2018
ANNUAL REPORT
INTL FCStone Inc. provides clients
with the global market access,
liquidity and expertise they need to
serve their customers, outperform
their competitors, manage their
risk, and grow their businesses.
We do so by 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
OPERATING REVENUES (in millions)
2018
2017
2016
2015
2014
$975.8
$784.0
$671.0
$624.3
$490.9
INCOME FROM CONTINUING OPERATIONS, BEFORE TAX (in millions)
2018
2017
$15.2
2016
2015
2014
$26.0
TOTAL ASSETS (in millions)
2018
2017
2016
2015
2014
$3,039.7
STOCKHOLDERS’ EQUITY (in millions)
2018
2017
2016
2015
2015
2014
2014
NET ASSET VALUE PER SHARE
2018
2017
2016
2015
2014
2 I 2018 ANNUAL REPORT
$101.5
$72.7
$78.1
$7,824.7
$6,243.4
$5,950.3
$5,070.0
$505.3
$449.9
$397.1
$433.8
$345.4
$397.1
$345.4
$26.72
$24.02
$23.56
$21.11
$18.29
SELECTED SUMMARY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Operating revenues
Transaction-based clearing expenses
Introducing broker commissions
Interest expense
Net operating revenues
Compensation and other expenses:
2018
$ 975.8
179.7
133.8
80.7
581.6
2017
$ 784.0
136.3
113.0
42.1
492.6
2016
$ 671.0
129.9
68.9
28.3
443.9
2015
$ 624.3
122.7
52.7
17.1
431.8
Compensation and benefits
337.7
295.7
263.9
251.1
2014
$ 490.9
108.5
49.9
10.5
322.0
201.9
21.5
12.3
14.9
9.9
3.9
7.3
4.3
5.5
—
14.5
296.0
—
26.0
6.4
19.6
(0.3)
$ 19.3
$ 1.01
$ 0.98
34.7
16.5
18.1
13.8
13.9
11.6
5.4
3.1
1.0
26.3
482.1
2.0
101.5
46.0
55.5
—
$ 55.5
$ 2.93
$ 2.87
34.4
15.2
15.2
13.3
11.6
9.8
5.0
4.3
47.0
25.9
477.4
—
15.2
8.8
6.4
—
28.0
13.3
14.0
11.5
7.1
8.2
4.7
4.4
—
22.3
377.4
6.2
72.7
18.0
54.7
—
23.5
13.5
12.5
10.5
4.7
7.2
4.6
7.3
—
18.8
353.7
—
78.1
22.4
55.7
—
$ 6.4
$ 54.7
$ 55.7
$ 0.32
$ 0.31
$ 2.94
$ 2.90
$ 2.94
$ 2.87
18,549,011
18,395,987
18,410,561
18,525,374
18,528,302
18,934,830
18,687,354
18,625,372
18,932,235
19,132,302
$7,824.7
$6,243.4
$5,950.3
$5,070.0
$3,039.7
$ 355.2
$ 230.2
—
—
$ 505.3
$ 449.9
11.6%
1,701
34.6%
1.5%
1,607
37.7%
$ 182.8
$ 45.5
$ 433.8
13.2%
1,464
39.3%
$ 41.6
$ 45.5
$ 397.1
15.0%
1,231
40.2%
$ 22.5
$ 45.5
$ 345.4
5.7 %
1,141
41.1 %
2018 ANNUAL REPORT I 3
Trading systems and market information
Occupancy and equipment rental
Professional fees
Travel and business development
Non-trading technology and support
Depreciation and amortization
Communications
Bad debts and impairments
Bad debt on physical coal
Other
Total compensation and other expenses
Other gains
Income from continuing operations, before tax
Income tax expense
Net income from continuing operations
Loss 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
Employees, end of period
Compensation and benefits as a
percentage of operating revenues
OVERVIEW
VISION & PHILOSOPHY
In 2003, the current management team reconfigured
the company as a provider of financial services
focused on under-served clients in niche markets.
We started with equity of less than $10 million and
10 people, and with the vision that, with relentless
effort and execution, a clear focus on providing great
service and value for our clients, and using common
sense and doing the right thing rather than the easy
thing, we could build a global financial business that
might one day become a credible and recognized
franchise.
Our financial “north star” has been the remarkable
power of compounding on our shareholder capital,
which we harness to become a bigger and more
valuable business. In addition, this approach enables
us to create our own capital runway for growth.
As a result, we are less dependent on the capital
markets, and thus can be flexible and opportunistic in
approaching them.
