and
was impacted by the bargain purchase gain on the acquired businesses
from Sterne Agee during fiscal 2016. The effective income tax rate
can vary from period to period depending on, among other factors,
the geographic and business mix of our earnings. Generally, when
the percentage of pretax earnings generated from the U.S. increases,
our effective income tax rate increases. Our effective income tax rate
during both periods was lower than the U.S. federal statutory rate
primarily due to a higher mix of earnings taxed at lower rates in
foreign jurisdictions.
32
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
(in millions)
COMPENSATION AND BENEFITS:
Fixed compensation and benefits
Variable compensation and benefits
OTHER NON-COMPENSATION EXPENSES:
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts and impairments
Other expense
Total compensation and other expenses
2017
59.7
14.8
74.5
7.1
15.1
8.4
3.2
8.2
—
20.8
62.8
137.3
$
$
Year Ended September 30,
2016
% Change
% Change
31% $
(44)%
4%
18%
14%
8%
33%
22%
—%
6%
13%
8% $
45.4
26.5
71.9
6.0
13.2
7.8
2.4
6.7
—
19.7
55.8
127.7
24% $
15%
20%
33%
(1)%
3%
4%
16%
n/m
11%
6%
14% $
2015
36.7
23.1
59.8
4.5
13.4
7.6
2.3
5.8
1.1
17.8
52.5
112.3
Year Ended September 30, 2017 Compared to
Year Ended September 30, 2016
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Total unallocated costs and other expenses increased $9.6 million to
$137.3 million in fiscal 2017 compared to $127.7 million in fiscal
2016. Compensation and benefits increased $2.6 million, or 4% to
$74.5 million in fiscal 2017 compared to $71.9 million in fiscal 2016.
Total unallocated costs and other expenses increased $15.4 million
to $127.7 million in fiscal 2016 compared to $112.3 million in fiscal
2015. Compensation and benefits increased $12.1 million, or 20% to
$71.9 million in fiscal 2016 compared to $59.8 million in fiscal 2015.
During fiscal 2017, the increase in fixed compensation and benefits
is primarily related to the incremental unallocated costs from the
acquisition of the Sterne Agee correspondent clearing and independent
wealth management businesses and increases in several administrative
departments, most notably our information technology department.
The decrease in variable compensation and benefits is primarily related
to lower current year performance impacting executive incentive
compensation. The increase in communication and data services is
primarily due to increased market information costs.
During fiscal 2016, the increase in fixed and variable compensation and
benefits is primarily related to the incremental costs from the acquisitions
of G.X. Clarke and the correspondent clearing and independent wealth
management businesses from Sterne Agee, higher management incentives
earned in Argentina and expansion of our information technology
department. The increase in communication and data services is
primarily due to increased market information costs. The increase
in other expense is primarily related to higher centralized operations
costs and costs of holding our internal bi-annual global sales meeting
during fiscal 2016. Excluding the incremental unallocated costs from
the acquisitions of G.X. Clarke and the correspondent clearing and
independent wealth management businesses from Sterne Agee, total
compensation and other expenses increased 10% over the prior year.
Variable vs. Fixed Expenses
(in millions)
Variable compensation and benefits
Transaction-based clearing expenses
Introducing broker commissions
Total variable expenses
Fixed compensation and benefits
Other fixed expenses
Bad debts
Bad debt on physical coal
Total non-variable expenses
Total non-interest expenses
2017
% of Total
2016
% of Total
2015
% of Total
Year Ended September 30,
$
$
138.7
136.3
113.0
388.0
157.0
130.4
4.3
47.0
338.7
726.7
19% $
19%
15%
53%
22%
18%
1%
6%
47%
100% $
137.4
129.9
68.9
336.2
126.5
109.1
4.4
—
240.0
576.2
24% $
23%
11%
58%
22%
19%
1%
—%
42%
100% $
135.8
122.7
52.7
311.2
115.3
95.3
7.3
—
217.9
529.1
26%
23%
10%
59%
22%
18%
1%
—%
41%
100%
33
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 years
ended September 30, 2017, 2016, and 2015.
Our variable expenses consist of 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 53% in fiscal 2017,
58% in fiscal 2016 and 59% in fiscal 2015.
See the discussion of Bad Debt on Physical Coal in the Executive
Summary previously discussed for additional information.
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:
- Financial Ag
& Energy
- LME Metals
Component:
- Global Payments
Components:
- Equity Market-
Making
- Debt Trading
- Investment Banking
- Asset Management
Components:
- Precious Metals
- Physical Ag
& Energy
Components:
- Exchange-traded
Futures & Options
- FX Prime Brokerage
- Correspondent
Clearing
- 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 revenues 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 expense 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.
34
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Total Segment Results
The following table shows summary information concerning all of our business segments combined.
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Segment income
% of
Operating
Revenues
Year Ended September 30,
% of
Operating
Revenues
2016
% of
Operating
Revenues
2015
$
100%
17%
14%
4%
15%
28%
$
14,112.0
318.7
224.2
41.0
60.2
—
14,756.1
14,083.9
672.2
126.8
68.9
20.8
455.7
108.7
347.0
141.0
206.0
$
100%
19%
10%
3%
16%
21%
$
34,089.9
322.3
192.5
42.5
37.5
—
34,684.7
34,068.9
615.8
121.0
52.7
10.8
431.3
110.7
320.6
132.5
188.1
100%
20%
9%
2%
18%
22%
2017
$ 28,673.3
329.4
282.9
63.7
80.3
0.1
29,429.7
28,639.6
790.1
133.9
112.9
34.3
509.0
122.0
387.0
218.0
169.0
$
Year Ended September 30, 2017 Compared to
Year Ended September 30, 2016
The net contribution of all our business segments increased 12% to
$387.0 million in fiscal 2017 compared to $347.0 million in fiscal
2016. Segment income decreased (18)% to $169.0 million in fiscal
2017 compared to $206.0 million in fiscal 2016.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
The net contribution of all our business segments increased 8% to
$347.0 million in fiscal 2016 compared to $320.6 million in fiscal
2015. Segment income increased 10% to $206.0 million in fiscal
2016 compared to $188.1 million in fiscal 2015.
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.
35
- Form 10-K
2015
—
152.3
88.0
15.1
7.0
—
262.4
—
262.4
27.6
19.9
0.2
214.7
63.0
151.7
66.1
85.6
2015
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table provides the financial performance for Commercial Hedging for the periods indicated.
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Segment income
2017
—
114.8
101.8
14.6
13.3
0.1
244.6
—
244.6
29.8
19.9
0.6
194.3
52.5
141.8
69.0
72.8
$
$
Year Ended September 30,
2016
% Change
% Change
—
$
(3)%
7%
6%
56%
—
4%
—
4%
7%
2%
50%
3%
(2)%
6%
5%
6% $
—
118.7
95.1
13.8
8.5
—
236.1
—
236.1
27.9
19.6
0.4
188.2
53.8
134.4
65.7
68.7
—
$
(22)%
8%
(9)%
21%
—
(10)%
—
(10)%
1%
(2)%
100%
(12)%
(15)%
(11)%
(1)%
(20)% $
The following tables set forth transactional revenues and selected data for Commercial Hedging for the periods indicated.
Transactional revenues (in millions):
Agricultural
Energy and renewable fuels
LME metals
Other
Selected data:
Futures and options (contracts, 000’s)
Average rate per contract
Average customer equity - futures and options (millions)
Transactional revenues (in millions):
Agricultural
Energy and renewable fuels
Other
Selected data:
Volume (contracts, 000’s)
Average rate per contract
$
$
$
$
$
$
$
Exchange-traded
Year Ended September 30,
2016
% Change
% Change
3% $
18%
1%
7%
3% $
69.6
5.7
49.5
6.8
131.6
12% $
(16)%
(6)%
(13)%
2% $
62.0
6.8
52.8
7.8
129.4
4%
(1)% $
2% $
22,810.2
5.66
923.6
10%
(8)% $
9% $
20,686.1
6.16
844.8
OTC
Year Ended September 30,
2016
% Change
% Change
2015
1% $
(5)%
(10)%
(2)% $
52.9
19.4
9.9
82.2
(23)% $
(42)%
5%
(26)% $
68.3
33.3
9.4
111.0
2017
71.8
6.7
50.1
7.3
135.9
23,785.7
5.61
938.1
2017
53.4
18.4
8.9
80.7
1,410.0
54.61
2%
(5)% $
1,380.8
57.50
(17)%
(10)% $
1,670.0
64.19
For information about the assets of this segment, see Note 21 to the Consolidated Financial Statements.
36
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Year Ended September 30, 2017 Compared to
Year Ended September 30, 2016
spreads across virtually all commodity sectors leading to a 10% decline
in the average rate per contract.
Operating revenues increased 4% to $244.6 million in fiscal 2017
compared to $236.1 million in fiscal 2016. Exchange-traded revenues
increased 3% to $135.9 million in fiscal 2017, resulting primarily from
higher agricultural and energy and renewable fuels revenues. Those
increases were partially offset by a modest decline in LME metals.
Overall exchange-traded contract volume increased 4%, while the
average rate per contract declined to $5.61.
OTC revenues decreased marginally to $80.7 million in fiscal 2017
while OTC volumes increased 2% to 1.41 million contracts in fiscal
2017 compared to 1.38 million in fiscal 2016. OTC revenues were
relatively flat with the prior year, as modest OTC volume growth was
offset by lower spreads across virtually all commodity sectors leading
to a 5% decline in the average rate per contract.
Consulting and management fees increased 6% to $14.6 million in
fiscal 2017 compared to $13.8 million in fiscal 2016 while interest
income, increased 56%, to $13.3 million in fiscal 2017 compared to
$8.5 million in fiscal 2016. The increase in interest income is driven
by an increase in short term interest rates as well as a 2% increase in
average customer equity.
Segment income increased 6% to $72.8 million in fiscal 2017 compared
to $68.7 million in fiscal 2016, driven by the growth in operating
revenues, partially offset by a $3.3 million increase in non-variable
direct expenses. The increase in non-variable direct expenses was
primarily related to an increase in operations charges and non-variable
clearing expenses. Variable expenses, excluding interest, expressed as
a percentage of operating revenues decreased to 42% in fiscal 2017
compared to 43% in fiscal 2016.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Operating revenues decreased 10% to $236.1 million in fiscal 2016
compared to $262.4 million in fiscal 2015. Exchange-traded revenues
increased 2% to $131.6 million in fiscal 2016, resulting primarily
from growth in the domestic grain markets as well as growth in our
London operations. Those increases were tempered by declines in LME
metals and energy markets. Overall exchange-traded contract volume
increased 10%, while the average rate per contract decreased to $5.66.
OTC revenues decreased 26% to $82.2 million in fiscal 2016 as
OTC volumes decreased 17% to 1.4 million contracts in fiscal 2016
compared to 1.7 million in fiscal 2015. The OTC volume decline
was primarily driven by lower customer volumes in the domestic
and Latin American agricultural markets. In addition, the effect of
lower energy prices and volatility resulted in a decline in energy and
renewable fuels OTC revenues. In addition, we experienced lower
Consulting and management fees decreased 9% to $13.8 million in
fiscal 2016 compared to $15.1 million in fiscal 2015 while interest
income, which remains constrained by low short-term interest rates,
increased 21%, to $8.5 million in fiscal 2016 compared to $7.0 million
in fiscal 2015. The increase in interest income is driven by a 9%
increase in average customer equity as well as an increase in short
term interest rates.
Segment income decreased 20% to $68.7 million in fiscal 2016
compared to $85.6 million in fiscal 2015, driven by the decline in
operating revenues. Variable expenses, excluding interest, expressed
as a percentage of operating revenues increased to 43% in fiscal 2016
compared to 42% in fiscal 2015.
Global Payments
We provide global payment solutions to banks and commercial
businesses as well as charities and 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 the Society for Worldwide Interbank
Financial Telecommunication (“SWIFT”), we are able to offer
our services to large money center and global banks seeking more
competitive international payments 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.
37
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table provides the financial performance and selected data for Global Payments for the periods indicated.
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Segment income
Selected data:
Global Payments (# of payments, 000’s)
Average revenue per trade
$
$
$
2017
—
86.7
2.5
—
—
—
89.2
—
89.2
4.6
3.8
0.2
80.6
16.2
64.4
13.8
50.6
Year Ended September 30,
2016
% Change
% Change
—
$
22%
19%
—
—
—
22%
—
22%
7%
9%
100%
23%
24%
23%
11%
27% $
—
71.1
2.1
—
—
—
73.2
—
73.2
4.3
3.5
0.1
65.3
13.1
52.2
12.4
39.8
—
$
(6)%
31%
—
(100)%
—
(5)%
—
(5)%
23%
(30)%
—%
(5)%
(6)%
(4)%
11%
(8)% $
2015
—
75.4
1.6
—
0.1
—
77.1
—
77.1
3.5
5.0
0.1
68.5
14.0
54.5
11.2
43.3
648.9
137.46
46%
(16)% $
444.9
164.53
37%
(31)% $
325.4
236.94
For information about the assets of this segment, see Note 21 to the Consolidated Financial Statements.
Year Ended September 30, 2017 Compared to
Year Ended September 30, 2016
Operating revenues increased 22% to $89.2 million in fiscal 2017
compared to $73.2 million in fiscal 2016. The volume of payments
made increased by 46%, as we continue to benefit from an increase
in financial institutions and other customers utilizing our electronic
transaction order system, however this was partially offset by a 16%
decrease in the average revenue per trade.
Segment income increased 27% to $50.6 million in fiscal 2017
compared to $39.8 million in fiscal 2016. The increase primarily
resulted from the increase in operating revenues, partially offset by an
increase in non-variable direct expenses, primarily in compensation
and benefits, trade system costs, and operations charges. Variable
expenses, excluding interest, expressed as a percentage of operating
revenues was 28% in fiscal 2017 compared to 29% in fiscal 2016.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Operating revenues decreased 5% to $73.2 million in fiscal 2016
compared to $77.1 million in fiscal 2015. The volume of payments
made increased by 37%, as we continued to benefit from an increase
in financial institutions and other customers utilizing our electronic
transaction order system, however this was more than offset by a 31%
decrease in the average revenue per trade.
Segment income decreased 8% to $39.8 million in fiscal 2016
compared to $43.3 million in fiscal 2015. The decrease primarily
resulted from the lower operating revenues as well as a $1.2 million
increase in non-variable expenses including compensation and related
benefits as well as trade system costs. Variable expenses, excluding
interest, expressed as a percentage of operating revenues was 29% in
fiscal 2016 which was flat with fiscal 2015.
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 local understanding of 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, 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.
38
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table provides the financial performance for Securities for the periods indicated.
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Segment income
2017
—
81.7
10.4
13.6
46.0
—
151.7
—
151.7
24.5
8.0
24.6
94.6
19.0
75.6
29.0
46.6
$
$
Year Ended September 30,
2016
% Change
% Change
— $
(25)%
(3)%
(22)%
20%
—
(13)%
—
(13)%
(6)%
(32)%
60%
(22)%
(22)%
(22)%
3%
(33)% $
—
108.6
10.7
17.5
38.4
—
175.2
—
175.2
26.1
11.8
15.4
121.9
24.4
97.5
28.1
69.4
$
—
43%
81%
(27)%
61%
—%
35%
—
35%
10%
39%
71%
38%
15%
45%
4%
71% $
The following table sets forth operating revenues by product line and selected data for Securities for the periods indicated.
Operating revenues by product line (in millions):
Equity Market-Making
Debt Trading
Investment Banking
Asset Management
Selected data:
Equity Market-Making (gross dollar volume, millions)
Equity Market-Making revenue per $1,000 traded
Debt Trading (principal dollar volume, millions)
Debt Trading revenue per $1,000 traded
Average assets under management in Argentina (millions)
2017
$
$
56.7
80.4
2.7
11.9
151.7
$ 87,789.8
$
0.65
$ 133,352.3
0.60
$
564.9
$
Year Ended September 30,
2016
% Change
% Change
(9)% $
(12)%
(27)%
(35)%
(13)% $
62.4
90.9
3.7
18.2
175.2
88,518.8
(1)% $
(7)% $
0.70
24% $ 107,747.4
0.84
(29)% $
562.4
—% $
8% $
87%
(61)%
30%
35% $
(10)% $
19% $
70% $
9% $
(2)% $
2015
—
76.1
5.9
24.0
23.8
—
129.8
—
129.8
23.7
8.5
9.0
88.6
21.2
67.4
26.9
40.5
2015
57.7
48.6
9.5
14.0
129.8
98,604.3
0.59
63,502.6
0.77
572.1
For information about the assets of this segment, see Note 21 to the Consolidated Financial Statements.
Year Ended September 30, 2017 Compared to
Year Ended September 30, 2016
Operating revenues decreased 13% to $151.7 million in fiscal 2017
compared to $175.2 million in fiscal 2016.
Operating revenues in Equity Market-Making decreased 9%, to
$56.7 million in fiscal 2017 compared to fiscal 2016, as a result of
a 7% decline in the average revenue per $1,000 traded as a result
of lower market volatility as well as a 1% decline in the gross dollar
volume traded. Equity Market-Making operating revenues include
the trading profits we earn before the related expense deduction for
ADR conversion fees. These ADR fees are included in the consolidated
income statements as ‘transaction-based clearing expenses’.
Operating revenues in Debt Trading decreased 12% to $80.4 million
in fiscal 2017 compared to fiscal 2016, primarily as a result of a decline
in operating revenue in our Argentina operations compared to the prior
year. Our Argentine operations had a strong performance in the prior
year as a result of the effect of the devaluation of the Argentine Peso.
These declines in Argentina were partially offset by operating revenue
growth in our domestic institutional fixed income business. Investment
Banking operating revenues declined 27% in fiscal 2017 compared to
fiscal 2016, resulting primarily as a result of management’s decision
to exit our domestic investment banking business. Asset Management
operating revenues in fiscal 2017 decreased 35% to $11.9 million in
fiscal 2017 versus $18.2 million in fiscal 2016. Similar to Debt Trading,
Asset Management operating revenues had a strong performance in
the prior year as a result of the devaluation of the Argentine Peso.
Average assets under management were $564.9 million in fiscal 2017
compared to $562.4 million in fiscal 2016.
39
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Segment income decreased 33% to $46.6 million in fiscal 2017
compared to $69.4 million in fiscal 2016 primarily as a result of the
decrease in operating revenues as well as a $7.9 million increase in
interest expense in our domestic institutional fixed income business.
Variable expenses, excluding interest, expressed as a percentage of
operating revenues decreased to 34% in fiscal 2017 compared to
36% in fiscal 2016.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Operating revenues increased 35% to $175.2 million in fiscal 2016
compared to $129.8 million in fiscal 2015.
Operating revenues from Equity Market-Making increased 8%,
to $62.4 million in fiscal 2016 compared to fiscal 2015, despite a
10% decline in the gross dollar volume traded, as favorable market
conditions drove an increase in the average revenue per $1,000 traded.
Operating revenues in Debt Trading increased 87% to $90.9 million
in fiscal 2016 compared to fiscal 2015. The increase in operating
revenues was a result of the acquisition of G.X. Clarke, which was
effective on January 1, 2015 and thus only contributed operating
revenues beginning in the second quarter of fiscal 2015, as well as
strong performance in Argentina as the result of the market conditions
following the devaluation of the Argentine peso. Investment Banking
operating revenues declined 61% in fiscal 2016 compared to fiscal
2015, resulting primarily from management’s decision to exit the
domestic investment banking business. Asset Management revenues
in fiscal 2016 increased 30% to $18.2 million in fiscal 2016 versus
$14.0 million in fiscal 2015. Average assets under management were
$562.4 million in fiscal 2016 compared to $572.1 million in fiscal 2015.
Segment income increased 71% to $69.4 million in fiscal 2016
compared to $40.5 million in fiscal 2015 primarily as a result of the
increase in operating revenues. Variable expenses, excluding interest,
expressed as a percentage of operating revenues decreased to 36%
in fiscal 2016 compared to 41% in fiscal 2015, as the G.X. Clarke
business has a relatively low level of 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.
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 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 consolidated income
statements, in accordance with U.S GAAP accounting requirements
for broker-dealers. Precious metals inventory held by our subsidiaries
that are not broker-dealers continues to be valued at the lower of
cost or market value. Precious metals sales and cost of sales for
subsidiaries that are not broker-dealers continue to be recorded on a
gross basis. Operating revenues and losses from our Precious Metals
commodities derivatives activities are included in ‘trading gains, net’
in the consolidated income statements.
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.
In our Physical Ag and Energy commodity business, inventories of
certain of our agricultural commodities are carried 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. Changes in the fair values of these agricultural
commodities inventories are included as a component of ‘cost of
physical commodities sold’ in the consolidated income statements.
Inventories of energy, including coal, kerosene, and propane are valued
at the lower of cost or market (“LCM”). Revenues generated from
our Physical Ag and Energy commodity business are recorded on a
gross basis. Operating revenues and losses from our Physical Ag and
Energy commodity business are included in ‘cost of sales of physical
commodities’ in the consolidated income statements.
We generally mitigate the price risk associated with commodities
held in inventory through the use of derivatives. We do not elect
hedge accounting under U.S. GAAP in accounting for this price
risk mitigation. Management continues to evaluate performance and
allocate resources on an operating revenue basis.
40
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table provides the financial performance for Physical Commodities for the periods indicated.
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Bad debt on physical coal
Segment (loss) income
2017
28,673.3
2.0
1.0
1.2
6.9
—
28,684.4
28,639.6
44.8
0.8
0.4
6.3
37.3
10.1
27.2
11.6
47.0
(31.4)
$
$
Year Ended September 30,
2016
% Change
% Change
103% $
(386)%
—%
—%
(1)%
—
103%
103%
22%
14%
(20)%
62%
18%
25%
16%
15%
n/m
(336)% $
14,112.0
(0.7)
1.0
1.2
7.0
—
14,120.5
14,083.9
36.6
0.7
0.5
3.9
31.5
8.1
23.4
10.1
—
13.3
(59)% $
(77)%
100%
(33)%
150%
—
(59)%
(59)%
58%
75%
67%
225%
49%
88%
38%
(9)%
n/m
129% $
2015
34,089.9
(3.0)
0.5
1.8
2.8
—
34,092.0
34,068.9
23.1
0.4
0.3
1.2
21.2
4.3
16.9
11.1
—
5.8
The following tables set forth operating revenue by product line and selected data for Physical Commodities for the periods indicated.
Total revenues
Cost of sales of physical commodities
Operating revenues
Selected data:
Gold equivalent ounces traded (000’s)
Average revenue per ounce traded
Total revenues
Cost of sales of physical commodities
Operating revenues
2017
$ 27,958.9
27,932.8
26.1
$
137,235.3
0.19
$
2017
725.6
706.9
18.7
$
$
% Change
% Change
Precious Metals
Year Ended September 30,
2016
13,674.2
13,650.3
104% $
105%
9% $
23.9
(60)% $
(60)%
68% $
2015
33,816.4
33,802.2
14.2
49%
(27)% $
92,073.7
0.26
(27)%
136% $
126,365.5
0.11
Physical Ag & Energy
Year Ended September 30,
2016
% Change
% Change
2015
63% $
63%
47% $
446.3
433.6
12.7
62% $
63%
41% $
275.6
266.6
9.0
For information about the assets of this segment, see Note 21 to the Consolidated Financial Statements.
Year Ended September 30, 2017 Compared to
Year Ended September 30, 2016
Operating revenues increased 22% to $44.8 million in fiscal 2017
compared to $36.6 million in fiscal 2016.
Precious metals operating revenues increased 9% to $26.1 million
in fiscal 2017 compared to $23.9 million in fiscal 2016. Operating
revenues increased as a result of a 49% increase in the number of
ounces traded, while the average revenue per ounce traded decreased
27% as market volatility decreased, resulting in a narrowing of spreads.
Operating revenues in Physical Ag & Energy increased 47% to
$18.7 million in fiscal 2017 compared to $12.7 million in fiscal
2016. The increase in operating revenues is primarily due to business
expansion in our U.S. subsidiary, FCStone Merchant Services, LLC,
which had an increase in operating revenues of $6.5 million, or 57%,
following an internal restructuring of the business, resulting in increased
operating revenues from both existing and new customer relationships.
Segment loss was $31.4 million in fiscal 2017 compared to segment
income of $13.3 million in fiscal 2016, resulting in a decrease of
336%. The segment loss was primarily due to a charge to earnings
of $47.0 million to record an allowance for doubtful accounts
for a bad debt incurred in our physical coal business, which was
conducted solely in our Singapore subsidiary, INTL Asia Pte. Ltd.
See Executive Summary for additional information related to the
Bad Debt on Physical Coal.
Partially offsetting the segment loss within Physical Ag & Energy,
segment income generated by FCStone Merchant Services, LLC
increased $2.3 million, or 153%, over the prior year due to increased
operating revenues reduced by higher interest expense and non-
variable direct expenses. Precious metals segment income increased
$0.6 million over the prior year. Variable expenses, excluding interest
expense, expressed as a percentage of operating revenues remained
unchanged at 25% in fiscal 2017 and fiscal 2016.
41
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Operating revenues increased 58% to $36.6 million in fiscal 2016
compared to $23.1 million in fiscal 2015.
Precious metals operating revenues increased 68% to $23.9 million
in fiscal 2016 compared to $14.2 million in fiscal 2015. Operating
revenues increased despite a 27% decline in the number of ounces
traded, as market volatility increased, partially as a result of the Brexit
vote, drove a widening of spreads.
Operating revenues in Physical Ag & Energy increased 41% to
$12.7 million in fiscal 2016 compared to $9.0 million in fiscal 2015.
The increase in operating revenues is primarily due an increase in
volumes in our physical fats & oils, energy and coal activities.
Segment income increased 129% to $13.3 million in fiscal 2016 compared
to $5.8 million in fiscal 2015, primarily as a result of the increase in
operating revenues as well a $1.0 million decline in non-variable direct
expenses which includes both fixed expenses and bad debt expense.
Bad debt expense declined $2.4 million in fiscal 2016 as compared
to fiscal 2015, which was partially offset by a $0.8 million increase
in operational expenses. Variable expenses expressed as a percentage
of operating revenues increased to 25% in fiscal 2016 compared to
22% in fiscal 2015, primarily drive by higher variable compensation.
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.
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.
As of September 30, 2017, we held $2.2 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.
Following our acquisition of the Sterne Agee correspondent 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. Also as part of this transaction, we acquired Sterne Agee’s
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 clearer’s in the securities industry, with
approximately 50 correspondent clearing relationships with over
$15 billion in assets under management or administration as of
September 30, 2017.
In addition, 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.
Following the October 1, 2016 acquisition of ICAP plc’s London-based
EMEA oil voice brokerage business, we employ over 30 employees
providing 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.
(in millions)
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting and management fees
Interest income
Other
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Variable direct compensation and benefits
Net contribution
Non-variable direct expenses
Segment income
42
2017
—
44.2
167.2
34.3
14.1
—
259.8
—
259.8
74.2
80.8
2.6
102.2
24.2
78.0
47.6
30.4
$
$
Year Ended September 30,
2016
% Change
% Change
$
—
110%
45%
304%
124%
—
72%
—
72%
9%
141%
160%
109%
160%
97%
93%
105% $
—
21.0
115.3
8.5
6.3
—
151.1
—
151.1
67.8
33.5
1.0
48.8
9.3
39.5
24.7
14.8
$
—
(2)%
19%
431%
66%
—
22%
—
22%
3%
76%
233%
27%
13%
31%
44%
15% $
2015
—
21.5
96.5
1.6
3.8
—
123.4
—
123.4
65.8
19.0
0.3
38.3
8.2
30.1
17.2
12.9
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table sets forth operating revenues by product line and selected data for Clearing and Execution Services for the periods indicated.
Operating revenues by product line (in millions):
Exchange-traded Futures and Options
FX Prime Brokerage
Correspondent Clearing
Independent Wealth Management
Derivative Voice Brokerage
Selected data:
Exchange-traded futures and options (contracts, 000’s)
Exchange-traded futures and options average rate per contract
Average customer equity - futures and options (millions)
FX Prime Brokerage volume (U.S. notional, millions)
2017
114.9
18.7
27.2
72.3
26.7
259.8
$
$
75.4
1.31
$
1,077.8
$
$ 620,917.8
Year Ended September 30,
2016
% Change
% Change
2015
8% $
(11)%
386%
291%
n/m
72% $
106.1
20.9
5.6
18.5
—
151.1
76.9
(2)%
1.21
8% $
955.1
13% $
7% $ 580,426.9
4% $
(3)%
n/m
n/m
n/m
22% $
101.9
21.5
—
—
—
123.4
79.2
(3)%
1.15
5% $
943.4
1% $
29% $ 449,344.1
For information about the assets of this segment, see Note 21 to the Consolidated Financial Statements.
Year Ended September 30, 2017 Compared to
Year Ended September 30, 2016
Operating revenues increased 72% to $259.8 million in fiscal 2017
compared to $151.1 million in fiscal 2016.
Operating revenues in our Exchange-traded Futures and Options
business increased 8% to $114.9 million in fiscal 2017 compared
to $106.1 million in fiscal 2016, despite a 2% decline in exchange-
traded volumes as the average rate per contract increased 8%. Interest
income in the Exchange-traded Futures & Options business increased
$3.3 million to $8.4 million in fiscal 2017 primarily as a result of an
increase in short-term rates and a 13% increase in average customer
equity to $1,077.8 million in fiscal 2017 compared to $955.1 million
in fiscal 2016.
Operating revenues in our FX Prime Brokerage declined 11% to
$18.7 million in fiscal 2017 compared to $20.9 million in fiscal 2016,
despite a 7% increase in foreign exchange volumes resulting from a
narrowing of margins compared to fiscal 2016.
During the fourth fiscal quarter of 2016, we acquired the correspondent
clearing and independent wealth management businesses of Sterne
Agee. During fiscal 2017, the Correspondent Clearing and Independent
Wealth Management businesses generated operating revenues of
$27.2 million and $72.3 million, respectively. Included within these
operating revenues, Correspondent Clearing and Independent Wealth
Management businesses had interest income of $4.9 million and
$0.5 million, respectively.
On October 1, 2016, we acquired ICAP plc’s London-based EMEA
oil voice brokerage business. During fiscal 2017, the Derivative Voice
Brokerage business contributed $26.7 million in operating revenues.
Segment income increased 105% to $30.4 million in fiscal 2017
compared to $14.8 million in fiscal 2016, primarily as a result of
the acquisition of the Correspondent Clearing, Independent Wealth
Management and Derivative Voice Brokerage businesses and growth in
our Exchange-traded Futures & Options business, which were partially
offset by a decline in segment income in our FX Prime Brokerage
business. Segment income in fiscal 2017 includes a $0.9 million
quarterly charge to compensation and benefits per the terms of the
acquisition of the oil voice brokerage business that aggregated to
$3.6 million in fiscal 2017. The quarterly charge 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 69% in fiscal 2017 compared to
73% in fiscal 2016. The increase in introducing broker commissions
expense was primarily driven by the activity of the Sterne Agee
independent wealth management business, acquired during the fourth
quarter of fiscal 2016 and thus only three months of expenses were
included in fiscal 2016, resulting in higher expense of $42.1 million,
as well as a $5.0 million increase in introducing broker commissions
expense in the Exchange-traded Futures & Options business. Non-
variable direct expenses increased $22.9 million versus the prior year
as the result of the acquisitions discussed above, which collectively
added $21.8 million in non-variable expenses in fiscal 2017.
Year Ended September 30, 2016 Compared to
Year Ended September 30, 2015
Operating revenues increased 22% to $151.1 million in fiscal 2016
compared to $123.4 million in fiscal 2015.
Operating revenues in our Exchange-traded Futures and Options
business increased 4% to $106.1 million in fiscal 2016 compared
to $101.9 million in fiscal 2015, despite a 3% decline in exchange-
traded volumes as the average rate per contract increased 5% and
interest income increased $1.3 million compared to fiscal 2015. The
average level of customer equity increased 1% to $955.1 million in
fiscal 2016 compared to $943.4 million in fiscal 2015.
Operating revenues in our FX Prime Brokerage declined 3% to
$20.9 million in fiscal 2016 compared to $21.5 million in fiscal
2015, despite a 29% increase in foreign exchange volumes driven by
a narrowing of margins compared to the prior year period.
During the fourth fiscal quarter of 2016, we acquired the correspondent
clearing and independent wealth management businesses of Sterne
Agee. During the fourth fiscal quarter, the correspondent clearing
and independent wealth management businesses generated operating
revenues of $5.6 million and $18.5 million, respectively.
Segment income increased 15% to $14.8 million in fiscal 2016
compared to $12.9 million in fiscal 2015, primarily as a result of the
acquisition of the Sterne Agee businesses which added $1.5 million of
incremental segment income. Variable expenses, excluding interest, as
a percentage of operating revenues were 73% in fiscal 2016 compared
to 75% in fiscal 2015.
43
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 maintaining 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 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 September 30, 2017, we had total equity capital of $449.9 million
and outstanding bank loans of $230.2 million.
A substantial portion of our assets are liquid. As of September 30,
2017, approximately 95% 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.
As of September 30, 2017, we had deferred tax assets totaling
$42.6 million. We are required to assess our deferred tax assets
and the need for a valuation allowance at each reporting period. In
assessing the realizability of deferred tax assets, we consider whether
it is more likely than not that we will not realize some or all of the
deferred tax assets. We are required to record a valuation allowance
against deferred tax assets when it is considered more likely than not
that all or a portion of our deferred tax assets will not be realized.
The valuation allowance for deferred tax assets as of September 30,
2017 and September 30, 2016 was $4.0 million and $3.6 million,
respectively. The valuation allowances as of September 30, 2017 and
September 30, 2016 were primarily related to U.S. state and local
and foreign net operating loss carryforwards that, in the judgment of
management, are not more likely than not to be realized.
We incurred U.S. federal, state, and local taxable income/(losses) for
the years ended September 30, 2017, 2016, and 2015 of $(24.7)
million, $(9.7) million, and $16.5 million, respectively. The differences
between actual levels of past taxable income (losses) and pre-tax book
income (losses) are primarily attributable to temporary differences in
these jurisdictions. When evaluating if U.S. federal, state, and local
deferred taxes are realizable, we considered deferred tax liabilities of
$4.9 million that are scheduled to reverse from 2018 to 2020 and
$3.1 million of deferred tax liabilities associated with unrealized gains in
securities which we could sell, if necessary. Furthermore, we considered
our ability to implement business and tax planning strategies that
would allow the remaining U.S. federal, state, and local deferred tax
assets, net of valuation allowances, to be realized within approximately
11 years. Based on the tax planning strategies that are prudent and
feasible, management believes that it is more likely than not that we
will realize the tax benefit of the deferred tax assets, net of the existing
valuation allowance, in the future. However, the realization of deferred
income taxes is dependent on future events, and changes in estimate in
future periods could result in adjustments to the valuation allowance.
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
44
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
Excluding the bad debt on physical coal discussed below, during
the fiscal years ended September 30, 2017, 2016, and 2015, we
recorded bad debts, net of recoveries of $4.3 million, $4.4 million,
and $7.3 million, respectively. During the year ended September 30,
2017, our bad debts included $3.8 million of customer deficits in
the Commercial Hedging segment, primarily related to account
deficits from South Korean and Dubai commercial LME customers,
$0.2 million of uncollectible customer receivables in our Physical
Commodities segment, and $0.3 million of uncollectible customer
receivables in the CES segment, primarily related to our derivative
voice brokerage business. During the year ended September 30,
2016, our bad debts included $3.6 million of customer deficits in
the Commercial Hedging segment, $0.4 million of uncollectible
customer receivables in the Physical Commodities segment and
$0.4 million of uncollectible service fees and notes in the Securities
segment. During the year ended September 30, 2015, our bad debts
primarily related to $2.8 million of customer receivables in our
Physical Ag & Energy component of our Physical Commodities
segment, $2.3 million of OTC customer deficits and $0.6 million
of LME customer deficits in our Commercial Hedging segment,
$0.5 million of uncollectible service fees and notes in our Securities
segment, and $1.1 million of notes receivable related to loans
pertaining to a former acquisition. Additional information related to
bad debts, net of recoveries, for the fiscal years ended September 30,
2017, 2016, and 2015 is set forth in Note 6 of the Consolidated
Financial Statements.
Bad Debt on Physical Coal
During the fourth quarter of fiscal 2017, we recorded a charge
to earnings of $47.0 million, to record an allowance for doubtful
accounts related to a bad debt incurred in our physical coal business,
conducted solely in our Singapore subsidiary, INTL Asia Pte. Ltd.,
with a coal supplier. Components of the bad debt on physical coal
include allowances on amounts due to us from our supplier related
to: coal paid for but not delivered to customers; reimbursement of
demurrage claims, dead freight and other charges paid by INTL Asia
Pte. Ltd. to its customers; reimbursement due for deficiencies in the
quality of coal delivered to customers; and losses incurred related to
the cancellation of open sales contracts. INTL Asia Pte. Ltd. has been
recapitalized following the bad debt in order for its other businesses
to operate in normal course. See Executive Summary for additional
information related to the Bad Debt on Physical Coal.
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 September 30,
2017 and September 30, 2016, were $6.2 billion and $6.0 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 use 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 are restricted
from being transferred to its parent or other affiliates due to specific
regulatory requirements. These restrictions have no impact on our
ability to meet our cash obligations, and no impact is expected in
the future.
45
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 and AA-rated
money market investments. We do not hold any direct investments
in the general obligations of any sovereign nations.
As of September 30, 2017, $275.1 million of cash and cash equivalents
was held by our foreign subsidiaries. If these funds are needed for
operations in the U.S., we would be required to accrue and pay U.S.
taxes to repatriate these funds, up to the amount of undistributed
earnings of $321.3 million. However, our intent is to indefinitely
reinvest these funds outside of the U.S., and our current plans do not
demonstrate a need to repatriate them to fund our U.S. operations.
As of September 30, 2017, approximately $10.4 million of our financial
instruments owned and $10.5 million of financial instruments sold, not
yet purchased, are exchangeable foreign equities, ADRs, and GDRs.
In October 2016, we redeemed $45.5 million in aggregate principal
amount of our 8.5% Senior Notes due 2020 (the “Notes”) plus
accrued and unpaid interest to, but not including, the redemption
date of October 15, 2017. The notes were issued in July 2013, and
bore interest at a rate of 8.5% per year.
We have a loan from a commercial bank, secured by equipment
purchased with the proceeds. The note is payable in monthly
installments, ending in March 2020. As of September 30, 2017, the
current outstanding amount on the loan is $2.0 million.
As of September 30, 2017, we had four committed bank credit facilities,
totaling $532.0 million, of which $194.2 million was outstanding.
The credit facilities include:
•• A three-year syndicated loan facility, committed until March 18,
2019, under which INTL FCStone, Inc. is entitled to borrow up to
$262 million, subject to certain terms and conditions of the credit
agreement. The loan proceeds are used to finance working capital
needs of us and certain subsidiaries. The agreement contains financial
covenants related to consolidated tangible net worth, consolidated
funded debt to net worth ratio, consolidated fixed charge coverage
ratio and consolidated net unencumbered liquid assets, as defined.
The agreement also contains a non-financial covenant related to
the allowable annual consolidated capital expenditures permitted
under the agreement.
On November 30, 2017, we amended the loan facility, increasing the
allowable annual consolidated capital expenditures from $15.0 million
to $17.5 million. The agreement also amended the definition of
consolidated EBITDA for the purposes of the consolidated fixed
charge coverage ratio. This amendment allowed us to add back a
portion of the bad debt on physical coal previously discussed in
calculating consolidated EBITDA. Under the terms of the agreement,
the amendment was deemed effective as of September 30, 2017. As a
result of this amendment, we were in compliance with all covenants
under this loan facility as of September 30, 2017.
•• An unsecured syndicated loan facility, committed until April 5,
2018, under which our subsidiary, INTL FCStone Financial is
entitled to borrow up to $75 million, subject to certain terms and
conditions of the credit agreement. This line of credit is intended
to provide short-term funding of margin to commodity exchanges
as necessary.
•• A syndicated borrowing facility, committed until May 1, 2018,
under which our subsidiary, FCStone Merchant Services, LLC is
entitled to borrow up to $170 million, subject to certain terms and
conditions of the credit agreement. The loan proceeds are used to
finance activities in our Physical Ag & Energy commodity business.
•• An unsecured syndicated loan facility, committed until November 7,
2018, under which our subsidiary, INTL FCStone Ltd is entitled to
borrow up to $25 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.
Additional information regarding the committed bank credit facilities
can be found in Note 11 of the Consolidated Financial Statements.
As reflected above, $245 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.
As of September 30, 2017, we had four uncommitted bank credit
facilities with an outstanding balance of $34.0 million. The credit
facilities include:
•• A secured uncommitted loan facility under which our subsidiary, INTL
FCStone Financial may borrow up to $50.0 million, collateralized
by commodity warehouse receipts, to facilitate U.S. commodity
exchange deliveries of its customers, subject to certain terms and
conditions of the credit agreement.
•• 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, subject
to certain terms and conditions of the agreement. 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.
•• 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 borrowing are secured by first liens on
firm owned marketable securities or customer owned securities which
have been pledged to us under a clearing arrangement.
•• A secured uncommitted loan facility under which our subsidiary,
INTL FCStone Ltd may borrow up to $25.0 million, collateralized by
commodity warehouse receipts, to facilitate financing of commodities
under repurchase agreement services to its customers, subject to
certain terms and conditions of the credit agreement.
Our loan 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 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. We and our subsidiaries are in compliance with all of our
financial covenants under the outstanding facilities.
We contributed $2.0 million to our defined benefit pension plans
during the year ended September 30, 2017, and expect to contribute
$1.3 million to the plans during fiscal 2018.
46
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cash Flows
Our cash and cash equivalents decreased from $316.2 million as of
September 30, 2016 to $314.9 million as of September 30, 2017, a
net decrease of $1.3 million. Net cash of $13.9 million was provided
by operating activities, $22.3 million was used in investing activities
and net cash of $5.7 million was provided by financing activities, of
which $48.2 million was drawn on lines of credit and increased the
amounts payable to lenders under loans, while $45.5 million was
used to redeem the Notes. Fluctuations in exchange rates caused a
reduction of $1.4 million to our cash and cash equivalents.
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, within 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.
Capital expenditures included in investing activities for property,
plant and equipment totaled $16.1 million in fiscal 2017, increasing
from $15.4 million in fiscal 2016. The increase in capital expenditures
is primarily due to an ongoing back-office trade system conversion
related to our OTC activities in our Commercial Hedging segment
and FX Prime Brokerage activities in our Clearing and Execution
Services segment. Additionally, the increase in capital expenditures
is due to core information technology hardware acquisitions and
leasehold improvements on office space.
Over the past two years, we have been undergoing a trade system
conversion that is intended to replace an internally developed system
as well as a current third-party provided system. We have capitalized
$15.3 million of direct costs of materials and third-party services related
to obtaining and developing the trade system over this two year period.
On August 1, 2017, we implemented the first phase of the trade system
related to our OTC commodities business. The next phase of the
system related to our FX prime brokerage business is in the application
Contractual Obligations
development stage, and is expected to be placed into service during fiscal
2018. We estimate the useful life for the trade system to be ten years.
During fiscal 2017, we had no repurchases of our outstanding common
stock. During fiscal 2016, we repurchased 750,204 shares of our
outstanding common stock in open market transactions, for an
aggregate purchase price of $19.5 million. During fiscal 2015, we have
repurchased 224,509 shares of our outstanding common stock in open
market transactions, for an aggregate purchase price of $4.5 million.
On August 17, 2017, our Board of Directors authorized for fiscal
2018, the repurchase of up to 1.0 million shares of our outstanding
common stock from time to time in open market purchases and
private transactions, commencing on October 1, 2017 and ending on
September 30, 2018, subject to the discretion of the senior management
team to implement our stock repurchase plan, and subject to market
conditions and as permitted by securities laws and other legal, regulatory
and contractual requirements and covenants.
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.
Other Capital Considerations
Our activities are subject to significant governmental regulations
and capital adequacy requirements, both in the U.S. and overseas.
Certain other of our 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 September 30, 2017. Additional information on
these net capital and minimum net capital requirements can be found
in Note 13 of the 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.
The following table summarizes our cash payment obligations as of September 30, 2017:
Total
Less than 1 year
1 - 3 Years
3 - 5 Years
After 5 Years
Payments Due by Period
$
(in millions)
Operating lease obligations
Purchase obligations(1)
Senior unsecured notes
Contingent acquisition consideration
Other
10.1
—
—
—
1.7
11.8
(1) Represents an estimate of contractual purchase commitments in the ordinary course of business primarily for the purchase of precious metals and agricultural and energy
commodities. Unpriced contract commitments have been estimated using September 30, 2017 fair values. The purchase commitments for less than one year will be partially offset
by corresponding sales commitments of $583.5 million.
46.4 $
674.5
—
1.0
6.8
728.7 $
8.9 $
674.5
—
1.0
1.2
685.6 $
11.4 $
—
—
—
2.1
13.5 $
16.0 $
—
—
—
1.8
17.8 $
$
47
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Total contractual obligations exclude defined benefit pension obligations.
In fiscal 2018, we anticipate making contributions of $1.3 million
to defined benefit plans. Additional information on the funded
status of these plans can be found in Note 16 of the Consolidated
Financial Statements.
Based upon our current operations, we believe that cash flow from
operations, available cash and available borrowings under our credit
facilities will be adequate to meet our future liquidity needs.
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.
A significant portion of these instruments are primarily the execution
of orders for commodity futures and options on futures contracts on
behalf of its customers, substantially all of which are transacted on a
margin basis. Such transactions may expose us to significant credit
risk in the event margin requirements are not sufficient to fully cover
losses which customers may incur. We control the risks associated
with these transactions by requiring customers to maintain margin
deposits in compliance with individual exchange regulations and
internal guidelines. We monitor required margin levels daily and,
therefore, may require customers to deposit additional collateral or
reduce positions when necessary. We also establish contract limits for
customers, which are monitored daily. We evaluate each customer’s
creditworthiness on a case-by-case basis. Clearing, financing, and
settlement activities may require us to maintain funds with or pledge
securities as collateral with other financial institutions. Generally, these
exposures to exchanges are subject to netting of open positions and
collateral, while exposures to customers are subject to netting, per
the terms of the customer agreements, which reduce the exposure to
us by permitting receivables and payables with such customers to be
offset in the event of a customer default. Management believes that
the margin deposits held are adequate to minimize the risk of material
loss that could be created by positions held as of September 30,
2017. Additionally, we monitor collateral fair value on a daily basis
and adjust collateral levels in the event of excess market exposure.
Generally, these exposures to both counterparties and customers are
subject to master netting agreements and the terms of the customer
agreements, which reduce our exposure.
As a broker-dealer in U.S. Treasury obligations, U.S. government agency
obligations, agency mortgage-backed obligations, and asset-backed
obligations we are engaged in various securities trading, borrowing
and lending activities servicing solely institutional counterparties.
Our exposure to credit risk associated with the nonperformance of
counterparties in fulfilling their contractual obligations pursuant to
these securities transactions and market risk associated with the sale
of securities not yet purchased can be directly impacted by volatile
trading markets which may impair their ability to satisfy outstanding
obligations to us. In the event of non-performance and unfavorable
market price movements, we may be required to purchase or sell
financial instruments, which may result in a loss to us.
We transact OTC and foreign exchange contracts with our customers,
and our OTC and foreign exchange trade desks will generally offset
the customer’s transaction simultaneously with one of our trading
counterparties or will offset that transaction with a similar, but not
identical, position on the exchange. These unmatched transactions are
intended to be short-term in nature and are conducted to facilitate
the most effective transaction for our customer.
Additionally, we hold options and futures on options contracts
resulting from market-making and proprietary trading activities in
these product lines. We assist customers in our commodities trading
business to protect the value of their future production (precious or
base metals) by selling them put options on an OTC basis. We also
provide our commodities trading business customers with sophisticated
option products, including combinations of buying and selling puts
and calls. We mitigate our risk by effecting offsetting options with
market counterparties or through the purchase or sale of exchange-
traded commodities futures. The risk mitigation of offsetting options
is not within the documented hedging designation requirements of
the Derivatives and Hedging Topic of the ASC.
As part of the activities discussed above, we carry short positions. We
sell financial instruments that we do not own and borrow the financial
instruments to make good delivery, and therefore we are obliged to
purchase such financial instruments at a future date in order to return
the borrowed financial instruments. We record these obligations in
the consolidated financial statements as of September 30, 2017 and
September 30, 2016, at fair value of the related financial instruments,
totaling $717.6 million and $839.4 million, respectively. These
positions are held to offset the risks related to financial assets owned,
and reported in our consolidated balance sheets in ‘financial instruments
owned, at fair value’, and ‘physical commodities inventory’. We will
incur losses if the fair value of the financial instruments sold, not yet
purchased, increases subsequent to September 30, 2017, which might
be partially or wholly offset by gains in the value of assets held as of
September 30, 2017. The totals of $717.6 million and $839.4 million
include a net liability of $317.0 million and $210.9 million for
derivatives, based on their fair value as of September 30, 2017 and
September 30, 2016, respectively.
48
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
We do not anticipate non-performance by counterparties in the
above situations. We have a policy of reviewing the credit standing of
each counterparty with which it conducts business. We have credit
guidelines that limit our current and potential credit exposure to any
one counterparty. We administer limits, monitor credit exposure,
and periodically review the financial soundness of counterparties.
We manage the credit exposure relating to our trading activities
in various ways, including entering into collateral arrangements
and limiting the duration of exposure. Risk is mitigated in certain
cases by closing out transactions and entering into risk reducing
transactions.
We are a member of various exchanges that trade and clear futures and
option contracts. We are also a member of and provide guarantees to
securities clearinghouses and exchanges in connection with customer
trading activities. Associated with our memberships, we may be
required to pay a proportionate share of the financial obligations of
another member who may default on its obligations to the exchanges.
While the rules governing different exchange memberships vary, in
general our guarantee obligations would arise only if the exchange had
previously exhausted its resources. In addition, any such guarantee
obligation would be apportioned among the other non-defaulting
members of the exchange. Our liability under these arrangements
is not quantifiable and could exceed the cash and securities we have
posted as collateral at the exchanges. However, management believes
that the potential for us to be required to make payments under these
arrangements is remote. Accordingly, no contingent liability for these
arrangements has been recorded in the consolidated balance sheets
as of September 30, 2017 and 2016.
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
The preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reported period.
The accounting estimates and assumptions discussed in this section
are those that we consider the most critical to the financial statements.
We believe these estimates and assumptions can involve a high degree
of judgment and complexity. Due to their nature, estimates involve
judgment based upon available information. Actual results or amounts
could differ from estimates and the difference could have a material
impact on the financial statements. Therefore, understanding these
policies is important in understanding our reported and potential
future results of operations and financial position.
Valuation of Financial Instruments and Foreign Currencies.
Substantially all financial instruments are reflected in the consolidated
financial statements at fair value or amounts that approximate fair
value. These financial instruments include: cash and cash equivalents;
cash, securities and other assets segregated under federal and other
regulations; financial instruments purchased under agreements to resell;
deposits with clearing organizations; financial instruments owned;
and financial instruments sold but not yet purchased. Unrealized
gains and losses related to these financial instruments, which are not
customer owned positions, are reflected in earnings. Where available,
we use prices from independent sources such as listed market prices,
or broker or dealer price quotations. Fair values for certain derivative
contracts are derived from pricing models that consider current market
and contractual prices for the underlying financial instruments or
commodities, as well as time value and yield curve or volatility factors
underlying the positions. In some cases, even though the value of a
security is derived from an independent market price or broker or
dealer quote, certain assumptions may be required to determine the
fair value. However, these assumptions may be incorrect and the
actual value realized upon disposition could be different from the
current carrying value. The value of foreign currencies, including
foreign currencies sold, not yet purchased, are converted into its
U.S. dollar equivalents at the foreign exchange rates in effect at the
close of business at the end of the accounting period. For foreign
currency transactions completed during each reporting period, the
foreign exchange rate in effect at the time of the transaction is used.
The application of the valuation process for financial instruments and
foreign currencies is critical because these items represent a significant
portion of our total assets. Valuations for substantially all of the
financial instruments held are available from independent publishers
of market information. The valuation process may involve estimates
and judgments in the case of certain financial instruments with limited
liquidity and OTC derivatives. Given the wide availability of pricing
information, the high degree of liquidity of the majority of our assets,
and the relatively short periods for which they are typically held in
inventory, there is insignificant sensitivity to changes in estimates and
insignificant risk of changes in estimates having a material effect on
our financial statements. The basis for estimating the valuation of any
financial instruments has not undergone any change.
Revenue Recognition. A significant portion of our revenues are
derived principally from realized and unrealized trading income in
securities, derivative instruments, commodities and foreign currencies
purchased or sold for our account. We record realized and unrealized
trading income on a trade date basis. We state securities owned and
securities sold, not yet purchased and foreign currencies sold, not yet
purchased, at fair value with related changes in unrealized appreciation
or depreciation reflected in ‘trading gains, net’ in the consolidated
income statements. We record fee and interest income on the accrual
basis and dividend income is recognized on the ex-dividend date.
Revenue on commodities that are purchased for physical delivery to
customers and that are not readily convertible into cash is recognized
at the point in time when the commodity has been shipped, title and
risk of loss has been transferred to the customer, and the following
49
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
conditions have been met: persuasive evidence of an arrangement
exists, the price is fixed and determinable, and collectability of the
resulting receivable is reasonably assured.
The critical aspect of revenue recognition is recording all known
transactions as of the trade date of each transaction for the financial
period. We have developed systems for each of our businesses to capture
all known transactions. Recording all known transactions involves
reviewing trades that occur after the financial period that relate to
the financial period. The accuracy of capturing this information is
dependent upon the completeness and accuracy of data capture of
the operations systems and our clearing firms.
Income Taxes. We are subject to income taxes in the U.S. and
numerous foreign jurisdictions. Significant judgment is required
in determining the consolidated provision for income taxes and in
evaluating tax positions, including evaluating uncertainties. As a
result, the company recognizes tax liabilities based on estimates of
whether additional taxes and interest will be due. These tax liabilities
are recognized when despite our belief that our tax return positions
are supportable, we believe that certain positions may not be fully
sustained upon review by the relevant tax authorities.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Significant judgment is also required in determining any valuation
allowance recorded against deferred tax assets. In assessing the need for
a valuation allowance, management considers all available evidence for
each jurisdiction including past operating results, estimates of future
taxable income, and the feasibility of ongoing tax planning strategies.
In the event that we change our determination as to the amount of
deferred tax assets that can be realized, we will adjust our valuation
allowance with a corresponding impact to income tax expense in the
period in which such determination is made.
We believe that our accruals for tax liabilities are adequate for all
open audit years based on our assessment of many factors including
past experience and interpretations of tax law. This assessment relies
on estimates and assumptions and may involve a series of complex
judgments about future events. To the extent that new information
becomes available which causes us to change our judgment regarding
the adequacy of existing tax liabilities, such changes to tax liabilities will
impact income tax expense in the period in which such determination
is made. The consolidated provision for income taxes will change period
to period based on non-recurring events, such as the settlement of
income tax audits and changes in tax law, as well as recurring factors
including the geographic mix of income before taxes, state and local
taxes, and the effects of various global income tax strategies.
Accounting Standards Update
In October 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2016-16, Income Taxes
(Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.
This ASU requires entities to recognize at the transaction date the
income tax consequences of intercompany asset transfers other than
inventory. This ASU is effective for public business entities for annual
and interim periods in fiscal years beginning after December 15,
2017. The adoption of this standard should be applied on a modified
retrospective basis through a cumulative-effect adjustment directly to
retained earnings as of the beginning of the period of adoption. The
Company expects to adopt this guidance starting with the first quarter
of fiscal year 2019. The adoption of this standard is not expected
to have a material impact on the consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash
Flows (Topic 230): Restricted Cash. This ASU requires companies to
include cash and cash equivalents that have restrictions on withdrawal
or use in total cash and cash equivalents on the statement of cash
flows. This ASU is effective for public business entities for annual and
interim periods in fiscal years beginning after December 15, 2017.
The adoption of this standard should be applied using a retrospective
transition method to each period presented. The Company expects to
adopt this guidance starting with the first quarter of fiscal year 2019.
The Company has not yet determined the impact of this ASU on our
consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill
and Other: Simplifying the Test for Goodwill Impairment, which
eliminates Step 2 of the goodwill impairment test. Companies will
now perform their goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount. An entity will
recognize an impairment charge for the amount by which the carrying
amount exceeds the reporting unit’s fair value. This ASU is effective
for public business entities for its annual or any interim goodwill
impairment tests beginning in periods after December 15, 2019.
The Company expects to adopt this guidance starting with the first
quarter of fiscal year 2021. The Company does not expect this ASU
to have a significant impact on our consolidated financial statements.
In February 2017, the FASB issued ASU 2017-05 addressing the
derecognition of nonfinancial assets. The guidance defines in substance
nonfinancial assets, and states that the derecognition of business activities
should be evaluated under the consolidation guidance. The standard
eliminates the previous exclusion for businesses that are in-substance real
estate, and eliminates some differences based on whether a transferred
set is that of assets or a business and whether the transfer is to a joint
venture. The standard must be implemented in conjunction with the
implementation date of the revenue recognition accounting standard
update, which we will adopt on October 1, 2018. The Company plans
to adopt the new standard using the modified retrospective method
and are in the process of determining the impact of the guidance on
its consolidated financial statements together with our evaluation of
the new revenue recognition standard, as described further below.
50
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
In March 2017, the FASB issued ASU 2017-07 requiring that the service
cost component of pension and postretirement benefit costs be presented
in the same line item as other current employee compensation costs
and other components of those benefit costs be presented separately
from the service cost component and outside a subtotal of income
from operations, if presented. The update also requires that only the
service cost component of pension and postretirement benefit cost is
eligible for capitalization. The update is effective for annual periods
beginning after December 15, 2017 and interim periods within that
annual period. The Company expects to adopt this guidance starting
with the first quarter of fiscal year 2019. Application is retrospective
for the presentation of the components of these benefit costs and
prospective for the capitalization of only service costs. Early adoption is
permitted. The Company does not expect application of this guidance
to have a material impact on its consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock
Compensation (Topic 718): Scope of Modification Accounting, which
clarifies the changes to terms or conditions of a share-based payment
award that require an entity to apply modification accounting. The
amendments of this ASU are effective for annual reporting periods,
and interim periods therein, beginning after December 15, 2017.
Early application is permitted and prospective application is required.
The Company expects to adopt this guidance starting with the first
quarter of fiscal year 2019. The Company does not expect the adoption
of this guidance to have a significant impact on its consolidated
financial statements.
In August 2017, the FASB issued accounting guidance to improve
and simplify existing guidance to allow companies to better reflect its
risk management activities in the financial statements. The guidance
expands the ability to hedge non-financial and financial risk components,
eliminates the requirement to separately measure and recognize hedge
ineffectiveness and eases requirements of an entity’s assessment of hedge
effectiveness. This guidance is effective for periods beginning after
December 15, 2018 and early adoption is permitted. The Company
currently does not account for its derivative contracts under hedge
accounting. However, the Company is in the process of evaluating
the potential impacts this guidance may have on its consolidated
financial statements if it decides to account for these contracts under
the new hedge accounting rules.
In May 2014, the FASB issued 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 as
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.
51
- Form 10-K PART II
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk
ITEM 7A Quantitative and Qualitative Disclosures
about Market Risk
See also Note 5 to the Consolidated Financial Statements, ‘Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk’.
Market Risk
We conduct our market-making and trading activities predominantly
as a principal, which subjects our capital to significant risks. These risks
include, but are not limited to, absolute and relative price movements,
price volatility and changes in liquidity, over which we have virtually
no control. Our exposure to market risk varies in accordance with
the volume of customer-driven market-making transactions, the
size of the proprietary positions and the volatility of the financial
instruments traded.
We seek to mitigate exposure to market risk by utilizing a variety of
qualitative and quantitative techniques:
•• Diversification of business activities and instruments;
•• Limitations on positions;
•• Allocation of capital and limits based on estimated weighted risks; and
•• Daily monitoring of positions and mark-to-market profitability.
We utilize derivative products in a trading capacity as a dealer to
satisfy customer needs and mitigate risk. We manage risks from both
derivatives and non-derivative cash instruments on a consolidated
basis. The risks of derivatives should not be viewed in isolation, but
in aggregate with our other trading activities.
Management believes that the volatility of revenues is a key indicator
of the effectiveness of its risk management techniques.
The graph below summarizes volatility of our daily revenue, determined on a marked-to-market basis, during the year ended September 30, 2017.
s
y
a
D
f
o
r
e
b
m
u
N
90
80
70
60
50
40
30
20
10
0
1
$0
to
$500
Marked-to-Market Revenues
84
48
56
31
24
3
4
1
1
$500
to
$1,000
$1,000
to
$1,500
$1,500
to
$2,000
$2,000
to
$2,500
$2,500
to
$3,000
$3,000
to
$3,500
$3,500
to
$4,000
$4,000
to
$4,500
$4,500
to
$5,000
Daily Revenues ($000’s)
In our Securities market-making and trading activities, we maintain inventories of equity and debt securities. In our Physical Commodities
segment, our positions include physical inventories, forwards, futures and options on futures, and OTC derivatives. Our commodity trading
activities are managed as one consolidated book for each commodity encompassing both cash positions and derivative instruments. We monitor
the aggregate position for each commodity in equivalent physical ounces, metric tons, or other relevant unit.
Interest Rate Risk
In the ordinary course of our operations, we have interest rate risk
from the possibility that changes in interest rates will affect the values
of financial instruments and impact interest income earned. Within
our domestic institutional fixed income business, we maintain a
significant amount of trading assets and liabilities which are sensitive
to changes in interest rates. These trading activities consist primarily of
securities trading in connection with U.S. Treasury, U.S. government
agency, agency mortgage-backed and agency asset-backed obligations.
52
- Form 10-K
PART II
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk
Derivative instruments, which consist of futures, mortgage-backed
“to be announced” (TBA) securities and forward settling transactions,
are used to manage risk exposures in the trading inventory. We enter
into TBA securities transactions for the sole purpose of managing
risk associated with the purchase of mortgage pass-through securities.
In addition, we generate interest income from the positive spread
earned on customer deposits. We typically invest in U.S. Treasury bills,
notes, and obligations issued by government sponsored entities, reverse
repurchase agreements involving U.S. Treasury bills and government
obligations or AA-rated money market funds. In some instances, we
maintain interest earning cash deposits with banks, clearing organizations
and counterparties. We have an investment policy which establishes
acceptable standards of credit quality and limits the amount of funds
that can be invested within a particular fund and institution.
We employ an interest rate management strategy, where we use
derivative financial instruments in the form of interest rate swaps
and/or outright purchases of medium-term U.S. Treasury notes
to manage a portion of our aggregate interest rate position. On a
quarterly basis, we evaluate our overall level of short term investable
balances, net of our of variable rate debt, and either invest a portion
of these investable balances in medium-term U.S. Treasury notes or
enter into interest rate swaps, when a sufficient interest rate spread
between short-term and medium term rates exists. Under this strategy,
we do not actively trade in such instruments and generally intend
to hold these investment to their maturity date. Under this strategy,
excluding cash deposits and our investments in AA-rated money
market funds, the weighted average time to maturity of our portfolio
is not to exceed 24 months in duration.
As of September 30, 2017, we held no medium-term U.S. Treasury notes
and no interest rate swap derivative contracts as part of this strategy.
Currently our short term investment balances are held in short-term
U.S. Treasury bills, interest earning cash deposits and AA-rated money
market fund investments. During the fiscal year ended September 30,
2017, 2016 and 2015, operating revenues include unrealized (losses)
gains of ($5.8) million, ($0.7) million and $7.0 million, respectively,
related to the change in fair value of these U.S. Treasury notes and
interest rate swaps. The U.S. Treasury notes and interest rate swaps
are not designated for hedge accounting treatment, and changes in
their fair values, which are volatile and can fluctuate from period
to period, are included in operating revenues in the current period.
We manage interest expense using a combination of variable and fixed
rate debt as well as including the average outstanding borrowings
in our calculations of the notional value of interest rate swaps to be
entered into as part of our interest rate management strategy discussed
above. Refer to Note 5 to the Consolidated Financial Statements for
information on the interest rate swap transactions. The debt instruments
are carried at their unpaid principal balance which approximates fair
value. As of September 30, 2017, $228.2 million of our debt was
variable-rate debt. We are subject to earnings and liquidity risks for
changes in the interest rate on this debt. As of September 30, 2017,
we had $2.0 million outstanding in fixed-rate long-term debt. There
are no earnings or liquidity risks associated with our fixed-rate debt.
53
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
PART II
ITEM 8 Financial Statements and Supplementary Data
ITEM 8 Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
INTL FCStone Inc.:
We have audited the accompanying consolidated balance sheets of
INTL FCStone Inc. and subsidiaries as of September 30, 2017 and
2016, and the related consolidated statements of income, comprehensive
income, cash flows, and stockholders’ equity for each of the years
in the three-year period ended September 30, 2017. In connection
with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement schedule. These
consolidated financial statements and financial statement schedule are
the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements
and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of INTL FCStone Inc. and subsidiaries as of September 30, 2017
and 2016, and the results of their operations and their cash flows for
each of the years in the three-year period ended September 30, 2017,
in conformity with U.S. generally accepted accounting principles.
Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information
set forth therein.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), INTL FCStone
Inc.’s internal control over financial reporting as of September 30, 2017,
based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission, and our report dated December 14, 2017
expressed an adverse opinion on the effectiveness of INTL FCStone
Inc.’s internal control over financial reporting.
/s/ KPMG LLP
Kansas City, Missouri
December 14, 2017
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
INTL FCStone Inc.:
We have audited INTL FCStone Inc.’s internal control over financial
reporting as of September 30, 2017, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission. INTL
FCStone Inc.’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in
the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on
INTL FCStone Inc.’s internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies,
in internal control over financial reporting, such that there is a
54
- Form 10-K reasonable possibility that a material misstatement of the company’s
annual or interim financial statements will not be prevented or
detected on a timely basis. Management concluded that there were
material weaknesses that were identified and included in management’s
assessment as INTL FCStone Inc. did not:
•• Design, conduct, and document an effective continuous risk
assessment process related to new business lines, specifically at one
of INTL FCStone Inc.’s Singapore subsidiaries, to identify, analyze
and monitor risks impacting financial reporting, and implement
business process level controls and monitoring activities that are
responsive to those risks.