Ironically, the great financial crisis of 2008 created
unexpected opportunities for us to accelerate our
growth, expand our capabilities and our footprint,
OUR BUSINESS
Today, we are a diversified global brokerage
and financial services firm offering a vertically
integrated product suite, including high-touch
execution, electronic access through a wide variety
of technology platforms in almost every major
global market and financial product, and insightful
market intelligence and advice, as well as post-trade
settlement, clearing and custody services. This is a
unique product suite outside of the bulge bracket
banks, and it creates “sticky” relationships with our
clients. We help these clients access market liquidity,
maximize profits and manage risk.
Our businesses are supported by our global
infrastructure of regulated operating subsidiaries, our
advanced technology platform and our team of more
and thus better position ourselves for achieving
our long-term goal of becoming a larger financial
business. In the face of a more rigorous and complex
regulatory framework, we decided to invest in
retaining our broad capabilities to better serve our
clients, while many of our competitors withdrew
from markets and narrowed their offerings. When
these regulatory and related capital pressures forced
consolidation amongst smaller players, we became
an opportunistic consolidator – and at valuations
that allowed us to keep compounding our book value
without the need to incur undue amounts of goodwill.
Over the last 15 years our steady, determined and
disciplined approach has helped us achieve our
compounding strategy, with shareholder capital
increasing at a compound annual growth rate of 31%,
off the back of revenues that grew at 35% C.A.G.R.
These growth rates declined into the mid-20% range
as we became larger and as the aftermath of the
financial crises provided some significant headwinds,
but despite these headwinds, we believe that we
were still positive outliers in our industry in terms of
performance.
than 1,700 employees (as of September 30, 2018).
We believe our client-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 revenue stream is diversified by asset class,
client type and geography, with a significant portion
of recurring revenue derived from monetizing client
balances in the form of consistent and predictable
interest and fee earnings on the float.
4 I 2018 ANNUAL REPORT
Operating Revenue
Book Value of Equity
INTL Growth (US$ millions)
Operating Revenue
Book Value of Equity
Metric
Compound Annual Growth Rate
2003-2018
2008-2018
Operating Revenue
Book Value of Equity
35.0%
30.5%
23.9%
21.0%
$975.8
$505.3
$975.8
$505.3
$1,200
$1,000
$1,200
$800
$1,000
$600
$800
$400
$600
$400
$200
$200
--
--
2005
2004
2003
2005
2004
2003
2006
2006
2008
2007
2009
2008
2007
2009
2010
2012
2011
2010
2014
2013
2012
2011
2013
2015
2015
2014
2018
2017
2016
2016
2017
2018
Our Clients
We currently serve more than 20,000 commercial
and institutional clients, and more than 80,000
retail clients located in more than 130 countries. We
believe that our clients value us for our attention to
their needs, our expertise and flexibility, our global
reach, our ability to provide access to liquidity in
hard-to-reach markets, and our status as a well-
capitalized and regulated organization.
Strategic Position
We believe that we are well-positioned to capitalize
on key trends impacting the financial services
sector. In particular, embracing regulatory change
has created a competitive advantage for us and has
positioned us well for continued growth. Today’s
stringent regulatory requirements for financial
services firms act as barriers to entry, making it
difficult for existing and new participants to compete
with our business model.
We believe we have become a counterparty of
choice for a number of mid-sized clients that larger
institutions can no longer profitably serve. Similarly,
as the number of smaller competitors continues to
decline due to regulatory challenges and increased
capital requirements, we have gained market share
and have taken advantage of attractive acquisition
opportunities by leveraging our regulatory expertise.
2018 ANNUAL REPORT I 5
BY THE NUMBERS
$505 Million Stockholders’ Equity
Access to 36 Global Exchanges
$401.1 Billion FX Prime Brokerage
1.6 Million OTC Contracts Traded
$55 Million Net Income
251 Million Gold Equivalent Ounces Traded
$2.1 Billion Average Customer Equity
$118 Billion Equity Market Making
Offer Global Payments into ~170 Countries
Managing Business in 130+ Countries
129 Million Exchange Contracts Traded
More than 1,700 Employees Globally
$976 Million Operating Revenue
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.
SHARE PRICE OVER 15 YEARS
$60
$50
$40
$30
$20
$10
0
2003
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
1978
A new entity called Farmers
Commodities Corporation
was formed to accommodate
the grain hedging
brokerage services.
2000
FCC acquired Saul Stone and
Company to become one
of the nation’s largest commercial
grain brokerage firms.