•• Design and operate effective process level controls related to physical
coal trading activities in INTL FCStone Inc.’s Singapore subsidiary,
INTL Asia Pte. Ltd., specifically, INTL FCStone Inc. did not:
•– Design and operate controls over the existence of physical
commodities inventory.
•– Design and operate controls over the completeness, existence,
accuracy, and valuation of amounts due to be reimbursed by an
INTL Asia Pte. Ltd. supplier, including demurrage and other
fees related to physical coal business activities, which are recorded
within deposits with and receivables from broker-dealers, clearing
organizations and counterparties, net.
•– Establish appropriate segregation of duties within the purchasing,
accounts payable and cash disbursements process.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
PART II
ITEM 8 Financial Statements and Supplementary Data
consolidated balance sheets of INTL FCStone Inc. and subsidiaries as of
September 30, 2017 and 2016, and the related consolidated statements
of income, comprehensive income, cash flows, and stockholders’ equity
for each of the years in the three-year period ended September 30,
2017, as well as the accompanying financial statement schedule. These
material weaknesses were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2017 consolidated
financial statements and accompanying financial statement schedule,
and this report does not affect our report dated December 14, 2017,
which expressed an unqualified opinion on those consolidated financial
statements and the accompanying financial statement schedule.
In our opinion, because of the effect of the aforementioned material
weaknesses on the achievement of the objectives of the control criteria,
INTL FCStone Inc. has not maintained effective internal control
over financial reporting as of September 30, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We do not express an opinion or any other form of assurance on
the Remediation Steps to Address Material Weaknesses included in
Management’s Report on Internal Control over Financial Reporting
taken after September 30, 2017, relative to the aforementioned material
weaknesses in internal control over financial reporting.
/s/ KPMG LLP
Kansas City, Missouri
December 14, 2017
55
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
Consolidated Balance Sheets
(in millions, except par value and share amounts)
ASSETS
Cash and cash equivalents
Cash, securities and other assets segregated under federal and other regulations (including $54.5
and $618.8 at fair value at September 30, 2017 and September 30, 2016 respectively)
Collateralized transactions:
September 30, 2017
September 30, 2016
$
314.9
$
316.2
518.8
1,136.3
Securities purchased under agreements to resell
Securities borrowed
406.6
86.6
Deposits with and receivables from broker-dealers, clearing organizations and counterparties, net
(including $204.7 and $853.3 at fair value at September 30, 2017 and September 30, 2016, respectively)
Receivable from customers, net
Notes receivable, net
Income taxes receivable
Financial instruments owned, at fair value (includes securities pledged as collateral that can be sold
or repledged of $19.4 and $47.2 at September 30, 2017 and September 30, 2016, respectively)
Physical commodities inventory, net (including $73.2 and $71.2 at fair value at September 30, 2017
and September 30, 2016, respectively)
Deferred income taxes, net
Property and equipment, net
Goodwill and intangible assets, net
Other assets
Total assets
LIABILITIES AND EQUITY
Liabilities:
Accounts payable and other accrued liabilities (including $1.0 and $0.8 at fair value at September 30,
2017 and September 30, 2016, respectively)
Payable to:
Customers
Broker-dealers, clearing organizations and counterparties (including $4.8 and $3.5 at fair value at
September 30, 2017 and September 30, 2016, respectively)
Lenders under loans
Senior unsecured notes
Income taxes payable
Collateralized transactions:
Securities sold under agreements to repurchase
Securities loaned
Financial instruments sold, not yet purchased, at fair value
Total liabilities
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding
Common stock, $0.01 par value. Authorized 30,000,000 shares; 20,855,243 issued and
18,733,286 outstanding at September 30, 2017 and 20,557,175 issued and 18,435,218
outstanding at September 30, 2016
Common stock in treasury, at cost - 2,121,957 shares at September 30, 2017 and 2016
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
$
$
$
56
609.6
—
1,761.4
194.5
18.9
1.1
1,606.1
123.8
34.5
29.4
56.6
61.9
2,625.1
232.7
10.6
0.4
1,731.8
124.8
42.6
38.7
59.4
50.4
6,243.4
$
5,950.3
135.6 $
161.3
3,072.9
2,854.2
125.7
230.2
—
7.3
1,393.1
111.1
717.6
5,793.5
260.1
182.8
44.5
7.1
1,167.1
—
839.4
5,516.5
—
—
0.2
(46.3)
259.0
261.5
(24.5)
449.9
$
6,243.4
0.2
(46.3)
249.4
255.1
(24.6)
433.8
5,950.3
- Form 10-K
Consolidated Income Statements
(in millions, except share and per share amounts)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting, management, and account fees
Interest income
Other income
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and other expenses:
Compensation and benefits
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts
Bad debt on physical coal
Other
Total compensation and other expenses
Gain on acquisition
Income from operations, before tax
Income tax expense
Net income
Earnings per share:
Basic
Diluted
PART II
ITEM 8 Financial Statements and Supplementary Data
Year Ended September 30,
2016
2017
2015
$
$
$
$
28,673.3
332.2
283.4
64.8
69.7
0.2
29,423.6
28,639.6
784.0
136.3
113.0
42.1
492.6
295.7
39.4
15.2
15.2
13.3
9.8
4.3
47.0
37.5
477.4
—
15.2
8.8
6.4
0.32
0.31
$
$
$
$
14,112.0 $
321.2
224.3
42.0
55.2
0.2
14,754.9
14,083.9
671.0
129.9
68.9
28.3
443.9
263.9
32.7
13.3
14.0
11.5
8.2
4.4
—
29.4
377.4
6.2
72.7
18.0
54.7 $
2.94 $
2.90 $
34,089.9
328.6
192.5
42.5
39.4
0.3
34,693.2
34,068.9
624.3
122.7
52.7
17.1
431.8
251.1
28.1
13.5
12.5
10.5
7.2
7.3
—
23.5
353.7
—
78.1
22.4
55.7
2.94
2.87
Weighted-average number of common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
18,395,987
18,687,354
18,410,561
18,625,372
18,525,374
18,932,235
57
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
Consolidated Statements of Comprehensive Income
(in millions)
Net income
Other comprehensive income (loss), net of tax:
2017
Year Ended September 30,
2016
2015
$
6.4
$
54.7
$
Foreign currency translation adjustment
Pension liabilities adjustment
Net unrealized gain on available-for-sale securities
Reclassification of adjustment for losses (gains) included in net income:
Periodic pension costs (included in compensation and benefits)
Realized gain on available-for-sale securities (included in trading gains, net and
interest income)
Income tax expense from reclassification adjustments (included in income tax expense)
Reclassification adjustment for losses (gains) included in net income
Other comprehensive income (loss)
Comprehensive income
See accompanying notes to consolidated financial statements.
$
(1.4)
1.2
—
0.4
—
(0.1)
0.3
0.1
$
6.5
(7.4)
(0.2)
—
0.5
—
—
0.5
(7.1)
$
47.6
55.7
(4.0)
(1.5)
2.7
0.3
(5.4)
2.0
(3.1)
(5.9)
49.8
58
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
Consolidated Statements of Cash Flows
(in millions)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
2017
Year Ended September 30,
2016
2015
$
6.4
$
54.7
$
55.7
Provision for bad debt on physical coal
Depreciation and amortization
Provision for bad debts
Deferred income taxes
Amortization and extinguishment of debt issuance costs
Actuarial gain on pension and postretirement benefits
Amortization of share-based compensation expense
(Gain) loss on sale of property and equipment
Gain on acquisition
Gain on sale of exchange memberships and common stock
Changes in operating assets and liabilities, net:
Cash, securities and other assets segregated under federal and other regulations
Securities purchased under agreements to resell
Securities borrowed
Deposits and receivables from broker-dealers, clearing organizations, and
counterparties
Receivable from customers, net
Notes receivable, net
Income taxes receivable
Financial instruments owned, at fair value
Physical commodities inventory
Other assets
Accounts payable and other accrued liabilities
Payable to customers
Payable to broker-dealers, clearing organizations and counterparties
Income taxes payable
Securities sold under agreements to repurchase
Securities loaned
Financial instruments sold, not yet purchased, at fair value
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Cash paid for acquisitions, net
Purchase of exchange memberships and common stock
Sale of exchange memberships and common stock
Purchase of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net change in payables to lenders under loans
Payments related to earn-outs on acquisitions
Repayment of senior unsecured notes
Proceeds from note payable
Repayment of note payable
Share repurchase
Debt issuance costs
Exercise of stock options
Income tax benefit on stock options and awards
Net cash provided by financing activities
47.0
9.8
4.3
(9.8)
1.9
(0.3)
6.3
(0.3)
—
—
622.7
203.0
(79.7)
(889.1)
(116.4)
8.3
0.5
(125.6)
(1.7)
(16.0)
(19.6)
290.9
(124.1)
0.2
226.0
93.6
(124.4)
13.9
(6.0)
(0.2)
—
(16.1)
(22.3)
48.2
—
(45.5)
—
(0.8)
—
(0.3)
3.4
0.7
5.7
—
7.8
4.4
(0.8)
1.1
—
5.1
0.4
(6.2)
—
(379.9)
(285.1)
—
146.6
97.8
59.5
8.2
(192.9)
(91.0)
(17.4)
7.5
172.2
(53.8)
0.3
159.8
—
273.9
(27.8)
(20.0)
(0.1)
—
(15.4)
(35.5)
142.0
(2.9)
—
—
(0.8)
(19.5)
(2.1)
3.5
0.8
121.0
—
7.2
7.3
4.8
0.9
—
3.6
0.5
—
(1.2)
(315.0)
15.2
—
44.9
(169.0)
(14.5)
—
(565.0)
7.1
(16.2)
23.2
332.1
251.1
1.7
186.0
—
177.5
37.9
(7.8)
(0.7)
2.1
(9.1)
(15.5)
15.5
(2.2)
—
4.0
(0.4)
(4.7)
(0.2)
2.5
0.5
15.0
59
- Form 10-K 2017
Year Ended September 30,
2016
2015
1.4
(1.3)
316.2
314.9
38.0
17.1
$
$
$
— $
(0.2) $
— $
—
— $
— $
(5.0) $
$
$
$
$
$
$
$
$
$
(9.6)
48.1
268.1
316.2
26.0
8.5
$
$
$
— $
(0.4) $
$
187.1
(136.0)
51.1
$
— $
$
3.4
(0.6)
36.8
231.3
268.1
15.8
15.3
1.6
1.9
1,011.4
(995.1)
16.3
5.0
5.0
PART II
ITEM 8 Financial Statements and Supplementary Data
(in millions)
Effect of exchange rates on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Income taxes paid, net of cash refunds
Supplemental disclosure of non-cash investing and financing activities:
Identified intangible assets and goodwill on acquisitions
Additional consideration payable related to acquisitions
Acquisition of business:
Assets acquired
Liabilities acquired
Total net assets acquired
Deferred consideration payable related to acquisitions
Escrow releases and deposits related to acquisitions
See accompanying notes to consolidated financial statements.
60
- Form 10-K Consolidated Statements of Stockholders’ Equity
PART II
ITEM 8 Financial Statements and Supplementary Data
(in millions)
Balances as of September 30, 2014
Net income
Other comprehensive loss
Exercise of stock options
Share-based compensation
Repurchase of stock
Stock held in escrow for business combination
Balances as of September 30, 2015
Net income
Other comprehensive loss
Exercise of stock options
Share-based compensation
Repurchase of stock
Balances as of September 30, 2016
Net income
Other comprehensive income
Exercise of stock options
Share-based compensation
Balances as of September 30, 2017
See accompanying notes to consolidated financial statements.
Common
Stock
Treasury
Stock
Additional
Paid-in
Capital
$
0.2 $
(17.5)
$
229.6
Retained
Earnings
$
144.7 $
55.7
Accumulated
Other
Comprehensive
Loss
Total
(4.5)
(4.8)
(26.8)
(19.5)
(46.3)
0.2
0.2
3.0
3.6
(0.2)
4.8
240.8
3.5
5.1
—
249.4
200.4
54.7
255.1
6.4
(11.6)
$
(5.9)
(17.5)
(7.1)
(24.6)
0.1
$
0.2 $
(46.3)
$
3.3
6.3
259.0
$
261.5 $
(24.5) $
345.4
55.7
(5.9)
3.0
3.6
(4.7)
—
397.1
54.7
(7.1)
3.5
5.1
(19.5)
433.8
6.4
0.1
3.3
6.3
449.9
61
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
Notes to Consolidated Financial Statements
NOTE 1 Description of Business and Significant Accounting Policies
INTL FCStone Inc., a Delaware corporation, and its consolidated
subsidiaries (collectively “INTL” or “the Company”), is a diversified global
financial services organization providing execution, risk management
and advisory services, market intelligence, and clearing services across
assets classes and markets around the world. The Company’s services
include comprehensive risk management advisory services for commercial
customers; clearing and execution of debt and equity securities, listed
futures and options on futures contracts on all major securities and
commodity exchanges; structured over-the-counter (“OTC”) products in
a wide range of commodities; physical trading and hedging of precious
and base metals and select other commodities; trading of more than
140 foreign currencies; market-making in international equities; fixed
income; debt origination and asset management.
The Company provides these services to a diverse group of more than
20,000 customers in 130 countries located throughout the world, including
producers, processors and end-users of nearly all widely-traded physical
commodities to manage their risks and enhance margins; to commercial
counterparties who are end-users of the firm’s products and services; to
governmental and non-governmental organizations; and to commercial
banks, brokers, institutional investors and major investment banks.
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of INTL FCStone Inc. and all other entities in which the
Company has a controlling financial interest. All material intercompany
transactions and balances have been eliminated in consolidation.
Unless otherwise stated herein, all references to fiscal 2017, fiscal 2016,
and fiscal 2015 refer to the Company’s fiscal years ended September 30.
In the consolidated income statements, the total revenues reported
combine gross revenues for the physical commodities business and
net revenues for all other businesses. The subtotal ‘operating revenues’
in the consolidated income statements is calculated by deducting
physical commodities cost of sales from total revenues. The subtotal
‘net operating revenues’ in the consolidated income statements is
calculated as operating revenues less transaction based clearing expenses,
introducing broker commissions and interest expense. Transaction-
based clearing expenses represent variable expenses paid to executing
brokers, exchanges, clearing organizations and banks in relation to
our transactional volumes. Introducing broker commissions include
commission paid to non-employee third parties that have introduced
customers to the Company. Net operating revenues represent revenues
available to pay variable compensation to risk management consultants
and traders and direct non-variable expenses, as well as variable and
non-variable expenses of operational and administrative employees.
America (“U.S. GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent liabilities as of the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period. The most significant of these estimates and assumptions relate
to fair value measurements for financial instruments and investments,
revenue recognition, the provision for potential losses from bad debts,
valuation of inventories, valuation of goodwill and intangible assets,
self-insurance liabilities, incomes taxes and contingencies. These
estimates are based on management’s best knowledge of current events
and actions the Company may undertake in the future. The Company
reviews all significant estimates affecting the financial statements on a
recurring basis and records the effect of any necessary adjustments prior
to their issuance. Although these and other estimates and assumptions
are based on the best available information, actual results could be
materially different from these estimates.
Internal Subsidiaries Consolidation
Effective July 1, 2017, we merged our wholly-owned regulated United
States (“U.S.”) subsidiary, Sterne Agee & Leach, Inc., into our wholly
owned regulated U.S. subsidiary, INTL FCStone Financial Inc. (“INTL
FCStone Financial”). As such, the assets, liabilities and equity of Sterne
Agee & Leach, Inc. were transferred into INTL FCStone Financial.
Effective July 1, 2015, the Company merged three of its wholly-
owned regulated U.S. subsidiaries into its wholly owned regulated
U.S. subsidiary, INTL FCStone Securities Inc., and the surviving
entity was renamed INTL FCStone Financial Inc. and is registered as
both a broker-dealer and a futures commission merchant (“FCM”).
As such, the assets, liabilities and equity of FCStone, LLC, INTL
FCStone Partners L.P., and FCC Investments, Inc. were transferred
into INTL FCStone Financial.
Foreign Currency Translation
Assets and liabilities recorded in foreign currencies are translated at
the exchange rates prevailing on the balance sheet date. Revenue and
expenses are translated at average rates of exchange prevailing during
the period. Gains or losses on translation of the financial statements
of a non-U.S. operation, when the functional currency is other
than the U.S. dollar, are recorded in other comprehensive income
(“OCI”), net of tax, a component of stockholders’ equity. Foreign
currency remeasurement gains or losses on transactions denominated
in nonfunctional currencies are included in ‘trading gains, net’ in the
consolidated income statements.
Use of Estimates
Cash and Cash Equivalents
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of
The Company considers cash held at banks and all highly liquid
investments with original or acquired maturities of 90 days or less,
including certificates of deposit, which may be withdrawn at any time
62
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
at the discretion of the Company without penalty, to be cash and
cash equivalents. Cash and cash equivalents consist of cash, foreign
currency, money market funds and certificates of deposit not deposited
with or pledged to exchange-clearing organizations, broker-dealers,
clearing organizations or counterparties. The money market funds
are valued at period-end at the net asset value provided by the fund’s
administrator, which approximates fair value. Certificates of deposit
are stated at cost plus accrued interest, which approximates fair value.
The Company has an investment policy, which limits the maximum
amount placed in any one fund and with any one institution in order
to reduce credit risk. The Company does not believe that it is exposed
to significant risk on cash and cash equivalents.
Securities Borrowed and Loaned
The Company enters into securities borrowed and securities loaned
transactions. Securities borrowed and securities loaned are reported as
collateralized financings. Securities borrowed and securities loaned
transactions are recorded at the amount of cash collateral advanced
or received. The Company receives collateral generally in excess of the
market value of securities loaned. The Company monitors the market
value of securities borrowed and loaned on a daily basis, with additional
collateral obtained or refunded as necessary. Securities borrowed and
securities loaned are reported on a gross basis. Interest income and
interest expense are recognized over the life of the arrangements.
Cash, Securities and Other Assets Segregated
under Federal and other Regulations
Pursuant to requirements of the Commodity Exchange Act in the
U.S. and similarly in the United Kingdom (“U.K.”), pursuant to the
Markets in Financial Instruments Implementing Directive 2006/73/EC
underpinning the Client Asset or ‘CASS’ rules in the Financial Services
Authority (“FSA”) handbook, funds deposited by customers relating
to futures and options on futures contracts in regulated commodities
must be carried in separate accounts which are designated as segregated
customer accounts. The deposits in segregated customer accounts are
not commingled with the funds of the Company. Under the FSA’s rules,
certain categories of customers may choose to opt-out of segregation.
As of September 30, 2017 and 2016, cash, securities and other assets
segregated under federal and other regulations consisted of cash held
at banks and money market funds of approximately $464.3 million
and $515.2 million, respectively, U.S. Treasury securities and U.S.
government agency obligations of approximately $33.5 million and
$595.5 million, respectively, and commodities warehouse receipts of
approximately $21.0 million and $23.3 million, respectively (see fair
value measurements discussion in Note 4).
Securities Purchased/Sold Under Agreements to
Resell/Repurchase
The Company enters into securities purchased under agreements
to resell (reverse repurchase agreements) and securities sold under
agreements to repurchase (repurchase agreements) primarily to finance
financial instruments, acquire securities to cover short positions or
to acquire securities for settlement.
Reverse repurchase agreements and repurchase agreements are treated
as collateralized financing transactions and are recorded at their
contractual amounts plus accrued interest. The related interest is
recorded in the consolidated income statements as ‘interest income’ or
‘interest expense’, as applicable. In connection with these agreements
and transactions, it is the policy of the Company to receive or pledge
cash or securities to adequately collateralize such agreements and
transactions in accordance with general industry guidelines and
practices. The value of the collateral is valued daily and the Company
may require counterparties, or may be required by counterparties,
to deposit additional collateral or return collateral pledged, when
appropriate. The carrying amounts of these agreements and transactions
approximate fair value due to their short-term nature and the level
of collateralization.
Deposits with and Receivables from
Broker-dealers, Clearing Organizations and
Counterparties, and Payables to Broker-dealers,
Clearing Organizations and Counterparties
As required by the regulations of the U.S. Commodity Futures Trading
Commission (“CFTC”) and the aforementioned FSA handbook,
customer funds received to margin, guarantee, and/or secure commodity
futures transactions are segregated and accounted for separately from
the general assets of the Company. Deposits with exchange-clearing
organizations, broker-dealers and counterparties pertain primarily
to deposits made to satisfy margin requirements on customer and
proprietary open futures and options on futures positions and to satisfy
the requirements set by clearing exchanges for clearing membership.
The Company also pledges margin deposits with various counterparties
for OTC derivative contracts, and these deposits are also included
in deposits and receivables from broker-dealers and counterparties.
Deposits with and receivables from exchange-clearing organizations
and broker-dealers and counterparties are reported gross, except
where a right of offset exists. As of September 30, 2017 and 2016, the
Company had cash and cash equivalents on deposit with or pledged
to exchange-clearing organizations, broker-dealers and counterparties
of $2.3 billion and $0.9 billion, respectively.
These balances also include securities pledged by the Company on
behalf of customers and customer-owned securities that are pledged.
It is the Company’s practice to include customer owned securities on
its consolidated balance sheets, as the rights to those securities have
been transferred to the Company under the terms of the futures
trading agreement. Securities pledged include U.S. Treasury bills and
instruments backed by U.S. government sponsored entities. Securities
that are not customer-owned are adjusted to fair value with associated
changes in unrealized gains or losses recorded through current period
earnings. For customer owned securities, the change in fair value is
offset against the payable to customers with no impact recognized in
the consolidated income statements.
The securities, primarily U.S. Treasury securities, held by INTL FCStone
Financial, a subsidiary of the Company, as collateral or as margin
have been deposited with exchange-clearing organizations, broker-
dealers or other counterparties. The fair value of these securities was
approximately $251.4 million and $471.7 million as of September 30,
2017 and 2016, respectively.
Management has considered guidance required by the Transfers
and Servicing Topic of the ASC as it relates to securities pledged by
customers to margin their accounts within the FCM Division of
INTL FCStone Financial. Based on a review of the agreements with
63
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
the customer, management believes the transferor surrenders control
over those assets because: (a) the transferred assets have been isolated
from the transferor—put presumptively beyond the reach of the
transferor and its creditors, even in bankruptcy or other receivership,
(b) each transferee has the right to pledge or exchange the assets (or
beneficial interests) it received, and no condition both constrains the
transferee (or holder) from taking advantage of its right to pledge or
exchange and provides more than a trivial benefit to the transferor
and (c) the transferor does not maintain effective control over the
transferred assets through either (1) an agreement that both entitles
and obligates the transferor to repurchase or redeem them before
their maturity or (2) the ability to unilaterally cause the holder to
return specific assets, other than through a cleanup call. Under this
guidance, the Company reflects the customer collateral assets and
corresponding liabilities in the Company’s consolidated balance sheets
as of September 30, 2017 and 2016.
In addition to margin, deposits with exchange-clearing organizations
include guaranty deposits. The guaranty deposits are held by the clearing
organization for use in potential default situations by one or more
members of the clearing organization. The guaranty deposits may be
applied to the Company’s obligations to the clearing organization, or
to the clearing organization’s obligations to other clearing members
or third parties.
The Company maintains customer omnibus and proprietary accounts
with other counterparties, and the equity balances in those accounts
along with any margin cash or securities deposited with the carrying
broker are included in deposits and receivables from broker-dealers
and counterparties.
Receivables from and payables to exchange-clearing organizations
are also comprised of amounts due from or due to exchange-clearing
organizations for daily variation settlements on open futures and
options on futures positions. The variation settlements due from
or due to exchange-clearing organizations are paid in cash on the
following business day.
Deposits and receivables from broker-dealers, clearing organizations and
counterparties, and payables to broker-dealers, clearing organizations
and counterparties also include amounts related to the value of
customers cross-currency payment transactions related to the Global
Payments segment. These amounts arise due to a clearing period
before the funds are received and payments are made, which usually
is one to two business days.
Deposits and receivables with exchange-clearing organizations also
includes the unrealized gains and losses associated with the customers’
options on futures contracts. See discussion in the Financial Instruments
and Derivatives section below for additional information on the
treatment of derivative contracts. For customer owned derivative
contracts, the fair value is offset against the payable to customers
with no impact recognized on the consolidated income statements.
Receivable from and Payable to Customers
Receivable from customers, net of the allowance for doubtful accounts,
include the total of net deficits in individual exchange-traded and
OTC trading accounts carried by the Company. Customer deficits
arise from realized and unrealized trading losses on futures, options
on futures, swaps and forwards and amounts due on cash and margin
transactions. Customer deficit accounts are reported gross of customer
64
accounts that contain net credit or positive balances, except where a
right of offset exists. Net deficits in individual exchange-traded and
OTC trading accounts include both secured and unsecured deficit
balances due from customers as of the balance sheet date. Secured
deficit amounts are backed by U.S. Treasury bills and notes and
commodity warehouse receipts. These U.S Treasury bills and notes
and commodity warehouse receipts are not netted against the secured
deficit amounts, as the conditions for right of setoff have not been met.
Receivables from customers, net also includes the net amounts receivable
from securities customers in connection with the settlement of normal
cash securities, margin loans to customers, and customer cash debits.
It is the Company’s policy to report margin loans and payables that
arise due to positive cash flows in the same customer’s accounts on a
net basis when the conditions for netting as specified in GAAP are
met. Customers’ securities transactions cleared by the Company are
recorded on a settlement date. Securities owned by customers including
those that collateralize margin or other similar transactions, are not
reflected on the statement of financial condition as the Company does
not have title to those assets. In the event of uncompleted transactions
on settlement date, the Company recorded corresponding receivables
and payables, respectively. The carrying value of the receivables and
payables approximates fair value due to their short-term nature.
Payable to customers represent the total of customer accounts with
credit or positive balances. Customer accounts are used primarily in
connection with commodity transactions and include gains and losses
on open commodity trades as well as securities and other deposits
made as required by the Company, the exchange-clearing organizations
or other clearing organizations. Customer accounts with credit or
positive balances are reported gross of customer deficit accounts,
except where a right of offset exists.
Receivables from and payables to customers also include amounts
related to the value of customers cross-currency payment transactions
related to the Global Payments segment. These amounts arise due
to a clearing period before the funds are received and payments are
made, which usually is one to two business days.
The future collectability of the receivable from customers can be
impacted by the Company’s collection efforts, the financial stability of its
customers, and the general economic climate in which it operates. The
Company evaluates accounts that it believes may become uncollectible
on a specific identification basis, through reviewing daily margin
deficit reports, the historical daily aging of the receivables, and by
monitoring the financial strength of its customers. The Company may
unilaterally close customer trading positions in certain circumstances. In
addition, to evaluate customer margining and collateral requirements,
customer positions are stress tested regularly and monitored for excessive
concentration levels relative to the overall market size.
The Company generally charges off an outstanding receivable balance
when all economically sensible means of recovery have been exhausted.
That determination considers information such as the occurrence of
significant changes in the customer’s financial position such that the
customer can no longer pay the obligation, or that the proceeds from
collateral will not be sufficient to pay the balance.
Notes Receivable
The Company originates short-term notes receivable from customers
with the outstanding balances typically being insured 90% to 98%
- Form 10-K by a third party, including accrued interest, subject to applicable
deductible amounts. The Company may sell the insured portion of
the notes through non-recourse participation agreements with other
third parties. See discussion of notes receivable related to commodity
repurchase agreements below.
Accrual of commodity financing income on any note is discontinued
when, in the opinion of management, there is reasonable doubt as to
the timely collectability of interest or principal. Nonaccrual notes are
returned to an accrual status when, in the opinion of management,
the financial position of the borrower indicates there is no longer any
reasonable doubt as to the timely payment of principal and interest.
The Company records a charge against earnings for notes receivable
losses when management believes that collectability of the principal
is unlikely.
Physical Commodities Inventory
Inventories of certain agricultural commodities are carried at net
realizable value, which approximates fair value less disposal costs. The
agricultural commodities inventories have reliable, readily determinable
and realizable market prices, have relatively predictable and insignificant
costs of disposal and are available for immediate delivery. Changes
in the fair values of these agricultural commodities inventories are
included as a component of ‘cost of physical commodities sold’ in
the consolidated income statements.
Inventories of energy, including coal, kerosene, and propane are
valued at the lower of cost or market (“LCM”). Inventories of precious
metals held by our subsidiaries that are not broker-dealers are valued
at the LCM, using the weighted-average price and first-in first-out
costing method.
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 consolidated income statements. INTL FCStone Ltd is
regulated by the Financial Conduct Authority (“FCA”), the regulator
of the financial services industry in the United Kingdom.
Property and Equipment
Property and equipment is stated at cost, net of accumulated
depreciation and amortization and depreciated using the straight-
line method over the estimated useful lives of the assets. Leasehold
improvements are amortized on a straight-line basis over the estimated
useful life of the improvement or the term of the lease, whichever is
shorter. Certain costs of software developed or obtained for internal
use are capitalized and amortized over the estimated useful life of the
software. Expenditures for maintenance, repairs, and minor replacements
are charged against earnings, as incurred. Expenditures that increase the
value or productive capacity of assets are capitalized. When property
and equipment are retired, sold, or otherwise disposed of, the asset’s
carrying amount and related accumulated depreciation are removed
from the accounts and any gain or loss is included in earnings.
Goodwill and Identifiable Intangible Assets
Goodwill is the cost of acquired companies in excess of the fair value of
identifiable net assets at the acquisition date. Goodwill is not subject to
amortization, but rather is evaluated for impairment at least annually.
PART II
ITEM 8 Financial Statements and Supplementary Data
The Company evaluates its goodwill for impairment at the fiscal year
end (or more frequently if indicators of potential impairment exist)
in accordance with the Intangibles - Goodwill and Other Topic 350
of the ASC. Goodwill impairment is determined by comparing the
estimated fair value of a reporting unit with its respective carrying
value. If the estimated fair value exceeds the carrying value, goodwill
at the reporting unit level is not deemed to be impaired. However,
if the estimated fair value is below carrying value, further analysis is
required to determine the amount of the impairment. This further
analysis involves assigning tangible assets and liabilities, identified
intangible assets and goodwill to reporting units and comparing the
fair value of each reporting unit to its carrying amount.
In the course of the evaluation of the potential impairment of goodwill, the
Company may perform either a qualitative or a quantitative assessment.
The Company’s qualitative assessment of potential impairment may
result in the determination that a quantitative impairment analysis is not
necessary. Under this elective process, the Company assesses qualitative
factors to determine whether the existence of events or circumstances
leads us to determine that it is more likely than not that the fair value
of a reporting unit is less than its carrying amount. If after assessing
the totality of events or circumstances, the Company determines it is
more likely than not that the fair value of a reporting unit is greater
than its carrying amount, then performing a quantitative analysis is
not required. However, if the Company concludes otherwise, then we
perform a quantitative impairment analysis.
If the Company either chooses not to perform a qualitative assessment,
or the Company chooses to perform a qualitative assessment but are
unable to qualitatively conclude that no impairment has occurred,
then the Company performs a quantitative evaluation. In the case of
a quantitative assessment, the Company estimates the fair value of the
reporting unit which the goodwill that is subject to the quantitative
analysis is associated (generally defined as the businesses for which
financial information is available and reviewed regularly by management)
and compares it to the carrying value. If the estimated fair value of a
reporting unit is less than its carrying value, the Company estimates
the fair value of all assets and liabilities of the reporting unit, including
goodwill. If the carrying value of the reporting unit’s goodwill is greater
than the estimated fair value, an impairment charge is recognized for
the excess. The fair value of the Company’s reporting units exceeded
their respective carrying values under the first step of the quantitative
assessment and no impairment charges were recorded for any of the
periods presented.
Identifiable intangible assets subject to amortization are amortized
using the straight-line method over their estimated period of benefit,
ranging from two to twenty years. Identifiable intangible assets are
tested for impairment whenever events or changes in circumstances
suggest that an asset’s or asset group’s carrying value may not be fully
recoverable. Residual value is presumed to be zero for all identifiable
intangible assets.
Financial Instruments and Derivatives
Financial instruments owned and sold, not yet purchased, at fair value
consist of financial instruments carried at fair value or amounts that
approximate fair value, with related unrealized changes in gains or
losses recognized in earnings. The fair value of a financial instrument
is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced
or liquidation sale.
65
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
The Company accounts for its securities pledged on behalf of customers
and proprietary securities as trading securities in accordance with U.S.
GAAP accounting requirements for broker-dealers.
Investment in managed funds, at fair value represents investments in
funds managed by the Company’s fund managers. The investments
are valued at period-end at the net asset value provided by the fund’s
administrator.
Commodities warehouse receipts are valued at the cash price, or the
nearby futures prices in the absence of a cash price, for the commodity
based on published market quotes. For commodities warehouse receipts,
the change in fair value is offset against the payable to customers with
no impact on the consolidated income statements.
The Company utilizes derivative instruments to manage exposures
to foreign currency, commodity price and interest rate risks for the
Company and its customers. The Company’s objectives for holding
derivatives include reducing, eliminating, and efficiently managing
the economic impact of these exposures as effectively as possible.
Derivative instruments are recognized as either assets or liabilities
and are measured at fair value. As the Company does not elect
hedge accounting, gains and losses from the change in fair values of
derivatives for which the Company acts as principal are recognized
immediately in earnings.