2007
FCStone acquired
Chicago-based
Downes-O’Neill,
dairy specialists.
2010
The Company acquired
Hanley Group companies
to expand the group’s
OTC trading business.
1930
In the 1930’s, Saul Stone
and Company became one
of the first clearing members
of the Chicago Mercantile
Exchange (CME).
1983
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.
2004
International Assets acquired
global payments business
Global Currencies, thereby
establishing a London office.
2009
International Assets
Holding Corporation and
FCStone Group,
Inc. merged.
2011
International Assets
Holding Corporation
changed name to
INTL FCStone Inc.
2011
The Company acquired
the business of the Metals
1983
Division of MF Global
and upgraded to LME
Category One ring
dealing membership.
2012
The institutional
accounts of Tradewire
1994
Securities, LLC.
are acquired.
Farmers Commodities
Corporation (FCC) became a
clearing member of the Kansas
City Board of Trade in 1983 and
2012
in 1985 purchased its first seat
Online news and analysis
on the Chicago Board of Trade.
subscription service
Commodity Network
is launched.
International
Assets was listed on
NASDAQ.
2013
Accounts of First American
Capital and Trading Corp.
acquired, adding
correspondent clearing
service capabilities.
2015
The Company completes the
acquisition of G.X. Clarke & Co.,
2000
an institutional dealer in
U.S. government securities,
FCC acquired Saul Stone
federal agency and
and Company to become
mortgage-backed securities.
one of the nation’s
largest commercial grain
brokerage firms.
2003
2017
The company re-launches the
former independent wealth
2004
advisory service of Sterne
Agee LLC as SA Stone [xxx]
2007
Current management
team takes control of
International Assets
with a strategy to
2016
focus on wholesale
The Company completes
execution.
acquisition of the correspondent
securities clearing business
and independent wealth
management business
from Sterne Agee, LLC.
International Assets
acquired global
payments business
Global Currencies,
thereby establishing a
London office.
International Assets
acquired Gainvest
group in South
America, specializing
2018
in asset management
The Company secures a
and asset backed
post-Brexit footprint in
securities.
the EU by acquiring
Luxembourg-based
Carl Kliem SA.
1924
Saul Stone, a door-to-door
egg wholesaler, formed
Saul Stone and Company,
predecessor to FCStone.
1981
International Assets was
established as an
internationally focused
boutique brokerage firm.
2003
Current management team
take control of International
Assets with a strategy to
focus on wholesale execution.
2008
FCStone acquired
Nashville-based Globecot,
cotton specialists.
2010
The Company acquired
the futures division
of Hencorp, coffee,
cocoa & sugar specialists.
2012
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.
2013
The Company exits
its physical base
metals business.
2015
INTL FCStone Inc. consolidates
its securities, rates and
FCM businesses into
INTL FCStone Financial Inc.
2018
The Company bolsters its
Global Payments offering
by acquiring the SWIFT
Service Bureau of PayCommerce.
1994
International Assets
was listed on NASDAQ.
2007
International Assets acquired
Gainvest group in South
America, specializing in
asset management and
asset backed securities.
2010
Risk Management
Incorporated, energy risk
management specialists,
was acquired by the
newly merged company.
2011
Ambrian Commodities
Limited (“ACL”), was acquired
to provide commodities
execution capabilities in
the key LME market.
2013
INTL FCStone Markets LLC
registers as a swap dealer.
2014
The Company completes
the consolidation of its
two UK subsidiaries,
INTL FCStone Ltd and
INTL Global Currencies Ltd.
2016
The Company agrees to
acquire the London-based
EMEA oils business of ICAP plc,
expanding the Company’s
global energy capabilities.
1970
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.
CHAIRMAN’S LETTER
In 2018, we achieved shareholder return on equity of 11.6% and earnings
per share of $2.87 for the year. Stated after adjustment for the impact
of recent U.S. tax legislation, we achieved an ROE of 16.0%(1) and EPS
of $3.98.(1) We believe that this performance places us in the top tier for
companies in our industry.
As Chairman, I am proud of the value that the compound effect of consistently strong return on equity
generates for our shareholders, and we continue to favor it over other measures of value such as stock
price. As a shareholder myself, I appreciate the multiplier effect it has on our company’s book value.
We believe that our continued ability to turn strong performance into value for shareholders, coupled
with the continuation of market trends more favorable to our business, puts us in a position of strength
and will create new opportunities to deliver more value to our clients and our shareholders going
forward.
With an eye toward expanding our flexibility to seize such opportunities, we explored a potential public
debt offering in October of 2018. However, hewing to our governing principle and discipline of acting
only when “the price is right,” we chose to withdraw the offering as terms became unfavorable in the
face of sudden market instability. That said, we will continue to monitor the markets and look to re-
engage investors when conditions permit.
While industry consolidation continues to generate acquisition opportunities for our company, only
two met our criteria this year: We strengthened our Global Payments offering by acquiring the fully
accredited SWIFT Service Bureau from PayCommerce, and we secured an EU-based footprint for INTL
FCStone post-Brexit with the acquisition in Luxembourg of Carl Kliem S.A.
Maintaining a strong company culture remains a vital component of our strategy to grow our
client base and drive shareholder value. Our people continue to be our most important assets,
and our continuing and constant objectives are to encourage and reward them for innovative and
entrepreneurial thinking. At the same time, we continue to stress the tenets of teamwork and the
critical importance of collaborating with colleagues to sell products and services across our platform.
Into this culture, we welcome Diane L. Cooper, who has joined our board. As President and CEO of GE
Capital’s Commercial Distribution Business, Diane achieved a record of strong performance amid fierce
competition and sometimes challenging market environments. She’ll fit in perfectly, and I look forward
to the depth of knowledge and experience she will bring to the boardroom as we seek to maximize the
value of our company.
Moving from a welcome to a farewell, we extend our best wishes to Brian Sephton as he embarks on
a well-deserved retirement. Currently our head of Compliance and Legal, Brian has filled several key
roles in our company over his 14 years with us. We are grateful for his tireless efforts, his wise counsel,
and his unparalleled eye for the critical detail, and we are sad to lose him.
(1) A reconciliation between GAAP and non-GAAP amounts shown is provided in Appendix A.
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.
As in previous years, I will close this letter by taking stock of how far we’ve come as a company. Since
2002, your company has grown operating revenue from $5.2 million to $975.8 million and net income
from a loss of $300,000 to a profit of $55.5 million this year. Over the same period, shareholder equity
has grown from $4.3 million to $505.3 million.
As we know, the unprecedented convergence of historically low interest rates and low volatility
following the market crash of 2008 severely tested our strategy and our model. Yet, we pressed on,
and over the last several years have approached or achieved or our targets for return on equity
and earnings per share (with 2017 a notable exception). Now as interest rates and volatility climb
back toward their historic norms, we are not only reaping the rewards of our perseverance, but also
beginning to harness the latent potential of our strategy and our model.
Against the backdrop of this growth, the past year’s performance, and increasingly favorable market
conditions, we see our vision for this company truly taking shape. Today, the global markets generate
wealth and opportunity on a scale unprecedented in history; through our extensive conduits into and
between those markets, we connect our clients directly to those opportunities and help power their
growth. In doing so, we power our own.
None of this would be possible without you, our shareholders, and all the people who deliver value to
this company every day. We are proud that we are a company run by shareholders for shareholders,
and as one of you, I remain bullish about our future.
JOHN RADZIWILL
Chairman
A NEW FORMAT
To serve our shareholders better, we’ve chosen this year to discuss in greater detail our vision, business,
strategy and the key performance indicators we use to measure our progress and hold ourselves
accountable to our stakeholders. Our goal in doing so is to provide readers with a clearer and more
easily comparable picture of where we’ve been, where we are, and where we’re going from year to year.
2011
2011
2011
2012
2012
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.
Online news and
analysis subscription
service Commodity
Network is launched.
The institutional
accounts of Tradewire
Securities, LLC. are
acquired.
CHIEF EXECUTIVE’S LETTER
2018 was a record year in which we achieved some significant milestones. Our
net operating revenue approached $1 billion, shareholder funds now exceed
$500 million, and we took in more than $100 million in pre-tax earnings.
Growth in Revenue and Market Share
During the year we saw revenue growth in all our segments – all of which achieved individual high water
marks – and overall growth in operating revenue of 24%. This was due to organic growth of our client footprint
as we continue to become a more recognized franchise, and to generally more favorable market conditions.
Our business performs best when we have moderate volatility and can earn a carry on our customer float,
and we had both working for us during 2018. Volatility increases risk for hedgers and provides money-
making opportunities for speculators, so it drives more activity from both types of clients. While volatility has
increased recently, it remains generally low historically. This will likely change as central banks continue to
withdraw from stimulus and the markets normalize.