The Company’s derivative contracts consist of exchange-traded and
OTC derivatives. Fair values of exchange-traded derivatives are generally
determined from quoted market prices. OTC derivatives are valued
using valuation models. The valuation models used to derive the
fair values of OTC derivatives require inputs including contractual
terms, market prices, yield curves and measurements of volatility. The
Company uses similar models to value similar instruments. Where
possible, the Company verifies the values produced by pricing models
by comparing them to market transactions. Inputs may involve
judgment where market prices are not readily available. The Company
does not elect hedge accounting under the Derivatives and Hedging
Topic of the ASC in accounting for derivatives used as economic
hedges on its commodities.
The Company’s derivative contracts also include forward purchase and
sale contracts for physical delivery of the agricultural commodities
in a future period. Contracts to purchase agricultural commodities
generally relate to the current or future crop year. Contracts for the
sale of agricultural commodities generally do not extend beyond
one year. Forward purchase and sale contracts are valued at market
prices when available or other market quotes adjusted for differences,
primarily in transportation, between the exchange-traded market and
local markets where the terms of the contracts are based. Changes
in the fair value of agricultural commodity inventories held for sale,
forward purchase and sale contracts and exchange-traded futures and
options contracts are recognized as a component of cost of sales of
physical commodities.
The Company provides clearing and execution of exchange-traded
futures and options on futures for middle-market intermediaries,
end-users, producers of commodities and the institutional and
professional trader market segments. The Company has a subsidiary
that is a registered broker-dealer/FCM, clearing on various exchanges.
A primary source of revenues for the Company’s broker-dealer/FCM
are commissions and clearing fees derived from executing and clearing
orders for commodity futures contracts and options on futures on
behalf of its customers.
66
The Company also brokers foreign exchange forwards, options and cash,
or spot, transactions between customers and external counterparties.
A portion of the contracts are arranged on an offsetting basis, limiting
the Company’s risk to performance of the two offsetting parties. The
offsetting nature of the contracts eliminates the effects of market
fluctuations on the Company’s operating results. Due to the Company’s
role as a principal participating in both sides of these contracts, the
amounts are presented gross on the consolidated balance sheets at
their respective fair values, net of offsetting assets and liabilities.
The Company holds proprietary positions in its foreign exchange line
of business. On a limited basis, the Company’s foreign exchange trade
desk will accept a customer transaction and will offset that transaction
with a similar but not identical position with a counterparty. These
unmatched transactions are intended to be short-term in nature
and are often conducted to facilitate the most effective transaction
for the Company’s customer. These spot and forward contracts
are accounted for as free-standing derivatives and reported in the
consolidated balance sheets at their fair values. The Company does
not seek hedge accounting treatment for these derivatives, and
accordingly, the changes in fair value during the period are recorded
in the consolidated income statements in ‘trading gains, net’ (see
Note 5). In applying the guidance in the Balance Sheet-Offsetting
Topic of the ASC, the Company’s accounting policy is such that open
contracts with the same customer are netted at the account level, in
accordance with netting arrangements in place with each party, as
applicable and rights to reclaim cash collateral or obligations to return
cash collateral are netted against fair value amounts recognized for
derivative instruments with the same customer in accordance with
the master netting arrangements in place with each customer.
The Company may lease commodities to or from customers or
counterparties, or advance commodities to customers on an unpriced
basis, receiving payment when they become priced. These are valued
at fair value utilizing the fair value option based on guidance in the
Financial Instruments Topic of the ASC. As permitted by the fair value
option election, the entire instrument is recorded at fair value in the
consolidated balance sheets as a component of ‘financial instruments
owned and sold, not yet purchased’. Due to the short term nature
of the instruments, the balance of the agreements is not materially
different than the recorded fair value. The corresponding change in
fair value of the instrument is recognized in the consolidated income
statements as a component of ‘trading gains, net’ for the fiscal years
ended September 30, 2017, 2016, and 2015. The Company does
elect to value all of their commodities lease agreements at fair value
using the fair value option. See fair value measurements in Note 4.
Exchange and Clearing Organization
Memberships and Stock
The Company is required to hold certain exchange membership seats
and exchange firm and clearing organization common stock and pledges
them for clearing purposes, in order to provide the Company the
right to process trades directly with the various exchanges and clearing
organization. Exchange memberships include seats on the Chicago
Board of Trade (“CBOT”), the Minneapolis Grain Exchange, the New
York Mercantile Exchange (“NYMEX”), the Commodity Exchange,
Inc. (“COMEX”) Division of the New York Mercantile Exchange,
Mercado de Valores de Buenos Aires S.A. (“MERVAL”), the Chicago
Mercantile Exchange (“CME”) Growth and Emerging Markets,
- Form 10-K InterContinental Exchange, Inc. (“ICE”) Futures US, ICE Europe Ltd
and London Metal Exchange (“LME”). Exchange firm and clearing
organization common stock include shares of CME Group, Inc., ICE,
LME, and the Deposit Trust and Clearing Corporation (“DTCC”).
Exchange and clearing organization memberships and firm common
stocks required in order to conduct business on the exchange are
recorded at cost and are included in ‘other assets’ on the consolidated
balance sheets. Equity investments in exchange firm common stock
not required in order to conduct business on the exchange are classified
as trading securities and recorded at fair value, with unrealized gains
and losses recorded as a component of ‘trading gains, net’ on the
consolidated income statements. Equity investments in exchange
firm common stock not required in order to conduct business on
the exchange are included in ‘financial instruments owned’ on the
consolidated balance sheets.
The cost basis for exchange and clearing organization memberships and
firm common stock pledged for clearing purposes was $12.0 million
and $12.1 million as of September 30, 2017 and 2016, respectively.
The fair value of exchange and clearing organization memberships and
firm common stock pledged for clearing purposes was $10.2 million
and $9.1 million as of September 30, 2017 and 2016, respectively.
The fair value of exchange and clearing organization firm common
stock is determined by quoted market prices, and the fair value of
exchange memberships is determined by recent sale transactions. The
Company monitors the fair value of exchange and clearing organization
membership seats and firm common stock on a quarterly basis, and
does not consider any current unrealized losses on individual exchange
and clearing organization memberships and firm common stock to
be anything other than a temporary impairment.
Product Financing Arrangements
In the normal course of operations the Company executes notes
receivable under repurchase agreements with customers whereby the
customers sell certain commodity inventory or other investments to
the Company and agree to repurchase the commodity inventory or
investment at a future date at a fixed price. These transactions are
short-term in nature, and in accordance with the guidance contained
in the Transfers and Servicing Topic of the ASC, are treated as secured
borrowings rather than commodity inventory and purchases and sales
in the Company’s consolidated financial statements. These transactions
are reflected as ‘notes receivable’ in the consolidated balance sheet.
Commodities or investments sold under repurchase agreements
are reflected at the amount of cash received in connection with the
transactions. The Company may be required to provide additional
collateral based on the fair value of the underlying asset.
The Company also participates in commodity repurchase transactions
that are accounted for as commodity inventory and purchases and
sales of physical commodities as opposed to secured borrowings. The
repurchase price under these arrangements is not fixed at the time of
execution and, therefore, do not meet all the criteria to be accounted
for as product financing arrangements under ASC 470.
Lenders Under Loans and Senior Unsecured
Notes
Lenders under loans and senior unsecured notes are accounted for
at amortized cost.
PART II
ITEM 8 Financial Statements and Supplementary Data
Business Combinations
Acquisitions are accounted for as business combinations in accordance
with the provisions of the Business Combinations Topic of the ASC.
Under this accounting guidance most of the assets and liabilities
acquired and assumed are measured at fair value as of the acquisition
date. Certain contingent liabilities acquired require remeasurement
at fair value in each subsequent reporting period. Noncontrolling
interests are initially measured at fair value and classified as a separate
component of equity. Acquisition related costs, such as fees for attorneys,
accountants, and investment bankers, are expensed as incurred and
are not capitalized as part of the purchase price. For all acquisitions,
regardless of the consummation date, deferred tax assets, valuation
allowances, and uncertain tax position adjustments occurring after
the measurement period are recorded as a component of income,
rather than adjusted through goodwill.
Determining the fair value of certain assets and liabilities acquired is
subjective in nature and often involves the use of significant estimates
and assumptions. Estimating the fair value of the assets and liabilities
acquired requires significant judgment.
Contingent Consideration
The Company estimates and records the acquisition date estimated fair
value of contingent consideration as part of purchase price consideration
for acquisitions. Additionally, each reporting period, the Company
estimates changes in the fair value of contingent consideration, and
any change in fair value is recognized in the consolidated income
statement. An increase in the earn-out expected to be paid will result
in a charge to operations in the period that the anticipated fair value
of contingent consideration increases, while a decrease in the earn-out
expected to be paid will result in a credit to operations in the period
that the anticipated fair value of contingent consideration decreases.
The estimate of the fair value of contingent consideration requires
subjective assumptions to be made of future operating results, discount
rates, and probabilities assigned to various potential operating result
scenarios. Future revisions to these assumptions could materially
change the estimate of the fair value of contingent consideration and,
therefore, materially affect the Company’s future financial results.
Additional Paid-In Capital
The Company’s additional paid-in capital (“APIC”) consists of
stockholder contributions that are in excess of par value of common
stock. Included in APIC are amounts related to the exercise of stock
options, share-based compensation and shares held in escrow.
In September 2010, the Company acquired certain assets of Provident
Group (“Provident”). The purchase price for the assets and services
of the sellers was $5.0 million. Subsequent to closing, the individual
sellers placed the entire purchase price into an escrow account and
the funds were used to purchase outstanding shares of the Company
on the open market. There were 214,325 shares purchased and placed
into escrow as a result of this agreement. The entire purchase price
was recorded as a reduction in additional paid in capital as shares held
in escrow for business combinations. The shares held in escrow for
business combinations were to be released to the individual sellers,
over a five year period from the date of closing based on net profits,
in accordance with the provisions of the acquisition agreement. At
September 30, 2015, the end of the five year period, the terms of
67
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
the agreement were not met and 204,271 shares were forfeited to the
Company and recorded as treasury stock. In accordance with the
acquisition agreement, there were no shares earned or released during
the year ended September 30, 2015, while 10,054 shares were earned
and subsequently released to the sellers prior to fiscal 2015.
Revenue Recognition
Sales of physical commodities revenue are recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the fee
is fixed or determinable, and collectability is reasonably assured.
The Company reports its physical commodities revenues, except as
described below, on a gross basis, with the corresponding cost of sales
shown separately, in accordance with the guidelines provided in the
Revenue Recognition Topic of the ASC. Management has historically
assessed the performance of the physical commodities businesses on
an operating revenue basis, and continues to do so.
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 consolidated income statements, in accordance with U.S GAAP
accounting requirements for broker-dealers. Precious metals sales and
cost of sales for subsidiaries that are not broker-dealers continue to
be recorded on a gross basis.
Trading gains, net include brokerage fees and margins generated
from OTC derivative trades executed with customers and other
counterparties and are recognized when trades are executed. Trading
gains, net also include activities where the Company acts as principal in
the purchase and sale of individual securities, currencies, commodities
or derivative instruments with customers. These transactions may be
offset simultaneously with another customer or counterparty, offset
with similar but not identical positions on an exchange, made from
inventory, or may be aggregated with other purchases to provide
liquidity intraday, for a number of days, or in some cases, particularly
the base metals business, even longer periods (during which fair value
may fluctuate). In addition, trading gains, net includes activities from
the Company’s operations of a proprietary foreign exchange desk which
arbitrages the futures and cash markets (see additional discussion in
the Financial Instruments and Derivatives policy note for revenue
recognition on proprietary trading activities). Net dealer inventory
and investment gains are recognized on a trade-date basis and include
realized gains or losses and changes in unrealized gains or losses on
investments at fair value. Dividend income and dividend expense,
on short equity positions, are recognized net, in ‘trading gain, net’
on the ex-dividend date.
Commissions on various securities transactions and futures and options
on futures contracts are recorded on a trade-date basis. Commissions
on futures contracts are recognized on a half-turn basis in two equal
parts. The first half is recognized when the contract is opened and the
second half is recognized when the transaction is closed. Commissions
on options on futures contracts are generally recognized on a half-turn
basis, except that full commissions are recognized on options expected
to expire without being exercised or offset. Commissions and fees are
charged at various rates based on the type of account, the products
traded, and the method of trade. Clearing and transaction fees are
charged to customers on a per exchange contract basis based on the
trade date. Such fees are for clearing customers’ exchange trades and
include fees charged to the Company by the various futures exchanges.
See discussion of transaction-based clearing expenses below.
68
Under clearing agreements, we clear trades for unaffiliated correspondent
brokers and retain a portion of commissions as a fee for our services.
Correspondent clearing revenues are recorded net of commissions
remitted. Commissions are also reported net of soft dollar rebates.
Consulting, management, and account fees include risk management
consulting fees which are billed and recognized as revenue on a monthly
basis when risk management services are provided. Such agreements
are generally for one year periods, but are cancelable by either party
upon providing thirty days written notice to the other party and the
amounts are not variable based on customer trading activities. Asset
management fees are recognized as they are earned based on fees due
at each period-end date. These include performance fees based on
the amount that is due under the formula for exceeding performance
targets as of the period-end date. Fee income for structuring and
arrangement of debt transactions and management and investment
advisory income is recorded when the services related to the underlying
transactions are provided and success fees are recorded when complete,
as determined under the terms of the assignment or engagement.
Consulting, management, and account fees also includes various charges
related to clearing agreements with unaffiliated introducing broker
dealers such as transaction fees, annual account fees, service charges,
servicing fees, platform fees, fees generated in lieu of interest income
from a multi-bank sweep program with unaffiliated banks, money
market processing and distribution fees, and other correspondent
clearing fees. The annual account fees such as IRA fees and distribution
fees are recognized as earned over the term of the contract. The
transaction fees are earned and collected from clients as trades are
executed. Servicing fees such as omnibus fees are paid to us for
marketing and administrative services and are recognized as earned.
Interest income, generated primarily from investments and customer
inventory financing, is recognized on an accrual basis. Interest from
investments is generated from securities purchased using customer
funds deposited with the Company to satisfy margin requirements,
net of interest returned to customers, and from securities acquired
through internally-generated company funds. Interest also includes
unrealized gains and losses on securities owned and those deposited
with other parties.
Revenue generally is recognized net of any taxes collected from
customers and subsequently remitted to governmental authorities.
Cost of Sales of Physical Commodities
Cost of sales of physical commodities include finished commodity or
raw material and processing costs along with operating costs relating
to the receipt, storage and delivery of the physical commodities. Cost
of sales of physical commodities also includes changes in the fair
value of agricultural commodity inventories held for sale, and related
forward purchase and sale contracts and exchange-traded futures and
options contracts.
Interest Income and Expense
Interest income and interest expense, generated primarily through
investments, is recognized on an accrual basis. Interest from investments
is generated from securities purchased using customer funds deposited
with the Company to satisfy margin requirements and from proprietary
securities acquired through internally generated funds.
- Form 10-K Compensation and Benefits
Compensation and benefits consists primarily of salaries, incentive
compensation, variable compensation, including commissions,
related payroll taxes and employee benefits. The Company classifies
employees as either risk management consultants / traders, operational
or administrative personnel, which includes the executive officers.
Variable compensation paid to risk management consultants and
traders generally represents a fixed percentage of revenues generated,
and in some cases, revenues produced less direct costs and an overhead
allocation. The Company accrues commission expense on a trade
date basis.
Share-Based Compensation
The Company accounts for share-based compensation in accordance
with the guidance of the Compensation-Stock Compensation Topic of
the ASC. The cost of employee services received in exchange for a share-
based award is generally measured based on the grant-date fair value
of the award. Share-based employee awards that require future service
are amortized over the relevant service period. Expected forfeitures
are included in determining share-based employee compensation
expense. For option awards granted, compensation cost is recognized
on a straight-line basis over the vesting period for the entire award.
Transaction-Based Clearing Expenses
Clearing fees and related expenses include primarily variable expenses
for clearing and settlement services, including fees the Company
pays to executing brokers, exchanges, clearing organizations and
banks. These fees are based on transaction volume, and recorded as
expense on the trade date. Clearing fees are passed on to customers
and are presented gross in the consolidated statements of income
under the Revenue Recognition Topic of the ASC, as the Company
acts as a principal for these transactions.
Introducing Broker Commissions
Introducing broker commissions include commissions paid to non-
employee third parties that have introduced customers to the Company.
Introducing brokers are individuals or organizations that maintain
relationships with customers and accept futures and options orders
from those customers. The Company directly provides all account,
transaction and margining services to introducing brokers, including
accepting money, securities and property from the customers. The
commissions are determined and settled monthly.
Income Taxes
Income tax expense includes U.S. federal, state and local and foreign
income taxes. Certain items of income and expense are not reported
in tax returns and financial statements in the same year. The objectives
of accounting for income taxes are to recognize the amount of taxes
payable or refundable for the current year. The Company utilizes the
asset and liability method to provide income taxes on all transactions
recorded in the consolidated financial statements. This method
requires that income taxes reflect the expected future tax consequences
of temporary differences between the carrying amounts of assets or
PART II
ITEM 8 Financial Statements and Supplementary Data
liabilities for book and tax purposes. Accordingly, a deferred tax
asset or liability for each temporary difference is determined based
on the tax rates that the Company expects to be in effect when the
underlying items of income and expense are realized. Judgment
is required in assessing the future tax consequences of events that
have been recognized in the Company’s financial statements or tax
returns, including the repatriation of undistributed earnings of foreign
subsidiaries. See Note 18 for further information on the Company’s
income taxes.
Comprehensive Income
Comprehensive income consists of net income and other gains
and losses affecting stockholders’ equity that, under U.S. GAAP,
are excluded from net income. Other comprehensive income (loss)
includes net actuarial losses from defined benefit pension plans and
gains and losses on foreign currency translations.
Preferred Stock
The Company is authorized to issue one million shares of preferred
stock, par value of $0.01 per share, in one or more classes or series to be
established by the Company’s board of directors. As of September 30,
2017 and 2016, no preferred shares were outstanding and the Company’s
board of directors had not yet established any class or series of shares.
Accounting Standards Adopted
In April 2015, the FASB issued Accounting Standards Update (“ASU”)
No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30). ASU
2015-03 requires that debt issuance costs related to a recognized debt
liability be presented in the balance sheet as a direct deduction from
the carrying amount of that debt liability. In June 2015, the FASB
issued ASU 2015-15 as an amendment to this guidance to address
the absence of authoritative guidance for debt issuance costs related
to line-of-credit arrangements. The SEC staff stated that they would
not object to an entity deferring and presenting debt issuance costs as
an asset and subsequently amortizing the deferred debt issuance costs
ratably over the term of the line-of-credit arrangement, regardless of
whether there are any outstanding borrowings on the line-of-credit
arrangement. ASU 2015-03 required retrospective application to
all prior periods presented in the consolidated financial statements.
This new guidance was effective for the Company in the first quarter
of 2017. As a result of adopting this standard on October 1, 2016,
deferred financing costs of $1.0 million as of September 30, 2016,
previously reported within other assets, were reclassified to senior
unsecured notes in the consolidated balance sheet. As of September 30,
2017, there were no deferred financing costs as the senior unsecured
notes were redeemed during the year ended September 30, 2017, as
discussed in Note 10.
In January 2017, the FASB issued ASU 2017-01, Business
Combinations - Clarifying the Definition of a Business, which clarifies
the definition of a business for determining whether transactions should
be accounted for as acquisitions (or disposals) of assets or businesses.
The Company early adopted this guidance effective October 1, 2016,
and applied the guidance in determining whether the acquisition
discussed in Note 18 is the acquisition of an asset or of a business.
69
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 2 Bad Debt on Physical Coal
During the fourth quarter of fiscal 2017, the Company recorded a
charge to earnings of $47.0 million, to record an allowance for doubtful
accounts related to a bad debt incurred in the physical coal business,
conducted solely in the Company’s Singapore subsidiary, INTL Asia
Pte. Ltd., with a coal supplier. Components of the bad debt on physical
coal include allowances on amounts due to the Company from the
supplier related to: coal paid for but not delivered to customers;
reimbursement of demurrage claims, dead freight and other charges
paid by INTL Asia Pte. Ltd. to its customers; reimbursement due for
deficiencies in the quality of coal delivered to customers; and losses
incurred related to the cancellation of open sales contracts.
The Company purchased coal delivered onto barges and paid 80% of the
value against bills of lading and purchase invoices, with the remaining
20% payable following inspection upon delivery to customers’ vessels.
The Company took title of the coal when it was loaded onto barges
and maintained title until it was offloaded onto customers’ vessels.
The logistics related to the delivery of coal to the customers’ vessels
was out-sourced to the Company’s coal supplier, and the Company
determined that certain purchased coal was not delivered to the
customers’ vessels during the fourth quarter ended September 30,
2017. Furthermore, the Company determined that the supplier was
unable to deliver such purchased coal to its customers. Demurrage
claims, dead freight, and other penalty charges paid by INTL Asia
Pte. Ltd. to its customers were due to be reimbursed by the supplier
based on transaction agreements with the supplier. Subsequent to the
end of the fourth quarter ended September 30, 2017, the Company
determined the supplier was unable to make this reimbursement.
NOTE 3 Earnings per Share
The Company has received an acknowledgment of debt and a note
from the supplier in its first quarter ending December 31, 2017.
However, there is substantial uncertainty as to whether the supplier
will be able to meet its financial obligations to the Company and
as to the timing of any recovery. The bad debt on physical coal is
presented separately as a component of income from operations in
the consolidated income statements.
As of September 30, 2017, the physical coal business is part of our
Physical Commodities segment and conducted solely in INTL Asia
Pte. Ltd. Subsequent to September 30, 2017, the Company ceased and
exited the physical coal business. All remaining open sales contracts
have been canceled. During the first quarter ending December 31,
2017, the Company expects to record additional bad debt expense
of $1.0 million related to reimbursement due the Company from the
supplier for demurrage and other charges related to contracts with
delivery dates subsequent to September 30, 2017.
The Company has considered the impact of the exit of the physical
coal business on the Company’s financial position, future operating
results and liquidity, and believes the exit will not have a material
negative impact to the consolidated financial statements, expected
cash flows or liquidity of the Company. The physical coal business
had not contributed significantly to income from operations. The
Company has no long-lived or intangible assets related to the physical
coal business, and accordingly has recorded no impairment charges.
The Company believes any additional exit costs will not be material
to the consolidated financial statements.
The Company presents basic and diluted earnings per share (“EPS”) using
the two-class method which requires all outstanding unvested share-
based payment awards that contain rights to non-forfeitable dividends
and therefore participate in undistributed earnings with common
stockholders be included in computing earnings per share. Under the
two-class method, net earnings are reduced by the amount of dividends
declared in the period for each class of common stock and participating
security. The remaining undistributed earnings are then allocated to
common stock and participating securities, based on their respective
rights to receive dividends. Restricted stock awards granted to certain
employees and directors contain non-forfeitable rights to dividends
at the same rate as common stock, and are considered participating
securities. Basic EPS has been computed by dividing net income by
the weighted-average number of common shares outstanding.
The following is a reconciliation of the numerator and denominator
of the diluted net income per share computations for the periods
presented below.
(in millions, except share amounts)
Numerator:
Net income
Less: Allocation to participating securities
Net income allocated to common stockholders
Denominator:
Weighted average number of:
Common shares outstanding
Dilutive potential common shares outstanding:
Share-based awards
Diluted shares outstanding
Year Ended September 30,
2016
2017
2015
$
$
6.4
(0.1)
6.3
$
$
54.7
(1.0)
53.7
$
$
55.7
(1.3)
54.4
18,395,987
18,410,561
18,525,374
291,367
18,687,354
214,811
18,625,372
406,861
18,932,235
The dilutive effect of share-based awards is reflected in diluted net income
per share by application of the treasury stock method, which includes
consideration of unamortized share-based compensation expense.
Options to purchase 230,135, 910,060 and 997,459 shares of common
stock for fiscal years ended September 30, 2017, 2016, and 2015,
respectively, were excluded from the calculation of diluted earnings
per share because they would have been anti-dilutive.
70
- Form 10-K
Note 4 Assets and Liabilities, at Fair Value
Fair value is defined by U.S. GAAP as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability
in an orderly transaction between willing market participants on the
measurement date.
Fair value is a market-based measure considered from the perspective of
a market participant rather than an entity-specific measure. Therefore,
even when market assumptions are not readily available, the Company
is required to develop a set of assumptions that reflect those that
market participants would use in pricing the asset or liability at the
measurement date. The Company uses prices and inputs that are
current as of the measurement date, including periods of market
dislocation. In periods of market dislocation, the observability of
prices and inputs may be reduced for many securities. This condition
could cause a security to be reclassified to a lower level within the
fair value hierarchy.
The Company has designed independent price verification controls
and periodically performs such controls to ensure the reasonableness
of such values.
In accordance with FASB ASC 820, Fair Value Measurement, the
Company groups its assets and liabilities measured at fair value in
three levels based on the markets in which the assets and liabilities
are traded and the reliability of the assumptions used to determine
fair value. These levels are:
Level 1 - Valuation is based upon unadjusted quoted prices in active
markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities. Level 1 consists of financial assets and
liabilities whose fair values are estimated using quoted market prices.
Level 2 - Valuation is based upon quoted prices for identical or similar
assets or liabilities in markets that are less active, that is, markets in
which there are few transactions for the asset or liability that are
observable for substantially the full term. Included in Level 2 are
those financial assets and liabilities for which fair values are estimated
using models or other valuation methodologies. These models are
primarily industry-standard models that consider various observable
inputs, including time value, yield curve, volatility factors, observable
current market and contractual prices for the underlying financial
instruments, as well as other relevant economic measures.
Level 3 - Valuation is generated from prices or valuation techniques that
require inputs that are both significant to the fair value measurement
and unobservable (i.e., supported by little or no market activity).
Level 3 comprises financial assets and liabilities whose fair value is
estimated based on internally developed models or methodologies
utilizing significant inputs that are not readily observable from
objective sources.
Financial and nonfinancial assets and liabilities are classified in their
entirety based on the lowest level of input that is significant to the
fair value measurement. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). A market is active if
there are sufficient transactions on an ongoing basis to provide current
pricing information for the asset or liability, pricing information
is released publicly, and price quotations do not vary substantially
PART II
ITEM 8 Financial Statements and Supplementary Data
either over time or among market makers. Observable inputs reflect
the assumptions market participants would use in pricing the asset
or liability developed based on market data obtained from sources
independent of the reporting entity.
The guidance requires the Company to consider counterparty credit
risk of all parties of outstanding derivative instruments that would
be considered by a market participant in the transfer or settlement
of such contracts (exit price). The Company’s exposure to credit risk
on derivative financial instruments relates to the portfolio of OTC
derivative contracts as all exchange-traded contracts held can be
settled on an active market with a credit guarantee by the respective
exchange. The Company requires each counterparty to deposit margin
collateral for all OTC instruments and is also required to deposit
margin collateral with counterparties. The Company has assessed
the nature of these deposits and used its discretion to adjust each
based on the underlying credit considerations for the counterparty
and determined that the collateral deposits minimize the exposure
to counterparty credit risk in the evaluation of the fair value of OTC
instruments as determined by a market participant.
Fair value of financial and nonfinancial
assets and liabilities that are carried on the
Consolidated Balance Sheets at fair value on
a recurring basis
Cash and cash equivalents reported at fair value on a recurring basis
includes money market funds, which are valued at period-end at the
net asset value provided by the fund’s administrator, and certificates
of deposit, which are stated at cost plus accrued interest, which
approximates fair value.
Cash, securities and other assets segregated under federal and other
regulations reported at fair value on a recurring basis include the
value of pledged investments, primarily U.S. Treasury obligations
and commodities warehouse receipts.
Deposits with and receivables from broker-dealers, clearing organizations
and counterparties and payable to customers and broker-dealers,
clearing organizations and counterparties include the value of money
market funds and other pledged investments, primarily U.S. Treasury
obligations and foreign government obligations. These balances also
include the fair value of exchange-traded options on futures and
exchange-cleared OTC swaps and options determined by quoted
prices on the applicable exchange.
Financial instruments owned and sold, not yet purchased include the
value of common and preferred stock, American Depository Receipts
(“ADRs”), and Global Depository Receipts (“GDRs”), exchangeable
foreign ordinary equities, ADRs, and GDRs, corporate and municipal
debt obligations, U.S. Treasury obligations, U.S. government agency
obligations, foreign government obligations, agency mortgage-backed
obligations, asset-backed obligations, derivative financial instruments,
commodities warehouse receipts, exchange firm common stock, and
mutual funds and investments in managed funds. The fair value of
exchange firm common stock is determined by quoted market prices,
and the fair value of exchange memberships is determined by recent
sale transactions.
71
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
Physical commodities inventory includes precious metals that are a
part of the trading activities of a regulated broker-dealer subsidiary
and is recorded at fair value using spot prices. Physical commodities
inventory also includes agricultural and energy commodities that are
a part of the trading activities of a non-broker dealer subsidiary and
are also recorded at net realizable value using spot prices.
Cash equivalents, securities, commodities warehouse receipts, physical
commodities inventory, derivative financial instruments and contingent
liabilities are carried at fair value, on a recurring basis, and are classified
and disclosed into three levels in the fair value hierarchy.
The following section describes the valuation methodologies used by
the Company to measure classes of financial instruments at fair value
and specifies the level within the fair value hierarchy where various
financial instruments are classified.
The Company uses quoted prices in active markets, where available,
and classifies such instruments within Level 1 of the fair value hierarchy.
Examples include U.S. Treasury obligations, commodities warehouse
receipts, some common and preferred stock, ADRs, and GDRs,
some exchangeable foreign ordinary equities, ADRs, and GDRs,
some corporate and municipal obligations, physical precious metals,
agricultural, and energy commodities, equity investments in exchange
firms, mutual funds, as well as futures and options on futures contracts
traded on national exchanges. The fair value of exchange memberships
is determined by recent sale transactions and is included within Level 1.
When instruments are traded in secondary markets and observable
prices are not available for substantially the full term, the Company
generally relies on internal valuation techniques or prices obtained
from third-party pricing services or brokers or a combination thereof,
and accordingly, classified these instruments as Level 2. Examples
include U.S. government agency obligations, agency-mortgage
backed obligations, asset-backed obligations, foreign government
obligations, some common and preferred stock, ADRs, and GDRs,
certain exchangeable foreign ordinary equities, ADRs, and GDRs,
OTC commodity and foreign exchange forwards, swaps, and options,
OTC firm purchase and sale commitments related to precious metals
commodities, and OTC firm purchase and sale commitments related
to the Company’s agricultural and energy commodities.
Derivatives without a quoted price in an active market and derivatives
executed OTC are valued using internal valuation techniques, including
pricing models which utilize significant inputs observable to market
participants. The valuation techniques and inputs depend on the
type of derivative and the nature of the underlying instrument.
The key inputs depend upon the type of derivative and the nature of
the underlying instrument and include interest yield curves, foreign
exchange rates, commodity prices, volatilities and correlation. These
derivative instruments are included within Level 2 of the fair value
hierarchy.
With the exception of certain derivative instruments, financial
instruments owned and sold are primarily valued using third party
pricing sources. Third party vendors compile prices from various
sources and often apply matrix pricing for similar securities when no
prices are observable. The Company reviews the pricing methodologies
provided by the various vendors in order to determine if observable
market information is being used, versus unobservable inputs. When
evaluating the propriety of an internal trader price compared with
vendor prices, considerations include the range and quality of vendor
prices. Trader or broker prices are used to ensure the reasonableness
of a vendor price; however valuing financial instruments involves
judgments acquired from knowledge of a particular market. If a trader
asserts that a vendor or market price is not reflective of market value,
justification for using the trader price, including recent sales activity
where possible, must be provided to and approved by the appropriate
levels of management. Financial instruments owned and sold that
are valued using third party pricing sources are included within
either Level 1 or Level 2 of the fair value hierarchy based upon the
observability of the inputs used and the level of activity in the market.
Level 3 comprises financial assets and liabilities whose fair value is
estimated based on internally developed models or methodologies
utilizing significant inputs that are not readily observable from
objective sources. Included in Level 3 are some common stock and
ADRs, some corporate and municipal obligations, and contingent
liabilities. Level 3 assets and liabilities are valued using an income
approach based upon management developed discounted cash flow
projections, which are an unobservable input.
The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 2017 and
2016. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts
have not been comprehensively revalued for purposes of these financial
statements since that date and current estimates of fair value may
differ significantly from the amounts presented herein.
72
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
The following tables set forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis,
as of September 30, 2017 and September 30, 2016 by level in the fair value hierarchy. There were no assets or liabilities that were measured
at fair value on a nonrecurring basis as of September 30, 2017 and 2016.