During this record-breaking year, we continued to grow our business and build our franchise across both
commercial clients (i.e. non-financial industry companies, primarily) and institutional clients. Our strong rates
of growth in both revenue and transactional volumes substantially outpaced the rate of industry growth –
providing evidence that we have grown market share. Our hard work over many years is starting to pay off as
we have become a more recognized and respected player in our markets by clients, prospective employees
and competitors.
Across all our segments we have margins on incremental revenue of approximately 50% (depending on
product and business mix), which allows us to achieve significant operating margins if we can contain central
overheads. During 2018, we achieved an 18% increase in net operating revenues with fixed compensation only
growing by 4% and all other fixed costs growing by 6%, driving operational leverage to the bottom line.
Over the last two years, as more normalized market conditions have returned, we now have a number of
highly predictable revenue sources from interest and fees, which cover an increasingly material portion of
the central overhead required to operate our franchise. Covering the bulk of our costs with a high degree of
certainty provides greater “ballast” and predictability to our earnings.
Adding Companies and Capabilities – Patiently
We continued to see many small-to medium-sized acquisition opportunities – proof that that the industry
trend towards consolidation continues. We remain patient and disciplined in evaluating these opportunities
and making sure there is a good cultural fit (a client–first mentality), clear strategic value to our franchise in
the form of either client relationships or added capabilities, and ability to be financially accretive quickly. Very
few opportunities pass muster, but we did conclude two small, bolt-on acquisitions during the year, and one
right after year end, none of which were considered material but all of which add value to our franchise.
Carl Kliem S.A. is an independent interdealer broker based in Luxembourg, a leading European financial hub.
The company provides foreign exchange, interest rate and fixed-income products to a diverse, institutional
client base across the European Union. Carl Kliem S.A. employs approximately 40 people and has more
2013
INTL FCStone
Markets LLC
registers as a
swap dealer.
2013
2013
2014
2015
2015
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.
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.
than 400 active institutional clients. This acquisition provides us with a diverse offering and complementary
relationships for a wide range of our products. As a fully regulated EU entity, it also secures our market
presence in the European Union as the Brexit process plays out.
PayCommerce Financial Solutions, LLC is a fully accredited SWIFT Service Bureau provider. The acquisition
enables us to act as a SWIFT Service Bureau for our 300-plus correspondent bank network, thus providing
another important service for delivering cross-border payments in local currencies to the developing world.
In addition, we upgraded our regulatory status in Brazil to allow us to handle larger payments locally. While
this process took the better part of three years to complete, we saw an immediate uptick in revenue as we
enhanced our capabilities in this key payment corridor.
Just after year end, we reached agreement to acquire the New York-based broker-dealer formerly known as
Miller Tabak Roberts, an institutional fixed income business specializing in high yield, convertible, emerging
market and distressed debt. This acquisition brings with it more than 40 experienced professionals, expands
our current fixed income product offering, and adds more than 2,400 institutional relationships. We expect
that our existing clients will benefit from these additions to our offering, while our newly acquired clients will
benefit from the consolidation of the former Miller Tabak Roberts offering and our own offering.
Regulation Creates Opportunity
During the year, we saw the MiFID II regulatory regime come into effect (as well as new Basel bank
requirements) in the European Union. This is an update of MiFID I, and together, they constitute the European
equivalent of Dodd-Frank. Its aim is to bring greater transparency to financial markets and better protection
to investors. This is a massive piece of regulation which has had, and will continue to have, wide-ranging and
perhaps unforeseen consequences. We have taken the view that we are in the regulation business and that
this in turn provides us with a competitive advantage. We do not believe that our current activities will be
adversely impacted materially by this new regulation, which has created a more complex environment in
Europe and for European-based banks and brokers. We believe that this will be a positive development for us
in the medium term and beyond.
The Downside of Volatility
While moderate volatility drives client activity, extreme volatility causes liquidity stress on our clients that
must meet margin calls. If they cannot, their accounts are liquidated – resulting in potential losses for these
clients and perhaps charge-offs for us if they fail to meet their obligations. After our 2018 fiscal year end, we
experienced just such an event when both natural gas and crude oil experienced historic moves. In the case
of natural gas, the daily move on successive days reached multiples of the standard exchange requirements.
A number of FCM client accounts, managed by a commodity trading advisor, were adversely affected by these
price moves. While we had required significantly increased margin from these accounts, the price moves were
so extreme that all positions in these accounts had to be liquidated – resulting in a significant aggregate debit
balance. While the aggregate debit was within our worst-case stress test scenario, it was nonetheless a painful
reminder that markets can swing suddenly and improbably – more often than we think. We continue to pursue
collection of these receivables in the ordinary course of business.