(in millions)
ASSETS:
Certificate of deposits
Unrestricted cash equivalents - certificates of deposits
$
Commodities warehouse receipts
U.S. Treasury obligations
Securities and other assets segregated under federal and other
regulations
U.S. Treasury obligations
“To be announced” (TBA) and forward settling securities
Foreign government obligations
Derivatives
Deposits with and receivables from broker-dealers, clearing
organizations and counterparties
Common and preferred stock, ADRs, and GDRs
Exchangeable foreign ordinary equities, ADRs, and GDRs
Corporate and municipal bonds
U.S. Treasury obligations
U.S. government agency obligations
Foreign government obligations
Agency mortgage-backed obligations
Asset-backed obligations
Derivatives
Commodities leases
Commodities warehouse receipts
Exchange firm common stock
Mutual funds and other
Financial instruments owned
Physical commodities inventory
Total assets at fair value
LIABILITIES:
Accounts payable and other accrued liabilities - contingent
liabilities
$
$
TBA and forward settling securities
Derivatives
Level 1
Level 2
Level 3
Netting(1)
Total
September 30, 2017
3.8
3.8 $
21.0
33.5
54.5
244.7
—
—
2,608.6
2,853.3
31.2
9.2
28.2
60.0
—
—
—
—
1.3
—
38.5
8.3
6.0
182.7
73.2
3,167.5 $
—
— $
—
—
—
—
8.8
6.4
289.1
304.3
3.4
1.2
0.9
—
368.9
10.2
920.9
47.3
1,413.4
174.1
—
—
—
2,940.3
—
3,244.6 $
— $
—
2,476.2
— $
4.9
292.8
—
— $
—
—
—
—
—
—
—
—
0.1
—
—
—
—
—
—
—
—
—
—
—
—
0.1
—
0.1 $
1.0 $
—
—
—
— $
—
—
—
—
—
—
(2,952.9)
(2,952.9)
—
—
—
—
—
—
—
—
(1,252.6)
(138.7)
—
—
—
(1,391.3)
—
(4,344.2)
$
3.8
3.8
21.0
33.5
54.5
244.7
8.8
6.4
(55.2)
204.7
34.7
10.4
29.1
60.0
368.9
10.2
920.9
47.3
162.1
35.4
38.5
8.3
6.0
1,731.8
73.2
2,068.0
— $
(0.1)
(2,769.0)
1.0
4.8
—
Payables to broker-dealers, clearing organizations and
counterparties
Common and preferred stock, ADRs, and GDRs
Exchangeable foreign ordinary equities, ADRs, and GDRs
Corporate and municipal bonds
U.S. Treasury obligations
U.S government agency obligations
Agency mortgage-backed obligations
Derivatives
Commodities leases
4.8
34.4
10.5
0.3
285.9
27.9
0.1
317.0
41.5
717.6
Financial instruments sold, not yet purchased
Total liabilities at fair value
723.4
(1) Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level are included in that level.
2,476.2
33.7
10.3
0.3
285.9
—
—
—
—
330.2
2,806.4 $
297.7
0.7
0.2
—
—
27.9
0.1
1,427.2
191.1
1,647.2
1,944.9 $
(2,769.1)
—
—
—
—
—
—
(1,110.2)
(149.6)
(1,259.8)
(4,028.9)
—
—
—
—
—
—
—
—
—
—
1.0 $
$
$
73
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
(in millions)
ASSETS:
Unrestricted cash equivalents - certificates of deposits
Commodities warehouse receipts
U.S. government obligations
Securities and other assets segregated under federal and other
regulations
Money market funds
U.S. government obligations
TBA and forward settling securities
Derivatives
Deposits and receivables from broker-dealers, clearing
organizations and counterparties
Common and preferred stock, ADRs, and GDRs
Exchangeable foreign ordinary equities, ADRs, and GDRs
Corporate and municipal bonds
U.S. government obligations
Foreign government obligations
Mortgage-backed securities
Derivatives
Commodities leases
Commodities warehouse receipts
Exchange firm common stock
Mutual funds and other
Financial instruments owned
Physical commodities inventory
Total assets at fair value
LIABILITIES:
Accounts payable and other accrued liabilities - contingent
liabilities
TBA and forward settling securities
Derivatives
Level 1
Level 2
Level 3
Netting(1)
Total
September 30, 2016
$
7.1 $
23.3
—
— $
—
595.5
23.3
512.7
—
—
2,149.9
2,662.6
34.6
25.2
36.9
—
—
—
206.9
—
8.9
6.4
8.8
327.7
71.2
3,091.9 $
595.5
—
472.1
0.3
8.0
480.4
1.7
0.5
0.9
514.9
14.6
747.5
1,350.8
137.2
—
—
—
2,768.1
—
3,844.0 $
— $
—
1,961.7
— $
2.6
97.5
$
$
— $
—
—
—
—
—
—
—
—
0.2
—
3.0
—
—
—
—
—
—
—
—
3.2
—
3.2 $
0.8 $
—
—
— $
—
—
—
—
—
—
(2,289.7)
(2,289.7)
—
—
—
—
—
—
(1,363.8)
(129.1)
—
—
—
(1,492.9)
—
(3,782.6)
$
7.1
23.3
595.5
618.8
512.7
472.1
0.3
(131.8)
853.3
36.5
25.7
40.8
514.9
14.6
747.5
193.9
8.1
8.9
6.4
8.8
1,606.1
71.2
3,156.5
— $
0.9
(2,059.2)
0.8
3.5
—
Payable to broker-dealers, clearing organizations and
counterparties - derivatives
Common and preferred stock, ADRs, and GDRs
Exchangeable foreign ordinary equities, ADRs, and GDRs
Corporate and municipal bonds
U.S. government obligations
Foreign government obligations
Mortgage-backed securities
Derivatives
Commodities leases
3.5
23.9
25.8
6.9
509.8
—
—
210.9
62.1
839.4
Financial instruments sold, not yet purchased
843.7
Total liabilities at fair value
(1) Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level are included in that level.
100.1
0.4
0.5
—
509.8
—
—
1,319.3
207.8
2,037.8
2,137.9 $
1,961.7
23.5
25.3
6.9
—
—
—
199.4
—
255.1
2,216.8 $
(2,058.3)
—
—
—
—
—
—
(1,307.8)
(145.7)
(1,453.5)
(3,511.8)
—
—
—
—
—
—
—
—
—
—
0.8 $
$
$
Realized and unrealized gains and losses are included in ‘trading gains, net’ and ‘cost of sales of physical commodities’ in the consolidated
income statements.
74
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
Information on Level 3 Financial Assets and Liabilities
The Company’s financial assets at fair value classified within level 3 of the fair value hierarchy as of September 30, 2017 and 2016 are
summarized below:
(in millions)
Total level 3 assets
Level 3 assets for which the Company bears economic exposure
Total assets
Total financial assets at fair value
Total level 3 assets as a percentage of total assets
Level 3 assets for which the Company bears economic exposure as a percentage of total assets
Total level 3 assets as a percentage of total financial assets at fair value
September 30, 2017
$
$
$
$
0.1
0.1
6,243.4
2,068.0
September 30, 2016
$
$
$
$
3.2
3.2
5,950.3
3,156.5
—%
—%
—%
0.1%
0.1%
0.1%
The following tables set forth a summary of changes in the fair value of the Company’s Level 3 financial assets and liabilities during the fiscal
years ended September 30, 2017 and 2016, including a summary of unrealized gains (losses) during the fiscal year ended on the Company’s
Level 3 financial assets and liabilities still held as of September 30, 2017.
Balances at
beginning of
period
Realized gains
(losses) during
period
Level 3 Financial Assets and Financial Liabilities
For the Year Ended September 30, 2017
Unrealized
gains (losses)
during period
Purchases/
issuances
Settlements
Transfers in
or (out) of
Level 3
Balances at
end of period
$
$
0.2 $
3.0
3.2 $
— $
—
— $
(0.1) $
—
(0.1) $
— $
—
— $
— $
— $
(3.0)
(3.0) $
—
— $
0.1
—
0.1
Balances at
beginning of
period
Realized gains
(losses) during
period
Remeasurement
gains (losses)
during period Acquisitions
Settlements
Transfers in
or (out) of
Level 3
Balances at
end of period
(in millions)
ASSETS:
Common and preferred stock
and ADRs
Corporate and municipal
bonds
(in millions)
LIABILITIES:
Contingent liabilities
$
0.8 $
— $
0.2 $
— $
— $
— $
1.0
Balances at
beginning of
period
Realized gains
(losses) during
period
Level 3 Financial Assets and Financial Liabilities
For the Year Ended September 30, 2016
Unrealized
gains (losses)
during period
Purchases/
issuances
Settlements
Transfers in
or (out) of
Level 3
Balances at
end of period
$
$
0.5 $
3.2
3.7 $
— $
—
— $
(0.3) $
(0.2)
(0.5) $
— $
—
— $
— $
— $
—
— $
—
— $
0.2
3.0
3.2
Balances at
beginning of
period
Realized gains
(losses) during
period
Remeasurement
gains (losses)
during period Acquisitions
Settlements
Transfers in
or (out) of
Level 3
Balances at
end of period
(in millions)
ASSETS:
Common and preferred stock
and ADRs
Corporate and municipal
bonds
(in millions)
LIABILITIES:
Contingent liabilities
$
3.3 $
— $
0.4
$
— $
(2.9) $
— $
0.8
75
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
The Company had debentures issued by a single asset owning
company of Suriwongse Hotel located in Chiang Mai, Thailand. As
of September 30, 2016, the Company’s investment in the hotel was
$3.0 million, and was included within the corporate and municipal
bonds classification in the Level 3 financial assets and financial
liabilities table. The Company classified its investment in the hotel
within Level 3 of the fair value hierarchy because the fair value was
determined using significant unobservable inputs, which included
projected cash flows. These cash flows were discounted employing
present value techniques. In December 2016, the Company sold the
debentures and collected an amount approximating their carrying value.
The Company is required to make additional future cash payments
based on certain financial performance measures of its acquired
businesses. The Company is required to remeasure the fair value of
the cash earnout arrangements on a recurring basis The Company has
classified its liabilities for the contingent earnout arrangements within
Level 3 of the fair value hierarchy because the fair value is determined
using significant unobservable inputs, which include projected cash
flows. The estimated fair value of the contingent purchase consideration
is based upon management-developed forecasts, a Level 3 input in
the fair value hierarchy. These cash flows are discounted employing
present value techniques in arriving at fair value. The discount rate
was developed using market participant company data and there have
been no significant changes in the discount rate environment. From
the dates of acquisition to September 30, 2017, certain acquisitions
have had changes in the estimates of undiscounted cash flows, based
on actual performances fluctuating from estimates. During the fiscal
years ended September 30, 2017 and 2016, the fair value of the
contingent consideration increased $0.2 million and $0.4 million,
respectively, with the corresponding expense classified as ‘other’ in
the consolidated income statements.
The value of an exchange-traded derivative contract is equal to the
unrealized gain or loss on the contract determined by marking
the contract to the current settlement price for a like contract on the
valuation date of the contract. A settlement price may not be used if
the market makes a limit move with respect to a particular derivative
contract or if the securities underlying the contract experience significant
price fluctuations after the determination of the settlement price.
When a settlement price cannot be used, derivative contracts will
be valued at their fair value as determined in good faith pursuant to
procedures adopted by management of the Company.
The Company has classified equity investments in exchange firms’
common stock not pledged for clearing purposes as trading securities.
The investments are recorded at fair value, with unrealized gains and
losses recorded, net of taxes, included in earnings. As of September 30,
2017, the cost and fair value of the equity investments in exchange
firms is $3.9 million and $8.3 million, respectively. As of September 30,
2016, the cost and fair value of the equity investments in exchange
firms was $3.7 million and $6.4 million, respectively.
Additional disclosures about the fair value of
financial instruments that are not carried on the
Consolidated Balance Sheets at fair value
Many, but not all, of the financial instruments that the Company
holds are recorded at fair value in the Consolidated Balance Sheets.
The following represents financial instruments in which the ending
balance at September 30, 2017 and 2016 was not carried at fair value
in accordance with U.S. GAAP on our Consolidated Balance Sheets:
Short-term financial instruments: The carrying value of short-term
financial instruments, including cash and cash equivalents, cash
segregated under federal and other regulations, securities purchased
under agreements to re-sell and securities sold under agreements
to re-purchase, and securities borrowed and loaned are recorded at
amounts that approximate the fair value of these instruments due to
their short-term nature and level of collateralization. These financial
instruments generally expose us to limited credit risk and have no stated
maturities or have short-term maturities and carry interest rates that
approximate market rates. Under the fair value hierarchy, cash and cash
equivalents and cash segregated under federal and other regulations are
classified as Level 1. Securities purchased under agreements to re-sell
and securities sold under agreements to re-purchase, and securities
borrowed and loaned are classified as Level 2 under the fair value
hierarchy as they are generally overnight and are collateralized by
common stock, U.S. Treasury obligations, U.S. government agency
obligations, agency mortgage-backed obligations, and asset-backed
obligations.
Receivables and other assets: Receivables from broker-dealers, clearing
organizations, and counterparties, receivables from customers, net,
notes receivables, net and certain other assets are recorded at amounts
that approximate fair value due to their short-term nature and are
classified as Level 2 under the fair value hierarchy.
Payables: Payables to customers and payables to brokers-dealers,
clearing organizations, and counterparties are recorded at amounts
that approximate fair value due to their short-term nature and are
classified as Level 2 under the fair value hierarchy.
Lender under loans: Payables to lenders under loans carry variable
rates of interest and thus approximate fair value and are classified as
Level 2 under the fair value hierarchy.
Senior unsecured notes: The fair value of the Company’s senior unsecured
notes was estimated to be $46.2 million (carrying value of $45.5 million)
as of September 30, 2016 based on the transaction price at public
exchanges for the same issue and is classified as Level 1 under the
fair value hierarchy. The senior secured notes were redeemed during
the year ended September 30, 2017, as discussed further in Note 11.
76
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 5 Financial Instruments with Off-Balance Sheet Risk and Concentrations
of Credit Risk
The Company is party to certain financial instruments with off-balance
sheet risk in the normal course of its business. The Company has sold
financial instruments that it does not currently own and will therefore
be obliged to purchase such financial instruments at a future date.
The Company has recorded these obligations in the consolidated
financial statements as of September 30, 2017 at the fair values of
the related financial instruments. The Company will incur losses
if the fair value of the underlying financial instruments increases
subsequent to September 30, 2017. The total of $717.6 million as of
September 30, 2017 includes $317.0 million for derivative contracts,
which represent a liability to the Company based on their fair values
as of September 30, 2017.
Derivatives
The Company utilizes derivative products in its trading capacity as
a dealer in order to satisfy customer needs and mitigate risk. The
Company manages risks from both derivatives and non-derivative cash
instruments on a consolidated basis. The risks of derivatives should
not be viewed in isolation, but in aggregate with the Company’s other
trading activities. The Company’s derivative positions are included in
the consolidating balance sheets in ‘deposits with and receivables from
broker-dealers, clearing organizations, and counterparties’, ‘financial
(in millions)
Derivative contracts not accounted for as hedges:
Exchange-traded commodity derivatives
OTC commodity derivatives
Exchange-traded foreign exchange derivatives
OTC foreign exchange derivatives
Exchange-traded interest rate derivatives
Equity index derivatives
TBA and forward settling securities
Gross fair value of derivative contracts
Impact of netting and collateral
Total fair value included in ‘Deposits with and receivables from
broker-dealers, clearing organizations and counterparties’
Total fair value included in ‘Financial instruments owned, at fair value’
Total fair value included in ‘Payables to broker-dealers, clearing
organizations and counterparties
Fair value included in ‘Financial instruments sold, not yet purchased,
at fair value’
instruments owned and sold, not yet purchased, at fair value’ and
‘payables to broker-dealers, clearing organizations and counterparties’.
The Company employs an interest rate risk management strategy
using derivative financial instruments in the form of interest rate
swaps as well as outright purchases of medium-term U.S. Treasury
notes to manage a portion of the aggregate interest rate position. The
Company’s objective when using interest rate swaps under the strategy,
is to invest certain amounts of customer deposits in high quality, short-
term investments and swap the resulting variable interest earnings
into medium-term interest earnings. When used, the risk mitigation
of these interest rate swaps are not within the documented hedging
designation requirements of the Derivatives and Hedging Topic of
the ASC, and as a result are recorded at fair value, with changes in
the fair value of the interest rate swaps recorded within ‘trading gains,
net’ in the consolidated income statements. At September 30, 2016,
the Company had $375 million in notional principal of interest
rate swaps outstanding with a weighted-average life of 15 months.
During the year ended September 30, 2017, the Company settled
these interest rate swaps in advance of their original maturity date.
Listed below are the fair values of the Company’s derivative assets
and liabilities as of September 30, 2017 and 2016. Assets represent
net unrealized gains and liabilities represent net unrealized losses.
September 30, 2017
September 30, 2016
Assets(1)
Liabilities(1)
Assets(1)
Liabilities(1)
$
$
$
2,094.2
1,084.0
66.0
618.5
228.4
221.3
8.8
4,321.2
(4,205.5)
(46.4)
162.1
$
$
$
$
1,975.0
1,110.3
52.0
609.8
203.6
245.4
4.9
4,201.0
(3,879.2)
2,022.1
1,217.0
12.2
346.5
78.7
39.1
0.3
3,715.9
(3,653.5)
$
$
(131.5)
193.9
4.8
317.0
$
$
$
1,920.5
1,188.9
7.5
290.2
120.5
50.3
2.6
3,580.5
(3,366.1)
3.5
210.9
(1) As of September 30, 2017 and 2016, the Company’s derivative contract volume for open positions was approximately 6.1 million and 4.0 million contracts, respectively.
The Company’s derivative contracts are principally held in its
Commodities and Risk Management Services (“Commercial Hedging”)
segment. The Company assists its Commercial Hedging segment
customers in protecting the value of their future production by
entering into option or forward agreements with them on an OTC
basis. The Company also provides its Commercial Hedging segment
customers with option products, including combinations of buying
and selling puts and calls. The Company mitigates its risk by generally
offsetting the customer’s transaction simultaneously with one of
the Company’s trading counterparties or will offset that transaction
with a similar but not identical position on the exchange. The risk
mitigation of these offsetting trades is not within the documented
hedging designation requirements of the Derivatives and Hedging
Topic of the ASC. These derivative contracts are traded along with
cash transactions because of the integrated nature of the markets
for these products. The Company manages the risks associated with
derivatives on an aggregate basis along with the risks associated
with its proprietary trading and market-making activities in cash
instruments as part of its firm-wide risk management policies. In
particular, the risks related to derivative positions may be partially
offset by inventory, unrealized gains in inventory or cash collateral
paid or received.
77
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
The Company transacts in derivative instruments, which consist
of futures, mortgage-backed TBA securities and forward settling
transactions, that are used to manage risk exposures. The fair value
of these transactions is recorded in receivables or payables to broker-
dealers, clearing organizations and counterparties. Realized and
unrealized gains and losses on securities and derivative transactions
are reflected in ‘trading gains, net’.
The Company enters into TBA securities transactions for the sole
purpose of managing risk associated with the purchase of mortgage
pass-through securities. TBA securities are included within payables
to broker-dealers, clearing organizations and counterparties. Forward
settling securities represent non-regular way securities and are included
in financial instruments owned and sold. As of September 30, 2017,
these transactions are summarized as follows (in millions):
Gain/(Loss)
Notional
Amounts
Unrealized gain on TBA securities purchased within payables to broker-dealers, clearing organizations and
counterparties and related notional amounts(1)
Unrealized loss on TBA securities purchased within payables to broker-dealers, clearing organizations and
counterparties and related notional amounts(1)
Unrealized gain on TBA securities sold within deposits with and receivables from broker-dealers, clearing
organizations and counterparties and related notional amounts(1)
Unrealized loss on TBA securities sold within deposits with and receivables from broker-dealers, clearing
organizations and counterparties and related notional amounts(1)
Unrealized loss on forward settling securities purchased within payables to broker-dealers, clearing organizations
and counterparties and related notional amounts
Unrealized gain on forward settling securities sold within receivables from broker-dealers, clearing organizations
and counterparties and related notional amounts
(590.2)
(1) The notional amounts of these instruments reflect the extent of the Company’s involvement in TBA securities and do not represent risk of loss due to counterparty non-performance.
(1,881.9)
— $
1,236.8
(404.1)
882.9
(2.9)
(2.0)
(0.1)
51.3
3.0
5.8
$
$
$
$
$
$
$
$
$
$
$
The following table sets forth the Company’s net gains (losses) related to derivative financial instruments for the fiscal years ended September 30,
2017, 2016, and 2015, in accordance with the Derivatives and Hedging Topic of the ASC. The net gains (losses) set forth below are included
in ‘trading gains, net’ and ‘cost of sales of physical commodities’ in the consolidated income statements.
(in millions)
Commodities
Foreign exchange
Interest rate and equity
TBA and forward settling securities
Net gains from derivative contracts
Credit Risk
In the normal course of business, the Company purchases and sells
financial instruments, commodities and foreign currencies as either
principal or agent on behalf of its customers. If either the customer
or counterparty fails to perform, the Company may be required
to discharge the obligations of the nonperforming party. In such
circumstances, the Company may sustain a loss if the fair value of
the financial instrument or foreign currency is different from the
contract value of the transaction.
The majority of the Company’s transactions and, consequently, the
concentration of its credit exposure are with commodity exchanges,
customers, broker-dealers and other financial institutions. These activities
primarily involve collateralized and uncollateralized arrangements and
may result in credit exposure in the event that a counterparty fails to
meet its contractual obligations. The Company’s exposure to credit
risk can be directly impacted by volatile financial markets, which
may impair the ability of counterparties to satisfy their contractual
obligations. The Company seeks to control its credit risk through a
Year Ended September 30,
2017
2016
2015
$
$
47.3
8.7
(0.1)
(2.5)
53.4
$
$
41.8
9.7
0.8
(14.4)
37.9
$
$
78.6
7.5
3.2
(5.1)
84.2
variety of reporting and control procedures, including establishing
credit limits based upon a review of the counterparties’ financial
condition and credit ratings. The Company monitors collateral levels
on a daily basis for compliance with regulatory and internal guidelines
and requests changes in collateral levels as appropriate.
The Company is a party to financial instruments in the normal course
of its business through customer and proprietary trading accounts in
exchange-traded and OTC derivative instruments. These instruments
are primarily the execution of orders for commodity futures, options
on futures and forward foreign currency contracts on behalf of its
customers, substantially all of which are transacted on a margin basis.
Such transactions may expose the Company to significant credit risk
in the event margin requirements are not sufficient to fully cover
losses which customers may incur. The Company controls the risks
associated with these transactions by requiring customers to maintain
margin deposits in compliance with individual exchange regulations
and internal guidelines. The Company monitors required margin
levels daily and, therefore, may require customers to deposit additional
collateral or reduce positions when necessary. The Company also
78
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
establishes credit limits for customers, which are monitored daily.
The Company evaluates each customer’s creditworthiness on a case
by case basis. Clearing, financing, and settlement activities may
require the Company to maintain funds with or pledge securities as
collateral with other financial institutions. Generally, these exposures
to both customers and counterparties are subject to master netting, or
customer agreements, which reduce the exposure to the Company by
permitting receivables and payables with such customers to be offset
in the event of a customer default. Management believes that the
margin deposits held as of September 30, 2017 and September 30,
2016 were adequate to minimize the risk of material loss that could
be created by positions held at that time. Additionally, the Company
monitors collateral fair value on a daily basis and adjusts collateral
levels in the event of excess market exposure.
Derivative financial instruments involve varying degrees of off-balance
sheet market risk whereby changes in the fair values of underlying
financial instruments may result in changes in the fair value of
the financial instruments in excess of the amounts reflected in the
consolidated balance sheets. Exposure to market risk is influenced by
a number of factors, including the relationships between the financial
instruments and the Company’s positions, as well as the volatility
and liquidity in the markets in which the financial instruments
are traded. The principal risk components of financial instruments
include, among other things, interest rate volatility, the duration
of the underlying instruments and changes in commodity pricing
and foreign exchange rates. The Company attempts to manage its
exposure to market risk through various techniques. Aggregate market
limits have been established and market risk measures are routinely
monitored against these limits.
NOTE 6 Allowance for Doubtful Accounts
Deposits with and receivables from broker-dealers, clearing
organizations, and counterparties, net, receivables from customers,
net, and notes receivable, net include an allowance for doubtful
accounts, which reflects the Company’s best estimate of probable
losses inherent in the accounts. The Company provides for an
allowance for doubtful accounts based on a specific-identification
basis. The Company continually reviews its allowance for doubtful
accounts. The allowance for doubtful accounts related to deposits
with and receivables from broker-dealers, clearing organizations, and
counterparties was $47.0 million and zero as of September 30, 2017
and 2016, respectively. The allowance for doubtful accounts related
to receivables from customers was $7.6 million and $9.5 million as
of September 30, 2017 and 2016, respectively. The allowance for
doubtful accounts related to notes receivable was zero and $0.2 million
as of September 30, 2017 and 2016, respectively.
During the year ended September 30, 2017, the Company recorded bad
debt expense related to customers, net of recoveries, of $4.3 million,
including provision increases of $4.2 million, direct write-offs of
$0.1 million. The increase in bad debts during fiscal 2017 primarily
related to $3.8 million of customer deficits in the Commercial Hedging
segment, primarily related to account deficits from South Korean and
Dubai commercial LME customers, $0.2 million of uncollectible
customer receivables in the Physical Commodities segment, and
$0.3 million of uncollectible customer receivables in the Clearing
and Execution segment, primarily related to our derivatives voice
brokerage business.
During the fourth quarter of fiscal 2017, the Company recorded
a charge to earnings of $47.0 million, to record an allowance for
doubtful accounts related to a bad debt incurred in the physical coal
business conducted solely in INTL Asia Pte. Ltd., with a coal supplier,
as further discussed in Note 2.
During the year ended September 30, 2016, the Company recorded bad
debt expense related to customers, net of recoveries, of $4.4 million,
including provision increases of $4.2 million and direct write-offs
of $0.4 million, offset by recoveries of $0.2 million. The increase
in bad debts during fiscal 2016 primarily related to $3.6 million of
customer deficits in the Commercial Hedging segment, $0.4 million
of uncollectible customer receivables in the Physical Commodities
segment, and $0.4 million of uncollectible service fees and notes in
the Securities segment.
During the year ended September 30, 2015, the Company recorded bad
debt expense related to customers, net of recoveries, of $7.3 million,
including provision increases of $6.6 million and direct write-offs of
$0.7 million, offset by minimal recoveries. The increase in bad debts
during fiscal 2015 related to$2.8 million of receivables from a renewable
fuels customer in the Physical Commodities segment, $2.3 million of
OTC customer deficits and $0.6 million of LME customer deficits
in the Commercial Hedging segment, $0.5 million of uncollectible
service fees and notes in our Securities segment, and $1.1 million of
notes receivable related to loans pertaining to a former acquisition.
Activity in the allowance for doubtful accounts for the years ended September 30, 2017, 2016, and 2015 was as follows:
(in millions)
Balance, beginning of year
Provision for bad debts
Charge-offs
Balance, end of year
2017
2016
2015
$
$
9.7
51.0
(6.1)
54.6
$
$
11.2
4.2
(5.7)
9.7
$
$
5.8
6.0
(0.6)
11.2
79
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
The Company originates short-term notes receivable from customers
with the outstanding balances typically being insured 90% to 98%
by a third party, including accrued interest, subject to applicable
deductible amounts. The total balance outstanding under insured
notes receivable was $2.1 million and $5.0 million as of September 30,
2017 and 2016, respectively. The Company has sold $2.1 million and
$4.6 million of the insured portion of the notes through non-recourse
participation agreements with other third parties as of September 30,
2017 and 2016, respectively. The Company has completed its exit
of the majority of this activity during the year ended September 30,
2017. The Company believes the run-off of the remaining activity
will have a minimal impact on the Company.
See discussion of notes receivable related to commodity repurchase
agreements in Note 14.
NOTE 7 Physical Commodities Inventory
The Company’s inventories consist of finished physical commodities. Inventories by component of the Company’s Physical Commodities
segment are shown below.
(in millions)
Physical Ag & Energy(1)
Precious metals - held by broker-dealer subsidiary(2)
Precious metals - held by non-broker-dealer subsidiaries(3)
Physical commodities inventory
(1) Physical Ag & Energy maintains agricultural commodity inventories, including corn, soybeans, wheat, dried distillers grain, canola, sorghum, coffee and others. The agricultural
commodity inventories are carried at net realizable value, which approximates fair value less disposal costs, with changes in net realizable value included as a component of ‘cost of
sales of physical commodities’ on the consolidated income statement. The agricultural inventories have reliable, readily determinable and realizable market prices, have relatively
insignificant costs of disposal and are available for immediate delivery. Physical Ag & Energy also maintains energy inventory, primarily coal, kerosene, and propane which are
valued at the lower of cost or market.
65.1
13.3
46.4
124.8
65.9
5.3
52.6
123.8
$
$
$
$
September 30, 2017
September 30, 2016
(2) Precious metals held by the Company’s subsidiary, INTL FCStone Ltd, a United Kingdom based broker-dealer subsidiary, is measured at fair value, with changes in fair value
included as a component of ‘trading gains, net’ on the consolidated income statement, in accordance with U.S. GAAP accounting requirements for broker-dealers.
(3) Precious metals inventory held by subsidiaries that are not broker-dealers are valued at the lower of cost or market value.
The Company has recorded lower of cost or market (“LCM”) adjustments for certain precious metals inventory of $0.7 million and $0.6 million
as of September 30, 2017 and 2016, respectively. The adjustments are included in ‘cost of sales of physical commodities’ in the consolidated
income statements.
NOTE 8 Property and Equipment, net
Property and equipment are stated at cost, and reported net of accumulated depreciation on the consolidated balance sheets. Depreciation on
property and equipment is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of
property and equipment range from 3 to 10 years. During the fiscal years ended September 30, 2017, 2016, and 2015, depreciation expense
was $7.0 million, $6.6 million and $5.7 million, respectively.
A summary of property and equipment, at cost less accumulated depreciation as of September 30, 2017 and 2016 is as follows:
September 30, 2017
September 30, 2016
$
$
7.2
25.3
22.6
15.4
70.5
(31.8)
38.7
$
$
6.8
22.8
20.6
11.9
62.1
(32.7)
29.4
(in millions)
Property and equipment:
Furniture and fixtures
Software
Equipment
Leasehold improvements
Total property and equipment
Less accumulated depreciation
Property and equipment, net
80
- Form 10-K
NOTE 9 Goodwill
Goodwill allocated to the Company’s operating segments as of September 30, 2017 and 2016 is as follows:
PART II
ITEM 8 Financial Statements and Supplementary Data
(in millions)
Commercial Hedging
Global Payments
Physical Commodities
Securities
Goodwill
NOTE 10 Intangible Assets
September 30, 2017
September 30, 2016
$
$
30.7
6.3
2.4
7.7
47.1
$
$
30.7
6.3
2.4
8.1
47.5
During the year ended September 30, 2017, the Company recorded additional customer base intangible assets of $6.0 million as part of the
ICAP acquisition. See Note 19 - Acquisitions for additional discussion.
The gross and net carrying values of intangible assets as of the balance sheet dates, by major intangible asset class are as follows (in millions):
Intangible assets subject to amortization:
Trade name
Software programs/platforms
Customer base
Total intangible assets
September 30, 2017
Accumulated
Amortization
Gross
Amount
Net
Amount
Gross
Amount
September 30, 2016
Accumulated
Amortization
Net
Amount
$
$
— $
2.7
20.0
22.7 $
— $
(2.5)
(7.9)
(10.4)
$
— $
0.2
12.1
12.3 $
1.1 $
2.7
14.0
17.8 $
(0.6)
(2.4)
(5.7)
(8.7)
$
$
0.5
0.3
8.3
9.1
Amortization expense related to intangible assets was $2.8 million, $1.6 million, and $1.5 million for the fiscal years ended September 30,
2017, 2016, and 2015, respectively. The estimated future amortization expense as of September 30, 2017 is as follows (in millions):
Year ending September 30,
2018
2019
2020
2021
2022 and thereafter
$
$
2.2
2.2
2.0
1.9
4.0
12.3
81
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
NOTE 11 Credit Facilities
Variable-Rate Credit Facilities
The Company has four committed credit facilities under which the
Company and its subsidiaries may borrow up to $532.0 million,
subject to the terms and conditions for these facilities. The amounts
outstanding under these credit facilities are short term borrowings
and carry variable rates of interest, thus approximating fair value. The
Company’s credit facilities are as follows:
•• A three-year syndicated committed loan facility under which
$262.0 million is available to the Company for general working
capital requirements. The line of credit is secured by a pledge of
shares held in certain of the Company’s subsidiaries. Unused portions
of the loan facility require a commitment fee of 0.625% on the
unused commitment. Borrowings under the facility bear interest
at the Eurodollar Rate, as defined, plus 3.00% or the Base Rate, as
defined, plus 2.00%, and averaged 4.20% as of September 30, 2017.
The agreement contains financial covenants related to consolidated
tangible net worth, consolidated funded debt to net worth ratio,
consolidated fixed charge coverage ratio and consolidated net
unencumbered liquid assets, as defined. The agreement also contains
a non-financial covenant related to the allowable annual consolidated
capital expenditures permitted under the agreement.
On November 30, 2017, the Company amended the loan facility
to increase the allowable annual consolidated capital expenditures
from $15.0 million to $17.5 million. The agreement also amended
the definition of consolidated EBITDA for the purposes of the
consolidated fixed charge coverage ratio. This amendment allowed
the Company to add back a portion of the bad debt on physical coal
discussed in Note 2 in calculating consolidated EBITDA. Under the
terms of the agreement, the amendment was deemed effective as of
September 30, 2017. As a result of this amendment, the Company
was in compliance with all covenants under the loan facility as of
September 30, 2017.
•• An unsecured syndicated committed line of credit under which
$75.0 million is available to the Company’s subsidiary, INTL FCStone
Financial to provide short term funding of margin to commodity
exchanges as necessary. This line of credit is subject to annual review,
and the continued availability of this line of credit is subject to
INTL FCStone Financial’s financial condition and operating results
continuing to be satisfactory as set forth in the agreement. Unused
portions of the margin line require a commitment fee of 0.50% on
the unused commitment. Borrowings under the margin line are on
a demand basis and bear interest at the Base Rate, as defined, plus
2.00%, which was 6.25% as of September 30, 2017. The agreement
contains financial covenants related to INTL FCStone Financial’s
tangible net worth, excess net capital and maximum net loss over a
trailing twelve month period, as defined. INTL FCStone Financial
was in compliance with these covenants as of September 30, 2017.
The facility is guaranteed by the Company.
•• A syndicated committed borrowing facility under which
$170.0 million is available to the Company’s subsidiary, FCStone
Merchant Services, LLC (“FCStone Merchants”) for financing
traditional commodity financing arrangements and commodity
repurchase agreements. The facility is secured by the assets of FCStone
Merchants, and guaranteed by the Company. Unused portions of
82
the borrowing facility require a commitment fee of 0.50% on the
unused commitment. The borrowings outstanding under the facility
bear interest at a rate per annum equal to the Eurodollar Rate plus
Applicable Margin, as defined, or the Base Rate plus Applicable
Margin, as defined, which averaged 4.00% as of September 30,
2017. The agreement contains financial covenants related to tangible
net worth, as defined. FCStone Merchants was in compliance with
this covenant as of September 30, 2017. FCStone Merchants paid
minimal debt issuance costs in connection with this credit facility.
•• A syndicated committed borrowing facility under which $25.0 million
is available to the Company’s subsidiary, INTL FCStone Ltd for short
term funding of margin to commodity exchanges. The borrowings
outstanding under the facility bear interest at a rate per annum equal
to 2.50% plus the Federal Funds Rate, as defined. The agreement
contains financial covenants related to consolidated tangible net
worth, as defined. INTL FCStone Ltd was in compliance with
this covenant as of September 30, 2017. INTL FCStone Ltd paid
minimal debt issuance costs in connection with this credit facility.
The facility is guaranteed by the Company.
The Company also has a secured, uncommitted loan facility, under
which the Company’s wholly owned subsidiary, INTL FCStone Ltd
may borrow up to approximately $25.0 million, collateralized by
commodity warehouse receipts, to facilitate financing of commodities
under repurchase agreement services to its customers, subject to certain
terms and conditions of the credit agreement.
The Company also has a secured, uncommitted loan facility, under
which the Company’s wholly owned subsidiary, INTL FCStone
Financial may borrow up to $50.0 million, collateralized by commodity
warehouse receipts, to facilitate U.S. commodity exchange deliveries
of its customers, subject to certain terms and conditions of the credit
agreement. There were $23.0 million in borrowings outstanding
under this credit facility at September 30, 2017, and no borrowings
outstanding at September 30, 2016.
The Company also has a secured uncommitted loan facility under which
the Company’s wholly owned subsidiary, INTL FCStone Financial
may borrow for short term funding of firm and customer securities
margin requirements, subject to certain terms and conditions of the
agreement. The uncommitted amount available to be borrowed is
not specified, and all requests for borrowing are subject to the sole
discretion of the lender. The facility bears interest at a rate per annum
equal to such rate in respect of such day as determined by the bank
in its sole discretion. In the event that the Company fails to pay the
principal and interest on the scheduled due date, the facilities bear
penalty interest at a rate equal to the Federal Funds rate plus 2%.
The amounts borrowed under the facilities are payable on demand.
As of September 30, 2017 and September 30, 2016, the Company
had no borrowings outstanding under this credit facility.
The Company also has a secured uncommitted loan facility under
which the Company’s wholly owned subsidiary, INTL FCStone
Financial may borrow up to $100.0 million for short term funding of
firm and customer securities margin requirements, subject to certain
terms and conditions of the agreement. The loans are payable on
demand and bear interest at a rate mutually agreed to with the lender.
The borrowings are secured by first liens on firm owned marketable
- Form 10-K part II
ITEM 8 Financial Statements and Supplementary Data
securities or customer owned securities which have been pledged to us
under a clearing arrangement. There were $11.0 million in borrowings
outstanding under this credit facility at September 30, 2017, and no
borrowings outstanding at September 30, 2016.
Note Payable to Bank
In April 2015, the Company obtained a $4.0 million loan from a
commercial bank, secured by equipment purchased with the proceeds.
The note is payable in monthly installments, ending in March 2020.
The note bears interest at a rate per annum equal to LIBOR plus 2.00%.
Senior Unsecured Notes
In July 2013, the Company completed an offering of $45.5 million
aggregate principal amount of the Company’s 8.5% Senior Notes due
2020 (the “Notes”). The net proceeds of the sale of the Notes were being
used for general corporate purposes. The Notes bore interest at a rate
of 8.5% per year (payable quarterly on January 30, April 30, July 30
and October 30 of each year). The Notes were scheduled to mature
on July 30, 2020. The Company could redeem the Notes, in whole
or in part, at any time on and after July 30, 2016, at a redemption
price equal to 100% of the principal amount redeemed plus accrued
and unpaid interest to, but not including, the redemption date. The
Company incurred debt issuance costs of $1.7 million in connection
with the issuance of the Notes, which were being amortized over the
term of the Notes.
On September 15, 2016, the Company provided notice, through
the trustee of the Notes, to the record holders of the Notes that the
Company would redeem the outstanding $45.5 million aggregate
principal amount of the Notes in full. On October 15, 2016, the
Company redeemed the Notes at a prices equal to 100% of the principal
amount redeemed plus accrued and unpaid interest to, but not
including, October 15, 2016. The remaining unamortized deferred
financing costs of $1.0 million were written off in connection with the
redemption of the Notes and are included in ‘interest expense’ in the
consolidated income statement for the year ended September 30, 2017.
The following table sets forth a listing of credit facilities, the current committed amounts, as of the report date, on the facilities, and outstanding
borrowings on the facilities as well as indebtedness on a promissory note and on senior notes as of September 30, 2017 and 2016:
CREDIT FACILITIES
(in millions)
Borrower
Security
renewal/
Expiration Date
total
Commitment
September 30,
2017
September 30,
2016
amounts Outstanding
COMMITTED CREDIT FACILITIES
INTL FCStone Inc.
INTL FCStone Financial, Inc.
FCStone Merchants Services, LLC Certain commodities assets
INTL FCStone Ltd.
Pledged shares of certain subsidiaries
None
None
March 18, 2019
April 5, 2018
May 1, 2018
November 7, 2018
$
$
262.0 $
75.0
170.0
25.0
532.0 $
150.0 $
—
44.2
—
194.2 $
UNCOMMITTED CREDIT FACILITIES
INTL FCStone Financial, Inc.
INTL FCStone Ltd.
Commodity warehouse receipts and
certain pledged securities
Commodity warehouse receipts
n/a
n/a
NOTE PAYABLE TO BANK
Monthly installments, due March 2020 and secured by certain equipment
SENIOR UNSECURED NOTES
8.50% senior notes, redeemed October 15, 2016
Total indebtedness
136.5
—
43.5
—
180.0
—
—
2.8
—
—
34.0
—
2.0
—
230.2 $
44.5
227.3
$
As reflected above, $245 million of the Company’s committed credit facilities are scheduled to expire during the fiscal year ended September 30,
2018. The Company intends to renew or replace these facilities as they expire, and based on the Company’s liquidity position and capital
structure, the Company believes it will be able to do so.
NOTE 12 Commitments and Contingencies
Legal Proceedings
Certain conditions may exist as of the date the financial statements
are issued, which may result in a loss to the Company but which
will only be resolved when one or more future events occur or fail
to occur. The Company assesses such contingent liabilities, and such
assessment inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against the
Company or unasserted claims that may result in such proceedings,
the Company’s legal counsel evaluates the perceived merits of any legal
proceedings or unasserted claims as well as the perceived merits of the
amount of relief sought or expected to be sought therein.
83
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
If the assessment of a contingency indicates that it is probable that a
material loss had been incurred at the date of the financial statements
and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potentially material loss contingency
is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability, together with
an estimate of the range of possible loss if determinable and material,
would be disclosed. Neither accrual nor disclosure is required for loss
contingencies that are deemed remote. The Company accrues legal
fees related to contingent liabilities as they are incurred.
In addition to the matters discussed below, from time to time and in
the ordinary course of business, the Company is involved in various
legal actions and proceedings, including tort claims, contractual
disputes, employment matters, workers’ compensation claims and
collections. The Company carries insurance that provides protection
against certain types of claims, up to the policy limits of the insurance.
As of September 30, 2017 and 2016, the consolidated balance sheets
include loss contingency accruals, recorded during and prior to these
fiscal years then ended, which are not material, individually or in
the aggregate, to the Company’s financial position or liquidity. In the
opinion of management, possible exposure from loss contingencies in
excess of the amounts accrued, and in addition to the possible losses
discussed below, is not material to the Company’s earnings, financial
position or liquidity.
The following is a summary of a significant legal matter involving
the Company:
Sentinel Litigation
Prior to the July 1, 2015 merger into INTL FCStone Financial, our
subsidiary, FCStone, LLC, had a portion of its excess segregated funds
invested with Sentinel Management Group Inc. (“Sentinel”), a registered
futures commission merchant (“FCM”) and an Illinois-based money
manager that provided cash management services to other FCMs.
In August 2007, Sentinel halted redemptions to customers and sold
certain of the assets it managed to an unaffiliated third party at a
significant discount. On August 17, 2007, subsequent to Sentinel’s sale
of certain assets, Sentinel filed for bankruptcy protection. In aggregate,
$15.5 million of FCStone, LLC’s $21.9 million in invested funds
were returned to it before and after Sentinel’s bankruptcy petition.
In August 2008, the bankruptcy trustee of Sentinel filed adversary
proceedings against FCStone, LLC, and a number of other FCMs
in the Bankruptcy Court for the Northern District of Illinois. The
case was subsequently reassigned to the U.S. District Court, for the
Northern District of Illinois. In the complaint, the trustee sought
avoidance of alleged transfers or withdrawals of funds received by
FCStone, LLC and other FCMs within 90 days prior to the filing of
the Sentinel bankruptcy petition, as well as avoidance of post-petition
distributions and disallowance of the proof of claim filed by FCStone,
LLC. The trustee sought recovery of pre- and post-petition transfers
totaling approximately $15.5 million.
The trial of this matter took place during October 2012. The trial
court entered a judgment against FCStone, LLC in January 2013. In
January 2013, the trial court entered an agreed order, staying execution
and enforcement, pending an appeal of the judgment. In March 2014,
the appeal court ruled in favor of FCStone, LLC. In April 2014, the
trustee filed a petition for rehearing of the appeal. In May 2014, the
84
U.S. Court of Appeals for the Seventh Circuit denied the petition.
The trustee did not file a writ for certiorari with the U.S. Supreme
Court during the time allotted to do so.
In February 2015, based on a new theory, the trustee filed a motion
for judgment against FCStone, LLC in the U.S. District Court, for
the Northern District of Illinois, seeking to claw back the post-petition
transfer of $14.5 million and to recover the funds held in reserve in
the name of FCStone, LLC. FCStone, LLC filed its opposition brief
and an associated motion for judgment in March 2015.
In March 2016, the U.S. District Court for the Northern District of
Illinois entered an order in favor of FCStone, LLC (now INTL FCStone
Financial Inc.) and against the trustee on the trustee’s post-petition
claim, in light of the Seventh Circuit’s opinion. The same court
previously ruled against INTL FCStone Financial and in favor of the
trustee with respect to the funds held in reserve accounts.
In April 2016, INTL FCStone Financial filed a notice of appeal to the
U.S. Court of Appeals for the Seventh Circuit relating to the portion
of the final judgment dated March 28, 2016 of the district court and
INTL FCStone Financial’s claim to funds in reserve accounts. In
April 2016, the trustee filed its notice of appeal from the March 28,
2016 final judgment of the district court. During April 2016, the
court consolidated the two appeals and directed the trustee to file an
opening brief. In June 2016, the trustee filed its appellate brief. In
August 2016, the Futures Industry Association, Inc. filed a voluntary
brief in support of INTL FCStone Financial’s cross-appeal.
Oral argument was heard in the Seventh Circuit on June 7, 2017.
On August 14, 2017, the Seventh Circuit ruled in favor of all of
INTL FCStone Financial’s arguments. The trustee petitioned the
Seventh Circuit for a rehearing on September 11, 2017, seeking
reconsideration of the court’s prior ruling. On October 2, 2017
that petition was denied. With the Seventh Circuit having issued a
mandate requiring the U.S. District Court for the Northern District
of Illinois to enter a judgment in favor of INTL FCStone Financial
on all counts on the issue of liability, INTL FCStone Financial filed
a motion in the District Court on October 13, 2017 for an order
directing the distribution of reserve funds in the approximate amount
of $2.0 million. This motion was argued in the District Court on
October 19, 2017, and the District Court directed the parties to
file proposed orders relating to the distribution of the reserve funds.
On October 24, 2017, INTL FCStone Financial Inc. submitted a
judgment order and an order directing the trustee to carry out the
requirements of the judgment. On October 24, 2017, the trustee filed
an objection to INTL FCStone Financial’s motion, and on November 8,
2017, INTL FCStone Financial filed its reply. The parties appeared
before the District Court on November 28, 2017 to address the
motions. INTL FCStone Financial requested immediate payment of
funds due based on the August 14, 2017 ruling in its favor, however the
trustee requested that the distribution of those reserve funds be held in
abeyance pending his final appeal to the United States Supreme Court.
The Company has determined that losses related to this matter are
neither probable nor reasonably possible. The Company believes the
case is without merit and intends to defend itself vigorously.
Our assessments are based on estimates and assumptions that
have been deemed reasonable by management, but that may later
prove to be incomplete or inaccurate, and unanticipated events
and circumstances may occur that might cause us to change those
estimates and assumptions.
- Form 10-K Contractual Commitments
Contingent Liabilities - Acquisition
Under the terms of the purchase agreement, the Company has a
contingent liability related to the acquisition in fiscal year 2015 further
discussed in Note 19. The Company has an obligation to pay additional
consideration if specific conditions and earnings targets are met by the
acquired business. The fair value of the additional consideration was
recognized as a contingent liability as of the acquisition date, and is
remeasured to its fair value each reporting period with changes in fair
value recorded in current earnings. The contingent liability for these
estimated additional purchase price considerations of $1.0 million
and $0.8 million are included in ‘accounts payable and other accrued
liabilities’ in the consolidated balance sheets as of September 30, 2017
and 2016, respectively. The change in fair value during the years ended
September 30, 2017, 2016, and 2015 were increases of $0.2 million,
part II
ITEM 8 Financial Statements and Supplementary Data
$0.4 million and $1.8 million, respectively, and are included in ‘other’
in the consolidated income statements. The estimated total purchase
price, including contingent consideration, is $27.5 million as of
September 30, 2017, of which $1.0 million remains outstanding.
Operating Leases
The Company is obligated under various noncancelable operating leases
for the rental of office facilities, automobiles, service obligations and
certain office equipment, and accounts for these lease obligations on
a straight line basis. The expense associated with operating leases was
$11.3 million, $9.9 million and $10.1 million, for fiscal years ended
September 30, 2017, 2016, and 2015, respectively. The expenses
associated with the operating leases and service obligations are reported
in the consolidated income statements in ‘occupancy and equipment
rental’, ‘transaction-based clearing expenses’ and ‘other’ expenses.
Future aggregate minimum lease payments under noncancelable operating leases as of September 30, 2017 are as follows:
(in millions)
Year ending September 30,
2018
2019
2020
2021
2022
Thereafter
$
$
8.9
8.3
7.7
6.7
4.7
10.1
46.4
Purchase Commitments
The Company determines an estimate of contractual purchase
commitments in the ordinary course of business primarily for the
purchase of precious metals and agricultural and energy commodities.
Unpriced contract commitments have been estimated using
September 30, 2017 fair values. The purchase commitments and
other obligations as of September 30, 2017 for less than one year, one
to three years and three to five years were $675.7 million, $1.8 million
and $2.1 million, respectively. There were $1.7 million in purchase
commitments and other obligations after five years as of September 30,
2017. The purchase commitments for less than one year will be
partially offset by corresponding sales commitments of $583.5 million.
Exchange Member Guarantees
The Company is a member of various exchanges that trade and clear
futures and option contracts. In connection with the Sterne acquisition,
the Company is also a member of and provides guarantees to securities
clearinghouses and exchanges in connection with customer trading
activities. Associated with its memberships, the Company may be
required to pay a proportionate share of the financial obligations of
another member who may default on its obligations to the exchanges.
While the rules governing different exchange memberships vary, in
general the Company’s guarantee obligations would arise only if the
exchange had previously exhausted its resources. In addition, any
such guarantee obligation would be apportioned among the other
non-defaulting members of the exchange. Any potential contingent
liability under these arrangements is not quantifiable and could exceed
the cash and securities it has posted to the clearinghouse as collateral.
The Company has not recorded any contingent liability in the
consolidated financial statements for these agreements and believes that
any potential requirement to make payments under these agreements
is remote.
Self-Insurance
The Company self-insures its costs related to medical and dental claims.
The Company is self-insured, up to a stop loss amount, for eligible
participating employees and retirees, and for qualified dependent
medical and dental claims, subject to deductibles and limitations.
Liabilities are recognized based on claims filed and an estimate of
claims incurred but not reported. The Company has purchased
stop-loss coverage to limit its exposure on a per claim basis and in
aggregate in the event that aggregated actual claims would exceed
120% of actuarially estimated claims. The Company is insured for
covered costs in excess of these limits. Although the ultimate outcome
of these matters may exceed the amounts recorded and additional losses
may be incurred, the Company does not believe that any additional
potential exposure for such liabilities will have a material adverse
effect on the Company’s consolidated financial position or results of
operations. As of September 30, 2017 and 2016, the Company had
$0.8 million and $1.0 million, respectively, accrued for self-insured
medical and dental claims included in ‘accounts payable and other
liabilities’ in the consolidated balance sheets.
85
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
NOTE 13 Regulatory Requirements and Subsidiary Dividend Restrictions
The Company’s subsidiary INTL FCStone Financial is registered as
a broker dealer and member of the Financial Industry Regulatory
Authority (“FINRA”) subject to the SEC Uniform Net Capital
Rule 15c3-1, which requires the maintenance of minimum net capital.
INTL FCStone Financial is also a commodity futures commission
merchant registered with the CFTC and subject to the net capital
requirements of the CFTC Regulation 1.17. Under the more restrictive
of these rules, INTL FCStone Financial is required to maintain
“adjusted net capital”, equivalent to the greater of $1,000,000 or
8 percent of customer and noncustomer risk maintenance margin
requirements on all positions, as defined in such rules, regulations,
and requirements. Net capital and the related net capital requirement
may fluctuate on a daily basis. INTL FCStone Financial also has
restriction on dividends, which restricts the withdrawal of equity
capital if the planned withdrawal would reduce net capital, subsequent
to haircuts and charges, to an amount less than 120% of the greatest
minimum requirement.
INTL FCStone Financial as a registered securities carrying broker
dealer is also subject to Rule 15c3-3 of the Securities Exchange Act
of 1934, which requires the Company to maintain separate accounts
for the benefit of securities customers and proprietary accounts of
broker dealers (“PABs”). These customer protection rules requires
the Company to maintain special reserve bank accounts (“SRBAs”)
for the exclusive benefit of securities customers and PABs.
Pursuant to the requirements of the Commodity Exchange Act, funds
deposited by customers of INTL FCStone Financial relating to their
trading of futures and options on futures on a U.S. commodities
exchange must be carried in separate accounts which are designated as
segregated customers’ accounts. Pursuant to the requirements of the
CFTC, funds deposited by customers of INTL FCStone Financial
relating to their trading of futures and options on futures traded on,
or subject to the rules of, a foreign board of trade must be carried
in separate accounts in an amount sufficient to satisfy all of INTL
FCStone Financial’s current obligations to customers trading foreign
futures and foreign options on foreign commodity exchanges or boards
of trade, which are designated as secured customers’ accounts. See
below for additional information regarding INTL FCStone Financial’s
calculation of segregated and secured customer funds.
The Company’s 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.
The Company’s subsidiary INTL FCStone Ltd is regulated by the
Financial Conduct Authority (“FCA”), the regulator of the financial
services industry in the United Kingdom, as a Financial Services Firm
under part IV of the Financial Services and Markets Act 2000. The
regulations impose regulatory capital, as well as conduct of business,
governance, and other requirements. The conduct of business rules
include those that govern the treatment of customer money and
other assets which under certain circumstances for certain classes of
customer must be segregated from the firm’s own assets.
The Company’s subsidiary INTL FCStone Pty Ltd is regulated by
the Australian Securities and Investment Commission and is subject
to a net tangible asset capital requirement.
FCStone Commodity Services (Europe), Ltd. is domiciled in Ireland
and subject to regulation by the Central Bank of Ireland, and is subject
to a net capital requirement.
INTL FCStone DTVM Ltda. (“INTL FCStone DTVM”) is a
registered broker-dealer and regulated by the Brazilian Central Bank
and Securities and Exchange Commission of Brazil, and is subject to
a capital adequacy requirement.
All subsidiaries of the Company are in compliance with all of their regulatory requirements as of September 30, 2017, as follows:
regulatory authority
(in millions)
Subsidiary
SEC and CFTC
INTL FCStone Financial Inc.
CFTC
INTL FCStone Financial Inc.
CFTC
INTL FCStone Financial Inc.
SEC
INTL FCStone Financial Inc.
INTL FCStone Financial Inc.
SEC
INTL Custody & Clearing Solutions Inc. SEC
SEC
SA Stone Wealth Management Inc.
FCA (United Kingdom)
INTL FCStone Ltd
FCA (United Kingdom)
INTL FCStone Ltd
FCA (United Kingdom)
INTL Netherlands BV
Brazilian Central Bank and Securities and
Exchange Commission of Brazil
National Securities Commission (“CNV”)
CNV
CNV
CNV
INTL FCStone DTVM Ltda.
INTL Gainvest S.A.
INTL Gainvest S.A.
INTL CIBSA S.A.
INTL CIBSA S.A.
as of September 30, 2017
requirement type
actual
Net capital
Segregated funds
Secured funds
Customer reserve
PAB reserve
Net capital
Net capital
Net capital
Segregated funds
Net capital
Capital adequacy
Capital adequacy
Net capital
Capital adequacy
Net capital
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
157.1 $
2,248.0 $
165.1 $
7.2 $
13.5 $
1.5 $
4.9 $
158.7 $
107.1 $
158.0 $
13.0 $
5.1 $
0.4 $
7.6 $
1.4 $
Minimum
requirement
74.0
2,195.7
148.7
—
0.2
0.1
0.3
88.3
106.6
88.3
0.5
0.2
0.1
0.9
0.5
Certain other non-U.S. subsidiaries of the Company are also subject to capital adequacy requirements promulgated by authorities of the
countries in which they operate. As of September 30, 2017, these subsidiaries were in compliance with their local capital adequacy requirements.
86
- Form 10-K part II
ITEM 8 Financial Statements and Supplementary Data
NOTE 14 Securities and Commodity Financing Transactions
The Company’s outstanding notes receivable in connection with
repurchase agreements for agricultural and energy commodities, whereby
the customers sell to the Company certain commodity inventory and
agree to repurchase the commodity inventory at a future date at a fixed
price were $0.8 million and $1.5 million as of September 30, 2017
and 2016, respectively.
The Company enters into securities purchased under agreements
to resell, securities sold under agreements to repurchase, securities
borrowed and securities loaned transactions to, among other things,
finance financial instruments, acquire securities to cover short positions,
acquire securities for settlement, and to accommodate counterparties’
needs. These agreements are recorded as collateralized financings at
their contractual amounts plus accrued interest. The related interest is
recorded in the consolidated income statements as interest income or
interest expense, as applicable. In connection with these agreements
and transactions, it is the policy of the Company to receive or pledge
cash or securities to adequately collateralize such agreements and
transactions in accordance with general industry guidelines and
practices. The value of the collateral is valued daily and the Company
may require counterparties to deposit additional collateral or return
collateral pledged, when appropriate. The carrying amounts of these
agreements and transactions approximate fair value due to their
short-term nature and the level of collateralization.
The Company pledges financial instruments owned to collateralize
repurchase agreements. At September 30, 2017, financial instruments
owned, at fair value of $19.4 million were pledged as collateral under
repurchase agreements. The counterparty has the right to repledge
the collateral in connection with these transactions. These financial
instruments owned have been pledged as collateral and have been
parenthetically disclosed on the consolidated balance sheet.
The Company also has repledged securities borrowed and securities
held on behalf of correspondent brokers to collateralize securities
loaned agreements with a fair value of $108.4 million.
In addition, as of September 30, 2017, the Company pledged financial
instruments owned, at fair value of $1,406.6 million as collateral for
tri-party repurchase agreements. For these securities, the counterparties
do not have the right to sell or repledge the collateral.
At September 30, 2017, the Company has accepted collateral that it is
permitted by contract to sell or repledge. This collateral consists primarily
of securities received in reverse repurchase agreements, securities borrowed
agreements, and margin securities held on behalf of correspondent
brokers. The fair value of such collateral at September 30, 2017, was
$631.7 million of which $306.9 million was used to cover securities
sold short which are recorded in financial instruments sold, not yet
purchased on the consolidated balance sheet. In the normal course
of business, this collateral is used by the Company to cover financial
instruments sold, not yet purchased, to obtain financing in the form
of repurchase agreements, and to meet counterparties’ needs under
lending arrangements. At September 30, 2017, substantially all of the
above collateral had been delivered against financial instruments sold,
not yet purchased or repledged by the Company to obtain financing.
The following table provides the contractual maturities of gross obligations under repurchase and securities lending agreements as of September 30,
2017 (in millions):
Securities sold under agreements to repurchase
Securities loaned
Gross amount of secured financing
$
$
640.2 $
111.1
751.3 $
432.9 $
—
432.9 $
320.0 $
—
320.0 $
Overnight and
Open
Less than
30 Days
30-90 Days
Over
90 Days
— $
—
— $
total
1,393.1
111.1
1,504.2
The following table provides the underlying collateral types of the gross obligations under repurchase and securities lending agreements as of
September 30, 2017 (in millions):
Securities sold under agreements to repurchase:
U.S. Treasury obligations
U.S. government agency obligations
Asset-backed obligations
Agency mortgage-backed obligations
Total securities sold under agreements
to repurchase
Securities loaned:
Common stock
Total securities loaned
Gross amount of secured financing
$
$
$
7.0
332.6
36.4
1,017.1
1,393.1
111.1
111.1
1,504.2
87
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
NOTE 15 Share-Based Compensation
Share-based compensation expense is included in ‘compensation and benefits’ in the consolidated income statements and totaled $6.3 million,
$5.1 million and $3.6 million for the fiscal years ended September 30, 2017, 2016, and 2015, respectively.
Stock Option Plans
The Company sponsors a stock option plan for its directors, officers, employees and consultants. The 2013 Stock Option Plan, which was
approved by the Company’s Board of Directors and shareholders, authorizes the Company to issue stock options covering up to 1.0 million
shares of the Company’s common stock. As of September 30, 2017, there were 0.7 million shares authorized for future grant under this plan.
Awards that expire or are canceled generally become available for issuance again under the plan. The Company settles stock option exercises
with newly issued shares of common stock.
Fair value is estimated at the grant date based on a Black-Scholes-Merton option-pricing model using the following weighted-average assumptions:
Expected stock price volatility
Expected dividend yield
Risk free interest rate
Average expected life (in years)
Year Ended September 30,
2016
2015
2017
31%
—%
0.99%
3.08
28%
—%
0.83%
3.06
28%
—%
0.66%
3.22
Expected stock price volatility rates are primarily based on the historical
volatility. The Company has not paid dividends in the past and does
not currently expect to do so in the future. Risk free interest rates
are based on the U.S. Treasury yield curve in effect at the time of
grant for periods corresponding with the expected life of the option
or award. The average expected life represents the estimated period of
time that options or awards granted are expected to be outstanding,
based on the Company’s historical share option exercise experience
for similar option grants. The weighted average fair value of options
issued during fiscal years ended September 30, 2017, 2016, and 2015
was $8.67, $6.40 and $4.31, respectively.
The following is a summary of stock option activity for the year ended September 30, 2017:
Balances at September 30, 2016
Granted
Exercised
Forfeited
Expired
Balances at September 30, 2017
Exercisable at September 30, 2017
Shares
available
for Grant
754,163
(110,000)
8,331
652,494
Number of
Options
Outstanding
1,215,821
110,000
(155,588)
(106,996)
(181,834)
881,403
222,116
Weighted
average
Exercise price
29.55
$
38.77
$
22.54
$
26.15
$
54.02
$
27.31
$
24.42
$
Weighted average
Grant Date
Fair Value
Weighted average
remaining term
(in years)
aggregate
Intrinsic Value
($ millions)
$
$
$
$
$
$
$
12.88
8.67
9.05
13.20
19.93
11.55
10.43
3.80 $
14.1
3.57 $
2.52 $
9.8
3.1
The total compensation cost not yet recognized for non-vested awards of $3.9 million as of September 30, 2017 has a weighted-average period
of 3.92 years over which the compensation expense is expected to be recognized. The total intrinsic value of options exercised during fiscal
years 2017, 2016 and 2015 was $2.6 million, $1.9 million and $3.6 million, respectively.
The options outstanding as of September 30, 2017 broken down by exercise price are as follows:
Exercise price
$
$
$
$
$
$
$
$
$
$
$
—
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
88
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
$
$
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
55.00
Number of Options
Outstanding
Weighted average
Exercise price
Weighted average
remaining term
(in years)
—
—
—
22,414 $
97,911 $
580,000 $
73,578 $
107,500 $
—
—
—
881,403 $
n/a
n/a
n/a
19.24
21.77
25.91
31.37
38.77
n/a
n/a
n/a
27.31
n/a
n/a
n/a
0.30
0.84
4.37
2.28
3.27
n/a
n/a
n/a
3.57
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
Restricted Stock Plan
The Company sponsors a restricted stock plan for its directors, officers
and employees. The Company’s 2017 restricted stock plan, which was
approved by the Company’s Board of Directors and shareholders,
authorizes up to 1.5 million shares to be issued. As of September 30,
2017, 1.5 million shares were authorized for future grant under the
restricted stock plan. Awards that expire or are canceled generally
become available for issuance again under the plan. The Company
utilizes newly issued shares of common stock to make restricted
stock grants.
The following is a summary of restricted stock activity through September 30, 2017:
Balances at September 30, 2016
Additional shares authorized by shareholders
Termination of 2012 plan
Granted
Vested
Forfeited
Balances at September 30, 2017
Shares
available
for Grant
747,782
1,500,000
(640,539)
(147,726)
459
1,459,976
Number
of Shares
Outstanding
357,752
147,726
(150,545)
(459)
354,474
Weighted average
Grant Date
Fair Value
Weighted average
remaining term
(in years)
aggregate
Intrinsic Value
($ millions)
$
$
$
$
$
27.39
1.39
$
13.9
40.98
26.69
37.31
33.34
1.26
$
13.6
The total compensation cost not yet recognized of $8.2 million as of September 30, 2017 has a weighted-average period of 1.26 years over
which the compensation expense is expected to be recognized. Compensation expense is amortized on a straight-line basis over the vesting
period. Restricted stock grants are included in the Company’s total issued and outstanding common shares.
NOTE 16 Retirement Plans
Defined Benefit Retirement Plans
Defined Contribution Retirement Plans
The Company offers participation in the INTL FCStone Inc. 401(k)
Plan (“401(k) Plan”), a defined contribution plan providing retirement
benefits, to all domestic employees who have reached 21 years of age,
and provided four months of service to the Company. Employees
may contribute from 1% to 80% of their annual compensation
to the 401(k) Plan, limited to a maximum annual amount as set
periodically by the Internal Revenue Service. The Company makes
matching contributions to the 401(k) Plan in an amount equal to
62.5% of each participant’s eligible elective deferral contribution to
the 401(k) Plan, up to 8% of employee compensation. Matching
contributions vest, by participant, based on the following years of
service schedule: less than two years – none, after two years – 33%,
after three years – 66%, and after four years – 100%.
U.K. based employees of INTL FCStone are eligible to participate
in a defined contribution pension plan. The Company contributes
double the employee’s contribution up to 10% of total base salary
for this plan. For this plan, employees are 100% vested in both the
employee and employer contributions at all times.
For fiscal years ended September 30, 2017, 2016, and 2015, the
Company’s contribution to these defined contribution plans were
$6.1 million, $5.3 million and $5.1 million, respectively.
The Company has a frozen defined benefit pension plan (the “Plan”)
and recognizes its funded status, measured as the difference between
the fair value of the plan assets and the projected benefit obligation,
in “accounts payable and other accrued liabilities” in the consolidated
balance sheets. Plan assets, which are managed in a third-party trust,
primarily consist of a diversified blend of approximately 80% debt
securities and 20% equity investments and had a total fair value
of $36.4 million and $33.7 million as of September 30, 2017 and
2016, respectively. All plan assets fall within Level 2 of the fair value
hierarchy. The benefit obligation associated with the Plan will vary
over time only as a result of changes in market interest rates, the life
expectancy of the plan participants, and benefit payments, since the
accrual of benefits was suspended when the Plan was frozen in 2006.
The benefit obligation was $36.5 million and $38.5 million and the
discount rate assumption used in the measurement of this obligation
was 3.75% and 3.60% as of September 30, 2017 and 2016, respectively.
The Company’s unfunded pension obligation was $0.1 million and
$4.8 million as of September 30, 2017 and 2016, respectively.