2016
2016
2017
2018
2018
2018
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.
The company
re-launches the former
independent wealth
advisory service of Sterne
Agee LLC as SA Stone
Wealth Management Inc.
The Company bolsters its
Global Payments offering
by acquiring the SWIFT
Service Bureau of
PayCommerce.
The Company secures
a post-Brexit footprint
in the EU by acquiring
Luxembourg-based
Carl Kliem SA.
INTL FCStone expands its
institutional offering with
the acquisition of US-
based broker-dealer GMP
Securities LLC (formerly
Miller Tabak Roberts).
CHIEF EXECUTIVE’S LETTER
STRATEGY
To achieve our vision of becoming a best-in-class financial franchise and our key financial objective of
compounding our capital at 15%, we need to run a resilient and growing business despite the highly cyclical
nature of the markets we operate in.
We focus on mitigating exposure to market risk, ensuring adequate liquidity to maintain our daily operations,
and making non-interest expenses variable, to the greatest extent possible. Our strategy is to employ
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 our experienced people. 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 more scalable and significantly larger
organization that still embraces an entrepreneurial approach to business, supported and underpinned by
strong centralized financial and compliance controls.
KEY PERFORMANCE INDICATORS
We have, since our inception, set out some simple but effective key performance indicators to monitor our
strategic progress and hold ourselves accountable. Because we take a long-term approach, all of these
indicators are focused on long-term performance and we recognize that we may underperform at times in
adverse markets and, similarly, outperform when we have tailwinds.
Compounding Capital:
Target: Annual shareholder return on equity of 15%
This objective implies growing our net earnings by
a similar amount annually as our retained earnings
grow. Our executive and senior management
compensation plans use this target for annual bonus
determination.
We now have the benefit of evaluating our
performance through perhaps the worst business
cycle for financial companies in a generation –
the great financial crisis. For us this was the worst
possible environment for our business due to
historically low volatility crimping client volumes,
zero interest rates on our client float and significantly
increased regulatory cost and capital. Despite these
conditions, we still recorded positive annual ROE
in the high single digits – below our target, but still
better than most of our peers. We are pleased that
our business model achieved the desired result even
in these dire conditions.
The chart below presents ROE and Adjusted ROE for
the last five fiscal years. In fiscal 2014, 2015, and 2016,
there is no difference between ROE and Adjusted
ROE. In fiscal 2017, Adjusted ROE excludes the bad
debt on physical coal, net of incentive recapture. In
fiscal 2018, Adjusted ROE excludes the impact of H.R.
1, the Tax Cuts and Jobs Act (“Tax Reform”) and bad
debt on physical coal. A reconciliation between ROE
and Adjusted ROE is provided in Appendix A.
20.0%
15.0%
10.0%
5.0%
0.0%
2014
20.0%
15.0%
10.0%
5.0%
0.0%
2015
2016
ROE and Adjusted ROE
2017
2018
ROE
Adjusted ROE
2014
2015
2016
2017
2018
As market conditions have normalized, with central
banks around the world starting to retreat and
allowing some modicum of volatility and interest
rates to prevail (although still historically low), we
have performed better and in 2018 exceeded our 15%
target on an adjusted basis.
12 I 2018 ANNUAL REPORT
ROE
Adjusted ROE
We saw our adjusted return on equity expand due to
higher interest rates, which increased earnings on our
float substantially, nearly all of which drops to the
bottom line. Slightly elevated volatility also drove
more volume on our platform. In addition, we also
saw strong underlying growth in our client footprint,
as we added new accounts at a healthy rate and
realized some market-share gains.
Product Diversification and Client Footprint Expansion
Target: Grow our offering and footprint prudently to guard against individual market cyclicality.
One of the key ways we have both grown our
revenue and mitigated the inherent cyclicality
in our individual markets is through revenue and
client diversification. We have actively expanded
our capabilities into different asset classes, markets
and client segments, which both diversifies our
revenue and creates a more valuable financial
network for our clients, as they can avoid the need
for multiple brokers. On the client side, we started
by focusing on commercial clients looking to hedge
their financial risks, as we saw this as providing a
durable stream of revenue. We expanded this client
base geographically and by industry. More recently
we have significantly grown our footprint with
institutional clients looking to access the markets
through our network to gain exposure and make
Commercial Hedging
money trading or investing. We also deal with a
large and growing number of financial institutions.