The Company recognized a net periodic benefit $0.3 million for the
year ended September 30, 2017. The net periodic benefit cost associated
with the Plan was $0.2 million for the year ended September 30,
2016 and less than $0.1 million for the year ended September 30,
2015. The expected long-term return on plan assets assumption is
6.00% for 2017. The Company made contributions of $2.0 million
and $1.8 million to the Plan in the years ended September 30, 2017
and 2016, respectively. The Company complies with minimum
funding requirements. The estimated undiscounted future benefit
payments are expected to be $2.1 million in 2018, $2.1 million in
2019, $2.0 million in 2020, $2.0 million in 2021, $1.9 million in
2022 and $9.5 million in 2023 through 2027.
89
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
NOTE 17 Other Expenses
Other expenses for the years ended September 30, 2017, 2016, and 2015 are comprised of the following:
Year Ended September 30,
2016
2017
(in millions)
Contingent consideration, net(1)
Insurance
Advertising, meetings and conferences
Non-trading hardware and software maintenance and
software licensing
Office supplies and printing
Other clearing related expenses
Other non-income taxes
Other
Total other expenses
(1) Contingent consideration includes remeasurement of contingent liabilities related to business combinations accounted for in accordance with the provisions of the Business
7.1
1.1
1.3
4.3
8.0
29.4
11.6
2.1
2.6
4.6
9.8
37.5
4.7
1.2
1.1
3.7
6.6
23.5
1.8
1.7
2.7
0.1
2.7
4.0
0.4
2.1
5.1
$
$
$
2015
Combinations Topic of the ASC (see Note 4).
NOTE 18 Income Taxes
Income tax expense (benefit) for the years ended September 30, 2017, 2016, and 2015 was allocated as follows:
2017
Year Ended September 30,
2016
2015
(in millions)
Income tax expense attributable to income from operations
Taxes allocated to stockholders’ equity, related to unrealized losses on
available-for-sale securities
Taxes allocated to stockholders’ equity, related to pension liabilities
Taxes allocated to additional paid-in capital, related to share-based
compensation
Total income tax expense
$
$
8.8
$
—
1.0
0.1
9.9
$
18.0
$
—
0.2
(0.8)
17.4
The components of income tax expense (benefit) attributable to income from operations were as follows:
(in millions)
Current taxes:
U.S. federal
U.S. State and local
International
Total current taxes
Deferred taxes
Income tax benefit attributable to interest income
Income tax expense
Year Ended September 30,
2017
2016
$
$
$
$
0.7
1.2
16.7
18.6
(9.8)
— $
$
8.8
1.3
0.8
16.8
18.9
(0.8)
(0.1)
18.0
U.S. and international components of (loss) income from operations, before tax, was as follows:
(in millions)
U.S.
International
Income from operations, before tax
Year Ended September 30,
2017
2016
$
$
(13.9)
29.1
15.2
$
$
4.9
67.9
72.8
90
22.4
(0.4)
(0.8)
(0.5)
20.7
0.8
1.2
15.4
17.4
5.0
—
22.4
14.5
63.7
78.2
2015
2015
$
$
$
$
$
$
- Form 10-K
Items accounting for the difference between income taxes computed at the federal statutory rate and income tax expense were as follows:
part II
ITEM 8 Financial Statements and Supplementary Data
Federal statutory rate effect of:
U.S. State and local income taxes
Foreign earnings and losses taxed at lower rates
Change in foreign valuation allowance
Change in state valuation allowance
U.S. permanent items
Foreign permanent items
U.S. bargain purchase gain
Other reconciling items
Effective rate
Year Ended September 30,
2017
2016
2015
35.0%
(2.6)%
11.5%
(1.4)%
4.1%
3.6%
8.1%
—%
(0.6)%
57.7%
35.0%
1.3%
(11.0)%
(0.3)%
—%
0.8%
1.9%
(3.0)%
0.3%
25.0%
35.0%
1.8%
(11.1)%
(0.1)%
0.6%
0.5%
2.1%
—%
(0.1)%
28.7%
The components of deferred income tax assets and liabilities were as follows:
(in millions)
Deferred tax assets:
Share-based compensation
Pension liability
Deferred compensation
Foreign net operating loss carryforwards
U.S. State and local net operating loss carryforwards
U.S. federal net operating loss carryforwards
Intangible assets
Bad debt reserve
Tax credit carryforwards
Other compensation
Other
Total gross deferred tax assets
Less valuation allowance
Deferred tax assets
Deferred income tax liabilities:
Unrealized gain on securities
Prepaid expenses
Property and equipment
Deferred income tax liabilities
Deferred income taxes, net
September 30, 2017
September 30, 2016
$
$
3.7
0.1
2.0
5.6
6.6
21.9
6.1
1.4
1.6
3.6
1.9
54.5
(4.0)
50.5
3.2
2.5
2.2
7.9
42.6
$
$
4.3
1.9
2.0
2.0
4.9
12.4
8.3
1.6
1.4
3.3
1.8
43.9
(3.6)
40.3
1.3
1.9
2.6
5.8
34.5
Deferred income tax balances reflect the effects of temporary differences
between the carrying amounts of assets and liabilities and their tax
bases and are stated at enacted tax rates expected to be in effect when
taxes are actually paid or recovered.
As of September 30, 2017 and 2016, the Company has net operating
loss carryforwards for U.S. federal, state, local, and foreign income tax
purposes of $30.1 million and $15.7 million, net of valuation allowances,
respectively, which are available to offset future taxable income in these
jurisdictions. The U.S. federal net operating loss carryforward of
$21.9 million begins to expire after September 2033. The state and
local net operating loss carryforwards of $4.4 million, net of valuation
allowance, begin to expire after September 2020. The Company has
an Alternative Minimum Tax credit carryforward of $1.3 million,
which has an indefinite life, and an R&D credit carryforward of
$0.4 million that begins to expire after September 2031. INTL Asia
Pte. Ltd. has a net operating loss carryforward of $3.8 million. This
Singapore net operating loss has an indefinite carryforward and, in
the judgment of management, is more likely than not to be realized.
The valuation allowance for deferred tax assets as of September 30, 2017
was $4.0 million. The net change in the total valuation allowance for
the year ended September 30, 2017 was an increase of $0.4 million.
The valuation allowances as of September 30, 2017 and 2016 were
primarily related to U.S. state and local and foreign net operating loss
carryforwards that, in the judgment of management, are not more
likely than not to be realized. In assessing the realizability of deferred
tax assets, management considers whether it is more likely than not
that some or all of the deferred tax assets will not be realized.
The Company incurred U.S. federal, state, and local taxable income/
(losses) for the years ended September 30, 2017, 2016, and 2015 of
$(24.7) million, $(9.7) million, and $16.5 million, respectively. The
differences between actual levels of past taxable income (losses) and
pre-tax book income (losses) are primarily attributable to temporary
differences in these jurisdictions. When evaluating if U.S. federal,
state, and local deferred taxes are realizable, the Company considered
deferred tax liabilities of $4.9 million that are scheduled to reverse from
2018 to 2020 and $3.1 million of deferred tax liabilities associated
91
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
with unrealized gains in securities which the Company could sell,
if necessary. Furthermore, the Company considered its ability to
implement business and tax planning strategies that would allow
the remaining U.S. federal, state, and local deferred tax assets, net of
valuation allowances, to be realized within approximately 11 years. Based
on the tax planning strategies that can be implemented, management
believes that it is more likely than not that the Company will realize
the tax benefit of the deferred tax assets, net of the existing valuation
allowance, in the future.
The total amount of undistributed earnings in the Company’s
foreign subsidiaries, for income tax purposes, was $321.3 million
and $294.3 million as of September 30, 2017 and 2016, respectively. It
is the Company’s current intention to reinvest undistributed earnings
of its foreign subsidiaries in the foreign jurisdictions, resulting in
the indefinite postponement of the remittance of those earnings.
Accordingly, no provision has been made for foreign withholding
taxes or U.S. federal income taxes which may become payable if
undistributed earnings of foreign subsidiaries were paid as dividends
to the Company.
The Company recognizes the tax benefit from an uncertain tax
position only if it is more likely than not that the tax position will
be sustained on examination by the taxing authority, based upon the
technical merits of the position. The tax benefit recognized in the
consolidated financial statements from such a position is measured
based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
(in millions)
Balance, beginning of year
Gross increases for tax positions related to current year
Gross increases for tax positions related to prior years
Gross decreases for tax positions of prior years
Settlements
Lapse of statute of limitations
Balance, end of year
2017
Year Ended September 30,
2016
2015
0.1
$
—
—
—
—
—
$
0.1
— $
—
0.1
—
—
—
$
0.1
—
—
—
—
—
—
—
$
$
The Company has a minimal balance of unrecognized tax benefits as
of September 30, 2017, that, if recognized, would affect the effective
tax rate. While it is expected that the amount of unrecognized tax
benefits will change in the next twelve months, the Company does
not expect this change to have a material impact on the results of
operations or the financial position of the Company.
Accrued interest and penalties are included in the related tax liability
line in the consolidated balance sheets. The Company had no accrued
interest and penalties included in the consolidated balance sheets as
of September 30, 2017 and 2016.
The Company recognizes accrued interest and penalties related to
income taxes as a component of income tax expense. The Company
had no amount of interest, net of federal benefit, and penalties
recognized as a component of income tax expense during the years
ended September 30, 2017, 2016, and 2015.
The Company and its subsidiaries file income tax returns with
the U.S. federal jurisdiction and various U.S. state and local and
foreign jurisdictions. The Company has open tax years ranging from
September 30, 2010 through September 30, 2017 with U.S. federal
and state and local taxing authorities. In the U.K., the Company has
open tax years ending September 30, 2016 to September 30, 2017. In
Brazil, the Company has open tax years ranging from December 31,
2012 through December 31, 2016. In Argentina, the Company has
open tax years ranging from September 30, 2010 to September 30,
2017. In Singapore, the Company has open tax years ranging from
September 30, 2012 to September 30, 2017.
NOTE 19 Acquisitions
The Company’s consolidated financial statements include the operating
results of the acquired businesses from the dates of acquisition.
Acquisition in Fiscal 2017
ICAP’s EMEA Oils Broking Business
Effective October 1, 2016, the Company’s subsidiary, INTL FCStone
Ltd acquired the London-based EMEA oils business of ICAP Plc.
The business included more than 30 front office employees across
the fuel, crude, middle distillates, futures and options desks that
have relationships with more than 200 commercial and institutional
customers throughout Europe, the Middle East and Africa. The terms of
the agreement included cash consideration of $6.0 million paid directly
to ICAP as well as incentive amounts payable to employees acquired
92
based upon their continued employment. The cash consideration paid
to ICAP was dependent upon the number of brokers who accepted
INTL FCStone Ltd’s employment offer. The transaction was accounted
for as an asset acquisition in accordance with FASB ASC 805-50 and
FASB ASC 350. The cash consideration paid was allocated entirely to
the intangible asset recognized related to the customer base acquired.
The intangible asset was assigned to the Clearing and Execution
Services segment and will be amortized over a useful life of 5 years.
Acquisition in Fiscal 2016
Sterne Agee
Effective July 1, 2016, the Company acquired all of the equity
interests of Sterne Agee, LLC’s (a wholly-owned subsidiary of Stifel
- Form 10-K
Financial Corp.) legacy independent brokerage and clearing businesses,
Sterne Agee & Leach, Inc.; Sterne Agee Clearing, Inc.; Sterne Agee
Financial Services, Inc. Effective August 1, 2016, the Company
acquired all of the equity interests of Sterne Agee, LLC’s legacy
Registered Investment Advisor (“RIA”) business, Sterne Agee Asset
Management, Inc. and Sterne Agee Investment Advisor Services, Inc. -
collectively (“Sterne Agee”) for cash consideration. Effective July 1,
2017, Sterne Agee & Leach, Inc. was merged into the Company’s
wholly-owned regulated U.S. subsidiary, INTL FCStone Financial.
Additionally, during 2017, Sterne Agee Clearing, Inc., Sterne Agee
Financial Services, Inc., Sterne Agee Asset Management, Inc., and
Sterne Agee Investment Advisor Services, Inc. were renamed INTL
Custody & Clearing Solutions, Inc., SA Stone Wealth Management,
Inc., INTL Advisory Consultants, Inc., and SA Stone Investment
Advisors, Inc., respectively.
The acquisition-date fair value of the consideration transferred totaled
$45.0 million. The purchase price allocation resulted in $24.9 million
in cash, $151.6 million in receivables, $5.7 million in deferred tax
assets, $4.8 million in other assets and $136.0 million in liabilities
assumed. The fair value of identifiable assets acquired and liabilities
assumed exceeded the fair value of the consideration transferred.
Consequently, the Company reassessed the recognition and measurement
of identifiable assets acquired and liabilities assumed and concluded
that all acquired assets and assumed liabilities were recognized and
that the valuation procedures and resulting measures were appropriate.
As a result, the Company recognized a gain of $6.2 million for the
year ended September 30, 2016, which is included in the line item
‘gain on acquisition’ in the consolidated income statement. The
Company believes the transaction resulted in a gain primarily due to
the Company’s ability to incorporate these business activities into its
existing business structure, and its ability to utilize certain deferred
tax assets and other assets while operating the business that may not
have been likely to be realized by the seller. There were no purchase
price adjustments recorded during the measurement period and the
purchase price allocation is now considered final.
The businesses have been included within the Company’s Clearing
and Execution Services Segment. The Company’s consolidated
income statement for the year ended September 30, 2016 includes
the post-acquisition results of the Sterne Agee businesses, which were
immaterial. The acquired businesses contributed net operating revenues
of $8.6 million and net loss of $0.1 million to the Company for the
period from July 1, 2016 to September 30, 2016.
Acquisition in Fiscal 2015
G.X. Clarke & Co.
Effective January 1, 2015, the Company acquired all of the partnership
interests of G.X. Clarke & Co., an SEC registered institutional dealer in
fixed income securities. G.X. Clarke was based in New Jersey, transacted
in U.S. Treasury, U.S. government agency and agency mortgage-backed
securities, and was a FINRA member with an institutional customer
base consisting of asset managers, commercial bank trust and investment
departments, broker-dealers, and insurance companies. The purchase
price payable by the Company was equal to G.X. Clarke’s net tangible
book value at closing of approximately $25.9 million plus a premium of
part II
ITEM 8 Financial Statements and Supplementary Data
$1.5 million, and up to an additional $1.5 million over the next three
years, subject to the achievement of certain profitability thresholds.
In conjunction with the acquisition, the name of G.X. Clarke was
changed to INTL FCStone Partners L.P. INTL FCStone Partners L.P.
was subsequently merged into the Company’s wholly-owned regulated
U.S. subsidiary, INTL FCStone Financial.
The acquisition agreement included the purchase of certain tangible
assets and assumption of certain liabilities. For the acquisition,
management made an initial fair value estimate of the assets acquired
and liabilities assumed as of January 1, 2015. The Company believed
that due to the short-term nature of many of the tangible assets acquired
and liabilities assumed, that their carrying values, as included in the
historical financial statements of G.X. Clarke, approximated their fair
values. The Company finalized its purchase accounting estimates with
the assistance of a third-party valuation expert. The portion of the
purchase price representing the initial premium of $1.5 million and
the contingent consideration of $0.1 million has been assigned to
the customer base and software programs/platforms intangible assets
(see Note 10). The Company assigned useful lives of 5 years for the
customer base and software programs/platforms intangible assets.
As part of the net cash paid, the Company and G.X. Clarke established
two escrow accounts totaling $10.0 million, related to an Adjustment
Escrow and Indemnity Escrow. The Adjustment Escrow, of $5.0 million,
related to potential purchase price adjustment obligations was released,
during year ended September 30, 2015, upon determination of the
final tangible book value of net assets of G.X. Clarke. The Indemnity
Escrow, of $5.0 million, related to potential claims made by the Company
for indemnification in accordance with the terms of the acquisition
agreement and was to be released immediately following the twenty-four
month anniversary of the closing date of the acquisition. The Indemnity
Escrow was released during the year ended September 30, 2017.
In addition, as part of the net cash paid for the acquisition, the
Company deferred payment of $5.0 million, in accordance with the
terms of the acquisition agreement. The deferred payment is equal to
$5.0 million less the aggregate net loss, if any, incurred for the twelve
full fiscal quarters commencing after the closing date. The deferred
payment amount shall be due upon and payable shortly after the
twelfth full fiscal quarter commencing after the closing date. A pro
rata share of the deferred payment amount is due to partners who are
terminated prior to the maturity date assuming certain conditions
of the agreement are met. The unpaid deferred payment amount
of $4.5 million is included in ‘accounts payable and other accrued
liabilities’ in the consolidated balance sheet.
As discussed above, the terms of the acquisition agreement include
a contingent payment of an additional purchase price of up to
$1.5 million, based on the performance of the acquired business. The
contingent consideration, which in no event shall exceed $1.5 million,
is expected to be paid in two payments. The first payment was made
after the first four full fiscal quarters commencing after the closing
date, and totaled $0.5 million, as the acquired business generated
more than $5.0 million in after-tax net income over the first four full
fiscal quarters after the closing date. The second and final payment
is expected to occur in February 2018. This payment is estimated to
be $1.0 million, if the acquired business has generated accumulated
after-tax net income of greater than $30.0 million over the twelve
full fiscal quarters commencing after the closing date.
93
- Form 10-K part II
ITEM 8 Financial Statements and Supplementary Data
NOTE 20 Accumulated Other Comprehensive Income (Loss)
Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded
from net income. Other comprehensive income (loss) includes net actuarial gains from defined benefit pension plans and losses on foreign
currency translations.
The following table summarizes the changes in accumulated other comprehensive income (loss) for the year ended September 30, 2017.
(in millions)
Balances as of September 30, 2016
Other comprehensive income (loss), net of tax before reclassifications
Amounts reclassified from AOCI, net of tax
Other comprehensive income (loss), net of tax
Balances as of September 30, 2017
Foreign
Currency
translation
adjustment
pension
Benefits
adjustment
accumulated Other
Comprehensive
Loss
$
$
(20.1) $
(1.4)
—
(1.4)
(21.5) $
(4.5)
1.2
0.3
1.5
(3.0)
$
$
(24.6)
(0.2)
0.3
0.1
(24.5)
NOTE 21 Segment and Geographic Information
The Company reports its operating segments based on services provided
to customers. The Company’s business activities are managed as
operating segments and organized into reportable segments as follows:
•• Commercial Hedging (includes components Financial Agricultural
(Ag) & Energy and LME Metals)
•• Global Payments
•• Securities (includes components Equity Market-Making, Debt
Trading, Investment Banking, and Asset Management)
•• Physical Commodities (includes components Precious Metals and
Physical Ag & Energy)
•• Clearing and Execution Services (includes components Exchange-traded
Futures and Options, FX Prime Brokerage, Correspondent Clearing,
Independent Wealth Management, and Derivative Voice Brokerage)
Commercial Hedging
The Company serves its commercial customers through its team of risk
management consultants, providing a high-value-added service that it
believes differentiates the Company from its competitors and maximizes
the opportunity to retain customers. The Company’s risk management
consulting services are designed to quantify and monitor commercial
entities’ exposure to commodity and financial risk. Upon assessing this
exposure, the Company develops a plan to control and hedge these
risks with post-trade reporting against specific customer objectives.
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.
The Company’s 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. The Company’s 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. The Company also provides execution of foreign
currency forwards and options and interest rate swaps as well as a
wide range of structured product solutions to commercial customers
who are seeking cost-effective hedging strategies. Generally, customers
direct their own trading activity and the Company’s risk management
consultants do not have discretionary authority to transact trades on
behalf of customers.
Global Payments
The Company provides global payment solutions to banks and
commercial businesses as well as charities and non-governmental
organizations and government organizations. The Company offers
payments services in more than 175 countries and 140 currencies,
which it believes is more than any other payments solution provider,
and provides competitive and transparent pricing. Its 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 the Company believes 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 the Society for Worldwide Interbank
Financial Telecommunication (“SWIFT”), the Company is able to
offer its services to large money center and global banks seeking more
competitive international payments services.
Through this single comprehensive platform and our commitment to
customer service, the Company believes it is able to provide simple
and fast execution, ensuring delivery of funds in any of these countries
quickly through its global network of approximately 300 correspondent
banks. In this business, the Company primarily acts as a principal in
buying and selling foreign currencies on a spot basis. The Company
derives revenue from the difference between the purchase and sale prices.
The Company believes its customers value its ability to provide
exchange rates that are significantly more competitive than those
offered by large international banks, a competitive advantage that
stems from its years of foreign exchange expertise focused on smaller,
less liquid currencies.
94
- Form 10-K
Securities
The Company provides value-added solutions that facilitate cross-
border trading and believes its customers value the Company’s ability
to manage complex transactions, including foreign exchange, utilizing
its local understanding of market convention, liquidity and settlement
protocols around the world. The Company’s 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. The Company
is one of the leading market makers in foreign securities, including
unlisted ADRs, GDRs and foreign ordinary shares. The Company
makes markets in over 3,600 ADRs, GDRs and foreign ordinary shares,
of which over 2,000 trade in the OTC market. In addition, it will, on
request, make prices in more than 10,000 unlisted foreign securities.
The Company is also a broker-dealer in Argentina where we are active
in providing institutional executions in the local capital markets.
The Company acts 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.
The Company also originates, structures and places 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, the Company may invest its
own capital in debt instruments before selling them. The Company also
actively trades in a variety of international debt instruments and operates
an asset management business in which it earns fees, commissions and
other revenues for management of third party assets and investment gains
or losses on its investments in funds and proprietary accounts managed
either by its investment managers or by independent investment managers.
Physical Commodities
This segment consists of the Company’s physical Precious Metals
trading and Physical Agricultural and Energy commodity businesses.
In Precious Metals, the Company provides a full range of trading and
hedging capabilities, including OTC products, to select producers,
consumers, and investors. In the Company’s trading activities, it acts
as a principal, committing its own capital to buy and sell precious
metals on a spot and forward basis.
In the Company’s Physical Ag & Energy commodity business, it acts
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. The Company provides financing to commercial commodity-
related companies against physical inventories. The Company uses
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.
part II
ITEM 8 Financial Statements and Supplementary Data
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 consolidated income statements, in accordance with U.S GAAP
accounting requirements for broker-dealers. Precious metals sales and
cost of sales for subsidiaries that are not broker-dealers continue to
be recorded on a gross basis.
Precious metals inventory held by subsidiaries that are not broker-
dealers continues to be valued at the lower of cost or market value.
Precious metals sales and cost of sales for subsidiaries that are not
broker-dealers continue to be recorded on a gross basis. The agricultural
commodity inventories are carried 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. The Company records its Physical Ag & Energy commodities
revenues on a gross basis.
Operating revenues and losses from its precious metals commodities
derivatives activities are included in ‘trading gains, net’ in the consolidated
income statements. Operating revenues and losses from our Physical Ag
and Energy commodity business are included in ‘cost of sales of physical
commodities’ in the consolidated income statements The Company
generally mitigates the price risk associated with commodities held
in inventory through the use of derivatives. The Company does not
elect hedge accounting under U.S. GAAP in accounting for this price
risk mitigation. The Company’s management continues to evaluate
performance and allocated resources on an operating revenue basis.
Clearing and Execution Services (CES)
The Company provides 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.
Through its platform, customer orders are accepted and directed to the
appropriate exchange for execution. The Company then facilitates the
clearing of customers’ transactions. Clearing involves the matching of
customers’ 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.
As of September 30, 2017, the Company held $2.2 billion in required
customer segregated assets, which it believes makes it 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. The Company seeks to leverage
its capabilities and capacity by offering facilities management or
outsourcing solutions to other FCM’s.
Following the Company’s acquisition of the Sterne Agee correspondent
clearing business, it is 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.
Also as part of this transaction, the Company acquired Sterne Agee’s
independent wealth management business which offers a comprehensive
product suite to retail customers nationwide. As a result it is one of the
leading mid-market clearer’s in the securities industry, with approximately
50 correspondent clearing relationships with over $15 billion in assets
under management or administration as of September 30, 2017.
95
- Form 10-K part II
ITEM 8 Financial Statements and Supplementary Data
In addition, the Company believes it is one of the largest non-bank
prime brokers and swap dealers in the world. Through this offering,
it provides prime brokerage foreign exchange services to financial
institutions and professional traders. The Company provides its
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. The Company also
operates a proprietary foreign exchange desk that arbitrages the
exchange-traded foreign exchange markets with the cash markets.
Following the October 1, 2016 acquisition of ICAP plc’s London-
based EMEA oil voice brokerage business, the Company employs over
30 employees providing 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 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 the Company’s management views the
results, the tables below also reflect the segment contribution to
‘operating revenues’, which is shown on the face of the consolidated
income statements and which is calculated by deducting physical
commodities cost of sales from total revenues.
Segment data includes the profitability measure of net contribution
by segment. Net contribution is one of the key measures used by
management to assess the performance of each segment and for
decisions regarding the allocation of the Company’s resources. Net
contribution is calculated as revenue less direct cost of sales, transaction-
based clearing expenses, variable compensation, introducing broker
commissions, and interest expense. Variable compensation paid to
risk management consultants/traders generally represents a fixed
percentage of an amount equal to revenues generated, and in some
cases, revenues produced less transaction-based clearing charges, base
salaries and an overhead allocation.
Segment data also includes segment income which is calculated as
net contribution less non-variable direct expenses of the segment.
These non-variable direct expenses include trader base compensation
and benefits, operational employee compensation and benefits,
communication and data services, business development, professional
fees, bad debts and other direct expenses.
Inter-segment revenues, charges, receivables and payables are eliminated
upon consolidation, except revenues and costs related to foreign
currency transactions undertaken on an arm’s length basis by the
foreign exchange trading business for the securities business. The
foreign exchange trading business competes for this business as it does
for any other business. If its rates are not competitive, the securities
businesses buy or sell their foreign currency through other market
counterparties.
On a recurring basis, the Company sweeps excess cash from certain
operating segments to a centralized corporate treasury function in
exchange for an intercompany receivable asset. The intercompany
receivable asset is eliminated during consolidation, and therefore this
practice may impact reported total assets between segments.
Information concerning operations in these segments of business is shown in accordance with the Segment Reporting Topic of the ASC as follows:
(in millions)
Total revenues:
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Corporate unallocated
Total
Operating revenues (loss):
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Corporate unallocated
Total
Net operating revenues (loss):
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Corporate unallocated
Total
96
2017
Year Ended September 30,
2016
2015
$
$
$
$
$
$
244.6
89.2
151.7
28,684.4
259.8
(6.1)
29,423.6
244.6
89.2
151.7
44.8
259.8
(6.1)
784.0
194.3
80.6
94.6
37.3
102.2
(16.4)
492.6
$
$
$
$
$
$
236.1
73.2
175.2
14,120.5
151.1
(1.2)
14,754.9
236.1
73.2
175.2
36.6
151.1
(1.2)
671.0
188.2
65.3
121.9
31.5
48.8
(11.8)
443.9
$
$
$
$
$
$
262.4
77.1
129.8
34,092.0
123.4
8.5
34,693.2
262.4
77.1
129.8
23.1
123.4
8.5
624.3
214.7
68.5
88.6
21.2
38.3
0.5
431.8
- Form 10-K
(in millions)
Net contribution:
(Revenues less cost of sales, transaction-based clearing expenses, variable bonus
compensation, introducing broker commissions and interest expense):
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Total
Segment income:
(Net contribution less non-variable direct segment costs):
Commercial Hedging
Global Payments
Securities
Physical Commodities(1)
Clearing and Execution Services
Total
Reconciliation of segment income to income from operations, before tax:
Segment income
Costs not allocated to operating segments
$
$
$
$
$
part II
ITEM 8 Financial Statements and Supplementary Data
2017
Year Ended September 30,
2016
2015
$
$
$
$
$
141.8
64.4
75.6
27.2
78.0
387.0
72.8
50.6
46.6
(31.4)
30.4
169.0
169.0
153.8
15.2
$
$
$
$
$
134.4
52.2
97.5
23.4
39.5
347.0
68.7
39.8
69.4
13.3
14.8
206.0
206.0
133.3
72.7
151.7
54.5
67.4
16.9
30.1
320.6
85.6
43.3
40.5
5.8
12.9
188.1
188.1
110.0
78.1
Income from operations, before tax
(1) During the fourth quarter of fiscal 2017, the Company recorded a charge to earnings of $47.0 million, to record an allowance for doubtful accounts related to a bad debt incurred
$
$
$
in the physical coal business conducted solely in INTL Asia Pte. Ltd., with a coal supplier, as further discussed in Note 2.
(in millions)
Total assets:
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Corporate unallocated
Total
as of September 30, 2017
as of September 30, 2016
as of September 30, 2015
$
$
1,650.3
199.5
2,101.7
339.5
1,818.9
133.5
6,243.4
$
$
1,637.5
191.4
2,130.7
258.0
1,617.4
115.3
5,950.3
$
$
1,548.1
207.3
1,861.0
190.9
1,163.8
98.9
5,070.0
Information regarding revenues and operating revenues for the years ended September 30, 2017, 2016, and 2015, and information regarding
long-lived assets (defined as property, equipment, leasehold improvements and software) as of September 30, 2017, 2016, and 2015 in
geographic areas were as follows:
(in millions)
Total revenues:
United States
Europe
South America
Asia
Other
Total
Operating revenues:
United States
Europe
South America
Asia
Other
Total
2017
Year Ended September 30,
2016
2015
$
$
$
$
1,168.0
166.9
53.9
28,030.3
4.5
29,423.6
529.4
166.9
54.0
29.2
4.5
784.0
$
$
$
$
817.1
463.5
64.8
13,405.1
4.4
14,754.9
457.0
120.2
64.8
24.6
4.4
671.0
$
$
$
$
25,959.0
121.2
49.0
8,560.0
4.0
34,693.2
424.3
125.0
49.0
21.9
4.1
624.3
97
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
(in millions)
Long-lived assets, as defined:
United States
Europe
South America
Asia
Total
as of September 30, 2017
as of September 30, 2016
as of September 30, 2015
$
$
29.7
7.3
1.5
0.2
38.7
$
$
23.3
4.8
1.2
0.1
29.4
$
$
13.8
4.0
1.7
0.2
19.7
NOTE 22 Quarterly Financial Information (Unaudited)
The Company has set forth certain quarterly unaudited financial data for the past two years in the tables below:
(in millions, except per share amounts)
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and benefits
Bad debts
Bad debt on physical coal
Other expenses
Total compensation and other expenses
(Loss) income from operations, before tax
Income tax expense
For the 2017 Fiscal Quarter Ended
June 30
March 31
December 31
$
$
September 30(1)
$
12,382.5
12,177.4
$
205.1
35.1
26.9
12.0
131.1
73.0
0.4
47.0
33.2
153.6
(22.5)
1.1
(23.6)
(1.27)
(1.27)
5,505.9
5,308.3
197.6
33.9
29.2
11.2
123.3
75.5
0.1
—
32.7
108.3
15.0
2.3
12.7
0.67
0.66
5,460.8
5,265.0
195.8
33.7
28.2
10.0
123.9
76.6
1.3
—
31.7
109.6
14.3
3.3
11.0
0.58
0.58
6,074.4
5,888.9
185.5
33.6
28.7
8.9
114.3
70.6
2.5
—
32.8
105.9
8.4
2.1
6.3
0.34
0.34
Net (loss) income
Net basic (loss) earnings per share
Net diluted (loss) earnings per share
(1) During the fourth quarter of fiscal 2017, the Company recorded a charge to earnings of $47.0 million, to record an allowance for doubtful accounts related to a bad debt incurred
$
$
$
$
$
$
$
$
$
$
$
$
in the physical coal business conducted solely in INTL Asia Pte. Ltd., with a coal supplier, as further discussed in Note 2.
September 30
June 30
March 31
December 31
For the 2016 Fiscal Quarter Ended
$
$
$
$
2,777.6
2,599.0
178.6
32.0
28.1
7.5
111.0
66.2
(0.2)
32.0
98.0
6.2
19.2
2.4
16.8
0.91
0.90
$
$
$
$
4,868.5
4,693.5
175.0
35.2
14.8
7.7
117.3
69.4
—
26.5
95.9
—
21.4
6.8
14.6
0.79
0.78
$
$
$
$
3,708.9
3,542.8
166.1
32.9
13.2
7.1
112.9
65.2
2.6
25.1
92.9
—
20.0
5.5
14.5
0.77
0.76
$
$
$
$
3,399.9
3,248.6
151.3
29.8
12.8
6.0
102.7
63.1
2.0
25.5
90.6
—
12.1
3.3
8.8
0.47
0.46
(in millions, except per share amounts)
Total revenues
Cost of sales of physical commodities
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and benefits
Bad debts
Other expenses
Total compensation and other expenses
Gain on acquisition
Income from operations, before tax
Income tax expense
Net income
Net basic earnings per share
Net diluted earnings per share
98
- Form 10-K
part II
SCHEDULE I INTL FCStone Inc. Condensed Balance Sheets
SCHEDULE I
INTL FCStone Inc. Condensed
Balance Sheets
Parent Company Only
(in millions)
ASSETS
Cash and cash equivalents
Deposits and receivables from broker-dealers, clearing organizations and counterparties
Receivable from subsidiaries, net
Notes receivable, net
Income taxes receivable
Investment in subsidiaries(1)
Financial instruments owned, at fair value
Deferred income taxes, net
Property and equipment, net
Other assets
Total assets
LIABILITIES AND EQUITY
Liabilities:
Accounts payable and other accrued liabilities
Payable to customers
Payable to lenders under loans
Payable to subsidiaries, net
Senior unsecured notes
Financial instruments sold, not yet purchased, at fair value
Total liabilities
EQUITY:
INTL FCStone Inc. (Parent Company Only) stockholders’ equity:
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding
Common stock, $0.01 par value. Authorized 30,000,000 shares; 20,855,243 issued and
18,733,286 outstanding at September 30, 2017 and 20,557,175 issued and 18,435,218
outstanding at September 30, 2016
Common stock in treasury, at cost - 2,121,957 shares at September 30, 2017 and 2016
Additional paid-in capital
Retained earnings(1)
September 30, 2017
September 30, 2016
$
$
$
$
2.0
—
3.8
4.8
8.6
312.3
—
26.5
24.8
7.6
390.4
$
$
19.8
2.1
152.0
49.4
—
25.3
248.6
1.3
2.9
3.6
6.9
14.0
316.3
1.3
15.7
12.7
16.2
390.9
27.7
4.6
139.3
17.1
44.5
35.9
269.1
—
—
0.2
(46.3)
259.0
(71.1)
141.8
390.4
0.2
(46.3)
249.4
(81.5)
121.8
390.9
Total INTL FCStone Inc. (Parent Company Only) stockholders’ equity
Total liabilities and equity
(1) Within the Condensed Balance Sheets and Condensed Statements of Operations of INTL FCStone Inc. - Parent Company Only, the Company has accounted for its investment in
wholly owned subsidiaries using the cost method of accounting. Under this method, the Company’s share of the earnings or losses of such subsidiaries are not included in the Condensed
Balance Sheet or Condensed Statements of Operations. If the accounting for its investment in wholly owned subsidiaries were presented under the equity method of accounting,
investment in subsidiaries and retained earnings would each increase by $332.6 million as of September 30, 2017, respectively, and $336.6 million, as of September 30, 2016,
respectively.