Finally, we increasingly serve a retail client base
(mainly through intermediaries). All of this creates
traffic over our network and grows our client
balances and float income.
The chart below shows the increasing diversification
of segment income, which protects our bottom line.
Global Payments
During 2018, we saw continued strong growth and
expansion of our commodities hedging segment in
Securities
Europe, which added diversification. In addition, the
acquisitions mentioned above provided both client
and product diversification.
Physical Commodities
Clearing & Execution Services
Segment Income
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing & Execution Services
2014
5%
5%
2018
18%
16%
52%
37%
6%
16%
22%
23%
2018 ANNUAL REPORT I 13
CHIEF EXECUTIVE’S LETTER
Intellectual Capital:
Target: 5 -10% organic growth in revenue
producers.
We recognize that this is often a “quality-not-
quantity” metric. Our business is based on sticky,
long term and meaningful value-added relationships
with our clients. While we are increasingly looking
to leverage our professional staff with appropriate
technology to drive efficiencies, people and
intellectual capital matter. Over the past 10 years, as
we have grown our capabilities, it has become easier
to attract the caliber of talent we need to drive our
business. As always, we take a patient and persistent
approach to attract people who think as we do and
want to build a long-term client-centric business.
Efficiency in Driving Revenue Growth
Target: Minimum return per front office producer
of $1 million per annum.
This is a key measure of our success in productivity
and efficiency in driving revenue through use of
technology as well as leveraging existing client
relationships and expanding our products and
capabilities.
We have comfortably exceeded this target in
recent years. The 2018 increase of 16% to $1.5
million per annum average is reflective of better
market conditions, as well as our progress on better
leveraging our revenue producers with technology
and better leveraging our growing capabilities into
our client relationships.
Efficient and Scalable Infrastructure
Target: Number of Revenue-producing staff is
50% of total staff.
To ensure that we keep an efficient and scalable
infrastructure, we target that more than 50% of our
employees should be client-facing and generating
revenue. This forces us to control support and
infrastructure costs and drive efficiencies with
technology.
Number of Front Office Staff
700
650
600
550
500
450
400
350
300
2014
2015
2016
2017
2018
We managed to attract good talent during 2018, and
the acquisitions mentioned above will bring even
more proven and experienced talent to the company.
Revenue Per Front Office Head
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
2014
2015
2016
2017
2018
Revenue pr front office head
Front Office Percentage of Total Staff
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2014
2015
2016
2017
2018
14 I 2018 ANNUAL REPORT
We have not consistently achieved this target for
the better part of five years largely due to the high
minimum infrastructure and operational costs related
to the clearing, settlement and custody side of our
business. We are working incrementally to address
this in two ways: 1) better use of technology to reduce
operational costs, and 2) achieving better scale on
our clearing platform (especially securities) driving
the operational leverage in this business.
We saw a decrease in this metric from approximately
43% in 2015 to 39% in 2017, when we acquired the
Sterne Agee securities clearing operations. This
clearing business was below scale and not covering
its fixed costs when acquired. Subsequently, it
has added more than 30 correspondent clearing
relationships and is now both profitable and starting
to realize operational leverage.
Flexible Cost Structure
Target: >50% of our total costs variable to
revenue.
To compound our capital consistently, we need to
ensure that we have a resilient business model with
a highly flexible cost structure to protect our bottom
line through the inherent cyclicality of the markets.
We do this by limiting fixed costs – especially fixed
compensation, which represents our largest expense.
This target has been achieved for the last five years.
Compensation Ratio
Target: Ratio of total compensation to operating
revenue less than 40%.
Compensation is our largest single expense and must
be managed effectively.
We adopt a transparent and flexible compensation
model that limits fixed costs but rewards
performance and puts us in a partnership
arrangement with our key people. We believe that
successful people in our industry are attracted to
such arrangements. However, we also balance
this approach with the need to ensure that overall
compensation cost is proportional to the return
shareholders require for supporting the costs, capital
and risks associated with providing our platform.
70%
60%
50%
40%
30%
20%
10%
0%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Variable Cost Ratio
2014
2015
2016
2017
2018
Compensation to Operating Revenue
2014
2015
2016
2017
2018
2018 ANNUAL REPORT I 15
CHIEF EXECUTIVE’S LETTER
Risk Metrics – De Minimis Directional Risk and
Consistent Revenue
Target: consistently profitable daily revenue on
a marked to market basis.
Our goal is to minimize the directional risk we take
when acting as a principal to ensure that we take on
limited risk and ensure stable, consistent revenues.