$
$
99
- Form 10-K
part II
SCHEDULE I INTL FCStone Inc. Condensed Statements of Operations
SCHEDULE I
INTL FCStone Inc. Condensed
Statements of Operations
2017
Year Ended September 30,
2016
2015
$
$
39.1
(1.0)
—
1.2
52.7
92.0
14.4
77.6
60.3
1.2
—
7.3
2.5
3.7
2.7
3.3
—
—
13.0
94.0
—
(16.4)
26.8
10.4
$
30.1
0.7
2.2
1.8
31.0
65.8
13.4
52.4
26.6
3.2
2.1
4.6
6.0
42.5
12.7
29.8
52.8
1.7
0.6
6.7
2.8
4.8
1.7
2.5
0.2
1.2
11.7
86.7
6.2
(28.1)
24.7
(3.4)
43.5
1.2
0.5
5.7
2.1
4.6
1.4
1.8
1.6
4.3
10.2
76.9
—
(47.1)
19.4
(27.7)
Net income (loss)
(2) Within the Condensed Balance Sheets and Condensed Statements of Operations of INTL FCStone Inc. - Parent Company Only, the Company has accounted for its investment
in wholly owned subsidiaries using the cost method of accounting. Under this method, the Company’s share of the earnings or losses of such subsidiaries are not included in the
Condensed Balance Sheet or Condensed Statements of Operations. If the accounting for its investment in wholly owned subsidiaries were presented under the equity method of
accounting, revenues would include a loss from investment in subsidiaries of $4.0 million for the year ended September 30, 2017, and income from investment in subsidiaries of
$58.1 million and $83.4 million for the years ended September 30, 2016 and 2015, respectively.
$
$
$
Parent Company Only
(in millions)
Revenues:
Management fees from affiliates
Trading (losses) gains, net
Consulting fees
Interest income
Dividend income from subsidiaries(2)
Interest expense
Net revenues
Non-interest expenses:
Compensation and benefits
Clearing and related expenses
Introducing broker commissions
Communication and data services
Occupancy and equipment rental
Professional fees
Travel and business development
Depreciation and amortization
Bad debts and impairments
Management services fees to affiliates
Other
Total non-interest expenses
Gain on acquisition
Loss from operations, before tax
Income tax benefit
100
- Form 10-K
part II
SCHEDULE I INTL FCStone Inc. Condensed Statements of Cash Flows
SCHEDULE I
INTL FCStone Inc. Condensed
Statements of Cash Flows
Parent Company Only
(in millions)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization
Provision for impairments
Deferred income taxes
Amortization and extinguishment of debt issuance costs
Amortization of share-based compensation expense
Gain on acquisition
Changes in operating assets and liabilities:
Deposits and receivables from broker-dealers, clearing organizations, and
counterparties
Receivables from subsidiaries, net
Due to/from subsidiaries
Notes receivable, net
Income taxes receivable
Financial instruments owned, at fair value
Other assets
Accounts payable and other accrued liabilities
Payable to customers
Financial instruments sold, not yet purchased, at fair value
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Capital contribution in affiliates
Capital withdrawals from affiliates
Purchase of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net change in lenders under loans
Proceeds from note payable
Payments of notes payable
Repayment of senior unsecured notes
Payments related to earn-outs on acquisitions
Share repurchase
Debt issuance costs
Exercise of stock options
Income tax benefit on stock options and awards
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest
Income taxes (received) paid, net of cash refunds
Supplemental disclosure of non-cash investing and financing activities:
Additional consideration payable related to acquisitions
2017
Year Ended September 30,
2016
2015
$
10.4
$
(3.4)
$
(27.7)
3.3
—
(10.7)
1.7
5.5
—
2.9
(0.3)
27.0
2.1
5.4
1.3
7.8
(7.8)
(2.5)
(10.6)
35.5
—
—
(6.1)
(6.1)
13.5
—
(0.8)
(45.5)
—
—
—
3.4
0.7
(28.7)
0.7
1.3
2.0
$
8.2
(22.3)
(0.2)
$
$
$
2.5
0.2
(3.3)
1.0
5.1
(6.2)
(2.8)
(3.1)
(86.6)
39.1
10.3
1.7
0.3
0.4
(26.1)
35.9
(35.0)
(48.4)
—
(5.5)
(53.9)
108.5
—
(0.8)
—
(2.9)
(19.5)
(1.9)
3.5
0.8
87.7
(1.2)
2.5
1.3
9.0
(33.8)
(0.4)
$
$
$
$
$
$
$
$
1.8
1.6
4.6
0.8
3.6
—
—
—
33.2
(7.8)
(11.4)
(3.0)
(3.9)
12.6
4.9
—
9.3
(22.4)
7.8
(7.8)
(22.4)
13.0
4.0
(0.4)
—
(2.2)
(4.7)
(0.1)
2.5
0.5
12.6
(0.5)
3.0
2.5
11.9
(12.9)
1.9
101
- Form 10-K
part II
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
ITEM 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
ITEM 9A Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures
In connection with the filing of this Form 10-K, our management,
including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)) as of September 30, 2017. We seek to design
our disclosure controls and procedures to provide reasonable assurance
that the reports we file or submit under the Exchange Act contain
the required information and that we submit these reports within
the time periods specified in SEC rules and forms. We also seek to
design these controls and procedures to ensure that we accumulate and
communicate correct information to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.
Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls
and procedures were not effective as of September 30, 2017, based
on the material weaknesses discussed in Management’s Report on
Internal Control over Financial Reporting described below.
Notwithstanding such material weaknesses in internal control over
financial reporting, our management concluded that the consolidated
financial statements in this annual report on Form 10-K present fairly,
in all material respects, the Company’s financial position, results
of operations and cash flows as of the dates, and for the periods
presented, in conformity with U.S. generally accepted accounting
principles (“U.S. GAAP”).
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is
defined in Exchange Act Rule 13a-15(f ) and 15d-15(f). Our internal
control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes
in accordance with U.S. GAAP. Our internal control over financial
reporting includes those policies and procedures that: (i) pertain to the
maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with U.S. GAAP, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company’s assets that could have a material
effect on the financial statements.
There are limitations inherent in any internal control, such as the
possibility of human error and the circumvention or overriding
of controls. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met, and may not prevent or
detect misstatements. As conditions change over time, so too may
the effectiveness of internal controls.
A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual or interim
financial statements will not be prevented or detected on a timely basis.
Management, with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated the Company’s internal control
over financial reporting as of September 30, 2017, based on the
framework in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations (COSO) of
the Treadway Commission. Based on management’s assessment using
these criteria, management identified the following deficiencies in our
internal control over financial reporting as of September 30, 2017.
Management concluded that the Company did not:
•• Design, conduct and document an effective continuous risk
assessment process related to new business lines, specifically at
one of the Company’s Singapore subsidiaries, to identify, analyze
and monitor risks impacting financial reporting, and implement
business process level controls and monitoring activities that are
responsive to those risks.
102
- Form 10-K •• Design and operate effective process level controls related to physical
coal trading activities in the Company’s Singapore subsidiary, INTL
Asia Pte. Ltd., specifically, the Company did not:
•– Design and operate controls over the existence of physical
commodities inventory.
•– Design and operate controls over the completeness, existence,
accuracy and valuation of amounts due to be reimbursed by an
INTL Asia Pte. Ltd. supplier, including demurrage and other
fees related to physical coal business activities, which are recorded
within deposits with and receivables from broker-dealers, clearing
organizations and counterparties, net.
•– Establish appropriate segregation of duties within the purchasing,
accounts payable and cash disbursements process.
part II
ITEM 9B Other Information
These deficiencies resulted in immaterial misstatements related to
amounts due to be reimbursed by an INTL Asia Pte. Ltd. supplier
and payable to customers related to physical coal business activities
for each of the interim periods during the year ended September 30,
2017, which were corrected in the consolidated balance sheet as of
September 30, 2017. However, these control deficiencies created a
reasonable possibility that a material misstatement to the consolidated
financial statements would not have been prevented or detected on
a timely basis. Accordingly, our management concluded that the
deficiencies represented material weaknesses in our internal control
over financial reporting as of September 30, 2017.
KPMG LLP was engaged to audit the effectiveness of our internal
control over financial reporting as of September 30, 2017 and issued
an adverse audit report regarding their assessment of the effectiveness
of internal control over financial reporting which is included on
page 63 in this Annual Report on Form 10-K.
(c)
Remediation Steps to Address Material Weaknesses
Management, and the Company’s Board of Directors, is focused on improving the Company’s processes and internal controls. Management, with
the concurrence of the Audit Committee of the Board of Directors of the Company, has directed management to proceed with a remediation
plan. The following actions and plans have been or are currently being implemented:
•• We have ceased and exited the physical coal business, which was only
conducted in INTL Asia Pte. Ltd. Additionally, we have evaluated
other business lines located in INTL Asia Pte. Ltd. to determine the
effects, if any, of these control deficiencies on those business lines.
Management has determined that these control deficiencies do not
exist within those other business lines.
•• We will introduce new policies requiring an internal audit of business
process level controls and monitoring activities subsequent to new
businesses to ensure that information systems, business processes,
internal controls, monitoring activities and personnel are fully aligned
with our control environment and financial reporting objectives.
•• We will introduce a new policy requiring quarterly analysis by
management, including consideration of changes in risk assessment,
of new business lines in order to conduct and document an effective
continuous risk assessment process to identify, analyze, and monitor
risks impacting financial reporting, and implement business process
level controls and monitoring activities that are responsive to
those risks.
(d) Changes in Internal Control Over Financial Reporting
During the fourth quarter of 2017, the Company implemented a
new trading system related to certain over-the-counter (“OTC”)
commodities business activities. As a result of the new trading system,
the Company began to internally value certain OTC derivative positions
that were previously valued by an unrelated third party. As such, we
have implemented new internal controls related to internally valued
OTC derivative transactions. Except as previously discussed above
for controls that were not operating in earlier periods, there were no
changes in our internal controls over financial reporting that occurred
during the quarter ended September 30, 2017 that materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
ITEM 9B Other Information
None.
103
- Form 10-K PART III
PART III
ITEM 10 Directors, Executive Officers and Corporate
Governance
We will include a list of our executive officers and biographical and
other information about them and our directors in the definitive
Proxy Statement for our 2018 Annual Meeting of Stockholders
to be held on February 14, 2018. We will file the proxy within
120 days of the end of our fiscal year ended September 30, 2017 (the
“2018 Proxy Statement”). The 2018 Proxy Statement is incorporated
herein by reference. Information about our Audit Committee may
be found in the Proxy Statement. That information is incorporated
herein by reference.
We adopted a code of ethics that applies to the directors, officers and
employees of the Company and each of its subsidiaries. The code
of ethics is publicly available on our Website at www.intlfcstone.
com/ethics.aspx. If we make any substantive amendments to the
code of ethics or grant any waiver, including any implicit waiver,
from a provision of the code to our Chief Executive Officer, Chief
Financial Officer, or Chief Accounting Officer, we will disclose the
nature of the amendment or waiver on that website or in a report
on Form 8-K.
ITEM 11 Executive Compensation
We will include information relating to our executive officer and director compensation and the compensation committee of our board of
directors in the 2018 Proxy Statement and is incorporated herein by reference.
104
- Form 10-K
PART III
ITEM 14 Principal Accountant Fees and Services
ITEM 12 Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters
We will include information relating to security ownership of certain
beneficial owners of our common stock and information relating
to the security ownership of our management in the 2018 Proxy
Statement and is incorporated herein by reference.
The following table provides information generally as of September 30,
2017, the last day of fiscal 2017, regarding securities to be issued
on exercise of stock options, and securities remaining available for
issuance under our equity compensation plans that were in effect
during fiscal 2017.
Plan Category
Equity compensation plans approved by stockholders
Equity compensation plans not approved by stockholders
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted average
exercise price of
outstanding options,
warrants and rights
Number of securities
remaining available for
future issuance under equity
compensation plans
881,403 $
—
881,403 $
27.31
—
27.31
652,494
—
652,494
ITEM 13 Certain Relationships and Related Transactions,
and Director Independence
We will include information regarding certain relationships and related transactions and director independence in the 2018 Proxy Statement
and is incorporated herein by reference.
ITEM 14 Principal Accountant Fees and Services
Information regarding principal accountant fees and services will be included in the 2018 Proxy Statement and is incorporated herein by reference.
105
- Form 10-K PART IV
ITEM 15 Exhibits
PART IV
ITEM 15 Exhibits
3.1
3.2
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Amended and Restated Certificate of Incorporation (incorporated by reference from the Company’s Form 8-K filed with the SEC on
October 9, 2009).
Amended and Restated By-laws (incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed with the SEC on
August 14, 2007).
International Assets Holding Corporation 2003 Stock Option Plan (incorporated by reference from the Company’s Proxy Statement on
Schedule 14A filed on January 14, 2003).
Amendment to International Assets Holding Corporation 2003 Stock Option Plan (incorporated by reference from the Company’s Proxy
Statement on Form 14A filed with the SEC on February 11, 2004).
Amendment to International Assets Holding Corporation 2003 Stock Option Plan (incorporated by reference from the Company’s Proxy
Statement on Form 14A filed with the SEC on January 23, 2006).
INTL FCStone Inc. 2013 Stock Option Plan (incorporated by reference from the Company’s Proxy Statement on Schedule 14A filed on
January 11, 2013).
Registration Rights Agreement, dated October 22, 2002, by and between the Company, and Sean O’Connor (incorporated by reference from
the Company’s Form 8-K filed with the SEC on October 24, 2002).
First Amendment to Registration Rights Agreement, dated December 6, 2002, by and between the Company and Sean O’Connor
(incorporated by reference from the Company’s Form 8-K filed with the SEC on December 10, 2002).
Registration Rights Agreement, dated October 22, 2002, by and between the Company and Scott Branch (incorporated by reference from the
Company’s Form 8-K filed with the SEC on October 24, 2002).
First Amendment to Registration Rights Agreement, dated December 6, 2002, by and between the Company and Scott Branch (incorporated
by reference from the Company’s Form 8-K filed with the SEC on December 10, 2002).
Registration Rights Agreement, dated October 22, 2002, by and between the Company and John Radziwill (incorporated by reference from
the Company’s Form 8-K filed with the SEC on October 24, 2002).
First Amendment to Registration Rights Agreement, dated December 6, 2002, by and between the Company and John Radziwill
(incorporated by reference from the Company’s Form 8-K filed with the SEC on December 10, 2002).
Employment Agreement, effective December 1, 2004, by and between the Company and Brian T. Sephton (incorporated by reference from
the Company’s Form 8-K, as filed with the SEC on November 24, 2004).
2012 Restricted Stock Plan (incorporated by reference from the Company’s Proxy Statement on Form 14A filed with the SEC on
January 13, 2012).
INTL FCStone Inc. 2016 Executive Performance Plan (incorporated by reference from the Company’s Proxy Statement on Form 14A filed
with the SEC on January 15, 2016).
INTL FCStone Inc. 2016 Long-Term Performance Incentive Plan (incorporated by reference from the Company’s Proxy Statement on
Form 14A filed with the SEC on January 15, 2016).
2017 Restricted Stock Plan (incorporated by reference from the Company’s Proxy Statement on Form 14A filed with the SEC on
January 13, 2017).
Farmers Commodities Corporation Supplemental Nonqualified Pension Plan (incorporated by reference from Amendment No. 2 to the
Registration Statement on Form S-4 filed by FCStone Group, Inc. with the SEC on December 9, 2004)
Form of Director Indemnification Agreement (incorporated by reference from Amendment No. 3 to the Registration Statement on Form S-4
filed by FCStone Group, Inc. with the SEC on December 30, 2004)
Credit Agreement made as of September 20, 2013 by and between INTL FCStone Inc. as Borrower, the Subsidiaries of INTL FCStone
Inc. identified therein, as guarantors, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, Bank of America
Merrill Lynch and Capital One, N.A., as Joint Lead Arrangers and Joint Book Managers, Bank Hapoalim B.M., BMO Harris Bank N.A. and
The Korea Development Bank, New York Branch, as additional Lenders, and with the lenders from time to time parties thereto (incorporated
by reference from the Company’s Current Report on Form 8-K filed with the SEC on September 24, 2013).
106
- Form 10-K PART IV
ITEM 15 Exhibits
10.15
10.16
First Amendment to Credit Agreement, made as of April 18, 2014, by and between INTL FCStone Inc., as Borrower, the Subsidiaries of
INTL FCStone Inc. identified therein, as Guarantors, with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C
Issuer, Bank of America Merrill Lynch and Capital One, N.A., as Joint Lead Arrangers and Joint Book Managers, Bank Hapoalim B.M.,
BMO Harris Bank N.A. and The Korea Development Bank, New York Branch, as additional Lenders (incorporated by reference from the
Company’s Current Report on Form 8-K filed with the SEC on April 22, 2014).
Second Amendment to Credit Agreement entered into as of May 12, 2015 with Bank of America, N.A., as Administrative Agent, Lender,
L/C Issuer and Swing Line Lender, Capital One, N.A., Bank Hapoalim B.M., BMO Harris Bank N.A. and The Korea Development
Bank, New York Branch, as additional Lenders, and with the lenders from time to time parties thereto (incorporated by reference from the
Company’s Current Report on Form 8-K filed with the SEC on May 18, 2015).
10.21
10.22
10.20
10.19
10.18
10.17 Third Amendment to Credit Agreement entered into as of March 18, 2016 with Bank of America, N.A., as Administrative Agent, Lender,
L/C Issuer and Swing Line Lender, Capital One, N.A., as Syndication Agent and a Lender, Bank Hapoalim B.M., BMO Harris Bank N.A.
BankUnited, N.A., and Barclays Bank PLC, as additional Lenders, and with the lenders from time to time parties thereto (incorporated by
reference from the Company’s Current Report on Form 8-K filed with the SEC on March 23, 2016).
Fourth Amendment to Credit Agreement entered into as of May 26, 2017 with Bank of America, N.A., as Administrative Agent, Lender,
L/C Issuer and Swing Line Lender, Capital One, N.A., as Syndication Agent and a Lender, Bank Hapoalim B.M., BMO Harris Bank N.A.
BankUnited, N.A., and Barclays Bank PLC, as additional Lenders, and with the lenders from time to time parties thereto. *
Fifth Amendment to Credit Agreement entered into as of November 30, 2017 with Bank of America, N.A., as Administrative Agent, Lender,
L/C Issuer and Swing Line Lender, Capital One, N.A., as Syndication Agent and a Lender, Bank Hapoalim B.M., BMO Harris Bank N.A.
BankUnited, N.A., and Barclays Bank PLC, as additional Lenders, and with the lenders from time to time parties thereto. *
Amended and Restated Credit Agreement, made as of June 21, 2010, by and between FCStone, LLC, as borrower, FCStone Group, Inc., as
a guarantor, International Assets Holding Corporation, as a guarantor, Bank of Montreal, as administrative agent, BMO Capital Markets, as
Sole Lead Arranger, and the lenders party thereto (incorporated by reference from the Company’s Current Report on Form 8-K filed with the
SEC on June 24, 2010).
Loan Authorization Agreement entered into as of May 5, 2015, by and between FCStone, LLC, as Borrower, and BMO Harris Bank N.A., as
Bank (incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on May 8, 2015).
Reaffirmation and Assumption entered into as of June 30, 2015 with BMO Harris Bank N.A. (incorporated by reference from the Company’s
Current Report on Form 8-K filed with the SEC on July 7, 2015).
Tenth Amendment to Amended and Restated Credit Agreement entered into as of April 4, 2017 with Bank of Montreal, as Administrative
Agent, and BMO Harris Financing, Inc., as a lender party thereto. *
Eleventh Amendment to Amended and Restated Credit Agreement entered into as of September 13, 2017 with Bank of Montreal, as
Administrative Agent, and BMO Harris Financing, Inc., as a lender party thereto. *
Twelfth Amendment to Amended and Restated Credit Agreement entered into as of December 13, 2017 with Bank of Montreal, as
Administrative Agent, and BMO Harris Financing, Inc., as a lender party thereto. *
Amended and Restated Credit Agreement, entered into as of March 15, 2016, by and among FCStone Merchant Services, LLC, as Borrower,
INTL FCStone Inc., as Guarantor, Bank of Montreal, as Administrative Agent and a Lender, BMO Capital Markets, as Sole Lead Arranger
and Sole Book Runner, and the lenders party thereto). (incorporated by reference from the Company’s Current Report on Form 10-K filed
with the SEC on December 14, 2016).
First Amendment to Amended and Restated Credit Agreement, entered into as of April 29, 2016, by and among FCStone Merchant Services,
LLC, as Borrower, INTL FCStone Inc., as Guarantor, Bank of Montreal, as Administrative Agent and a Lender, BMO Capital Markets, as
Sole Lead Arranger and Sole Book Runner, and the lenders party thereto). (incorporated by reference from the Company’s Current Report on
Form 10-K filed with the SEC on December 14, 2016).
Second Amendment to Amended and Restated Credit Agreement, entered into as of November 14, 2016, by and among FCStone Merchant
Services, LLC, as Borrower, INTL FCStone Inc., as Guarantor, Bank of Montreal, as Administrative Agent and a Lender, BMO Capital
Markets, as Sole Lead Arranger and Sole Book Runner, and the lenders party thereto). (incorporated by reference from the Company’s
Current Report on Form 10-K filed with the SEC on December 14, 2016).
10.23
10.24
10.25
10.26
10.27
10.28
10.29 Third Amendment to Amended and Restated Credit Agreement, entered into as of May 19, 2017, by and among FCStone Merchant Services,
10.30
10.31
LLC, as Borrower, INTL FCStone Inc., as Guarantor, Bank of Montreal, as Administrative Agent and a Lender, BMO Capital Markets, as
Sole Lead Arranger and Sole Book Runner, and the lenders party thereto). *
Credit Agreement, made as of November 15, 2013, by and between INTL FCStone Ltd, as Borrower, INTL FCStone Inc., as Guarantor,
Bank of America, N.A., as Administrative Agent and a Lender, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger
and Sole Book Manager, and with the lenders party thereto (incorporated by reference from the Company’s Current Report on Form 8-K filed
with the SEC on November 20, 2013).
Second Amendment to Credit Agreement, made as of November 5, 2015, by and between INTL FCStone Ltd, as Borrower, INTL FCStone
Inc., as Guarantor, Bank of America, N.A., as Administrative Agent and a Lender, and with the lenders party thereto (incorporated by
reference from the Company’s Current Report on Form 8-K filed with the SEC on November 10, 2015).
10.33
10.32 Third Amendment to Credit Agreement, made as of April 14, 2016, by and between INTL FCStone Ltd, as Borrower, INTL FCStone Inc.,
as Guarantor, Bank of America, N.A., as Administrative Agent and a Lender, and with the lenders party thereto. (incorporated by reference
from the Company’s Current Report on Form 10-K filed with the SEC on December 14, 2016).
Fourth Amendment to Credit Agreement, made as of October 27, 2016, by and between INTL FCStone Ltd, as Borrower, INTL FCStone
Inc., as Guarantor, Bank of America, N.A., as Administrative Agent and a Lender, and with the lenders party thereto. (incorporated by
reference from the Company’s Current Report on Form 10-K filed with the SEC on December 14, 2016).
Fifth Amendment to Credit Agreement, made as of November 7, 2017, by and between INTL FCStone Ltd, as Borrower, INTL FCStone
Inc., as Guarantor, Bank of America, N.A., as Administrative Agent and a Lender, and with the lenders party thereto. *
10.34
107
- Form 10-K PART IV
ITEM 15 Exhibits
14
21
23.1
31.1
31.2
32.1
32.2
International Assets Holding Corporation Code of Ethics (incorporated by reference from the Company’s Form 10-KSB filed with the SEC
on December 29, 2003).
List of the Company’s subsidiaries. *
Consent of KPMG LLP *
Certification of Chief Executive Officer, pursuant to Rule 13a—14(a). *
Certification of Chief Financial Officer, pursuant to Rule 13a—14(a). *
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. *
Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. *
Filed as part of this report.
*
Schedules and Exhibits Excluded
All schedules and exhibits not included are not applicable, not required or would contain information which is included in the Consolidated
Financial Statements, Summary of Significant Accounting Policies, or the Notes to the Consolidated Financial Statements.
108
- Form 10-K Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
PART IV
ITEM 15 Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
INTL FCStone Inc.
Dated:
/s/ SEAN M. O’CONNOR
Sean M. O’Connor
Chief Executive Officer
December 14, 2017
Signature
/s/ JOHN RADZIWILL
John Radziwill
/s/ SEAN M. O’CONNOR
Sean M. O’Connor
/s/ SCOTT J. BRANCH
Scott J. Branch
/s/ PAUL G. ANDERSON
Paul G. Anderson
/s/ EDWARD J. GRZYBOWSKI
Edward J. Grzybowski
/s/ JOHN M. FOWLER
John M. Fowler
/s/ BRUCE KREHBIEL
Bruce Krehbiel
/s/ DARYL HENZE
Daryl Henze
/s/ ERIC PARTHEMORE
Eric Parthemore
/s/ WILLIAM J. DUNAWAY
William J. Dunaway
Title
Date
Director and Chairman of the Board
December 14, 2017
Director, President and Chief Executive Officer
(Principal Executive Officer)
Director
Director
Director
Director
Director
Director
Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
December 14, 2017
109
- Form 10-K EXHIBIT 21 Subsidiaries of the Registrant
Name
FCC Futures, Inc.
FCStone Commodity Services (Europe) Ltd
FCStone do Brazil Ltda.
FCStone Group, Inc.
FCStone Merchant Services, LLC
FCStone Paraguay S.R.L.
Gainvest Asset Management Ltd.
Gainvest Uruguay Asset Management S.A.
INTL Advisory Consultants Inc.
INTL Asia Pte. Ltd.
INTL Capital S.A.
INTL CIBSA S.A.
INTL Custody & Clearing Solutions Inc.
INTL FCStone Assets, Inc.
INTL FCStone Banco de Cambio S.A.
INTL FCStone (BVI) Limited
INTL FCStone Capital Assessoria Financeira Ltda.
INTL FCStone Commodities DMCC
INTL FCStone de Mexico, S. de R.L. de C.V.
INTL FCStone DTVM Ltda.
INTL FCStone Financial Inc.
INTL FCStone (HK) Ltd.
INTL FCStone Ltd
INTL FCStone Markets, LLC
INTL FCStone (Netherlands) B.V.
INTL FCStone Nigeria Ltd
INTL FCStone Pte. Ltd.
INTL FCStone Pty Ltd
INTL FCStone S.A.
INTL FCStone (Shanghai) Trading Co., Ltd
INTL Gainvest S.A.
INTL Netherlands B.V.
INTL Participacoes Ltda.
SA Stone Investment Advisors Inc.
SA Stone Wealth Management Inc.
Westown Commodities, LLC
Place of Incorporation
Iowa, US
Ireland
Brazil
Delaware
Delaware, US
Paraguay
British Virgin Islands
Uruguay
Delaware, US
Singapore
Argentina
Argentina
Delaware, US
Florida, US
Brazil
British Virgin Islands
Brazil
Dubai, United Arab Emirates
Mexico
Brazil
Florida, US
Hong Kong
United Kingdom
Iowa, US
The Netherlands
Nigeria
Singapore
Australia
Argentina
China
Argentina
The Netherlands
Brazil
Delaware, US
Delaware, US
Iowa, US
E-1
- Form 10-K EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
INTL FCStone Inc.:
We consent to the incorporation by reference in the registration
statements (Nos. 333-117544, 333-137992, 333-144719, 333-152461,
333-186704, and 333-209912 on Form S-3 and Nos. 333-108332,
333-142262, 333-196413, 333-197773, and 333-216538 on Form S-8)
of INTL FCStone Inc. of our reports dated December 14, 2017, with
respect to the consolidated balance sheets of INTL FCStone Inc.
and subsidiaries as of September 30, 2017 and 2016, and the related
consolidated statements of income, comprehensive income, cash flows,
and stockholders’ equity for each of the years in the three-year period
ended September 30, 2017, and the related financial statement schedule,
and the effectiveness of internal control over financial reporting as
of September 30, 2017, which reports appear in the September 30,
2017 annual report on Form 10-K of INTL FCStone Inc.
Our report dated December 14, 2017, on the effectiveness of internal
control over financial reporting as of September 30, 2017, expresses our
opinion that INTL FCStone Inc. did not maintain effective internal
control over financial reporting as of September 30, 2017 because of
the effect of material weaknesses on the achievement of the objectives
of the control criteria and contains an explanatory paragraph that
states management concluded that there were material weaknesses
that were identified and included in management’s assessment as
INTL FCStone Inc. did not:
•• Design, conduct, and document an effective continuous risk
assessment process related to new business lines, specifically at one
of INTL FCStone Inc.’s Singapore subsidiaries, to identify, analyze
and monitor risks impacting financial reporting, and implement
business process level controls and monitoring activities that are
responsive to those risks.
•• Design and operate effective process level controls related to physical
coal trading activities in INTL FCStone Inc.’s Singapore subsidiary,
INTL Asia Pte. Ltd., specifically, INTL FCStone Inc. did not:
•– Design and operate controls over the existence of physical
commodities inventory.
•– Design and operate controls over the completeness, existence,
accuracy, and valuation of amounts due to be reimbursed by an
INTL Asia Pte. Ltd. supplier, including demurrage and other
fees related to physical coal business activities, which are recorded
within deposits with and receivables from broker-dealers, clearing
organizations and counterparties.
•– Establish appropriate segregation of duties within the purchasing,
accounts payable and cash disbursements process.
/s/ KPMG LLP
Kansas City, Missouri
December 14, 2017
E-2
- Form 10-K EXHIBIT 31.1 Section 302 Certification
I, Sean M. O’Connor, certify that:
1.
I have reviewed this Annual Report on Form 10-K of INTL
FCStone Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d - 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: December 14, 2017
/s/ SEAN M. O’CONNOR
Sean M. O’Connor
Chief Executive Officer
E-3
- Form 10-K EXHIBIT 31.2 Section 302 Certification
I, William J. Dunaway certify that:
1.
I have reviewed this Annual Report on Form 10-K of INTL
FCStone Inc.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this report;
4. The registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d - 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting,
or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting
and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal
control over financial reporting that occurred during the
registrant’s most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee
of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the registrant’s ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: December 14, 2017
/s/ WILLIAM J. DUNAWAY
William J. Dunaway
Chief Financial Officer
E-4
- Form 10-K EXHIBIT 32.1
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of INTL FCStone Inc. (the
Company) on Form 10-K for the period ended September 30, 2017
as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, Sean M. O’Connor, Chief Executive Officer
of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
(1)
The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: December 14, 2017
/s/ SEAN M. O’CONNOR
Sean M. O’Connor
Chief Executive Officer
A signed original of this written statement required by Section 906 or other document authenticating, acknowledging or otherwise adopting
the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided
to INTL FCStone Inc. and will be retained by INTL FCStone Inc. and furnished to the Securities and Exchange Commission or its staff
upon request.
E-5
- Form 10-K EXHIBIT 32.2
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of INTL FCStone Inc. (the
Company) on Form 10-K for the period ended September 30, 2017
as filed with the Securities and Exchange Commission on the date
hereof (the Report), I, William J. Dunaway, Chief Financial Officer
of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the
best of my knowledge:
(1) The Report fully complies with the requirements of section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: December 14, 2017
/s/ WILLIAM J. DUNAWAY
William J. Dunaway
Chief Financial Officer
A signed original of this written statement required by Section 906 or other document authenticating, acknowledging or otherwise adopting
the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided
to INTL FCStone Inc. and will be retained by INTL FCStone Inc. and furnished to the Securities and Exchange Commission or its staff
upon request.
E-6
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