We seek to act as a facilitator to our clients in
accessing the global trading markets and minimize
taking direct market risk. In certain of our business
activities, we act as a principal to facilitate client
trade execution, and for such transactions, we seek to
offset market risk through matched transactions and
hedging, and limit as much as possible the length of
our holding period.
We monitor our success in mitigating market risk
through proxies, which include analyzing the
variance of daily trading profitability and bad debt
exposure. Our daily trading profitability tends to
follow a bell-curve distribution, which we believe
Risk Metrics – Bad Debt Expense
Target: bad debt less than 1% of annual
operating revenue.
As a clearer, we guarantee the performance of our
clients to the exchanges and counterparties that
they execute trades with, and as such, we assume
counterparty risk. Our risk department calibrates our
risk to ensure that, in a normal market environment,
our client charge-offs are proportional to our capital
and operating revenue, and also to ensure that in the
times of severe market stress (Black Swans), we avoid
catastrophic loss and are able to continue to function
normally.
Marked-to-Market Revenue
204
165
158
58
17
2
97
35
17
s
y
a
D
f
o
r
e
b
m
u
N
250
200
150
100
50
0
$500 to $1,000
$0 to $500
$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 tp $4,000
$4,000 to $4,500
8
>$4,500
Daily Revenues ($000’s)
reflects our limited exposure to direct market risk. In
this regard, we did not have a daily marked-to-market
loss in 761 trading days during the period from
October 1, 2015 through September 30, 2018, even
during periods of extreme market volatility.
M
s
n
o
i
l
l
i
$8.0
$7.0
$6.0
$5.0
$4.0
$3.0
$2.0
$1.0
–
1.4%
1.2%
1.0%
0.8%
0.8%
0.6%
0.4%
0.2%
0.0%
2014
Bad Debt, Excluding Coal(1)
2017
2015
2016
2018
Bad debt, excluding physical coal
As a % of Operating Revenues
s
n
o
i
l
l
i
M
$8.0
$7.0
$6.0
$5.0
$4.0
$3.0
$2.0
$1.0
–
1.4%
1.2%
1.0%
0.8%
0.8%
0.6%
0.4%
0.2%
0.0%
2014
2015
2016
2017
2018
(1) In fiscal 2017 and 2018, bad debt excludes bad debt on
As a % of Operating Revenues
Bad debt, excluding physical coal
physcial coal of $47.0 million and $1.0 million, respectively.
We fulfill an essential function within the market
structure and we are becoming increasingly
important in filling this role as consolidation in the
sector continues. Our risk department reviews the
creditworthiness of our clients and their ability
to perform on their obligations, including making
margin calls to cover negative market moves.
The chart above provides our annual charge offs
and is empirical evidence of our risk management
approach.
16 I 2018 ANNUAL REPORT
FINANCIAL PERFORMANCE
As outlined in the prior sections, we believe that we offer our clients an experience that is not available
through other financial intermediaries. Clients receive superior execution services, including “one call” trader
access and market intelligence traditionally provided only by large, diversified global banks. Our unique
offering provides many of our clients with products and services that are often inaccessible to them due to
their middle-market size, and that our competitors cannot offer due to a lack of size and scale.
We believe that this combination creates strong and lasting client relationships and provides us with
opportunities for revenue growth through cross-selling. Our deep relationships are evidenced by strong client
growth in all business lines, including a net gain of more than 3,100 clients since 2017, and by our long-
standing client relationships. We employ a data-driven approach to consistently tailor our product offerings to
the changing needs of our clients and continuously monitor the resources they use and activities they pursue.
Within this context, we achieved strong operating revenue growth of $191.8 million, for a total of $975.8
million in fiscal 2018 – a 24% increase over the prior year. The return of some periods of volatility in our key
markets resulted in increased client activity and a widening of spreads in fiscal 2018, which combined with
increases in short-term interest rates and average client balances, resulted in record operating revenues in all
five of our reporting segments.
Overall segment income increased 55%, with Commercial Hedging and Physical Commodities adding $23.6
million and $48.0 million respectively. Clearing and Execution Services added $17.9 million, while our Global
Payments segment added $9.2 million. These gains were modestly offset by a $5.8 million decline in Securities
segment income.
Net income increased $49.1 million to $55.5 million in fiscal 2018 compared to fiscal 2017, primarily related
to the growth in operating revenues as well as the reduction in bad debt related to the physical coal business.
Net income in fiscal 2018 includes an estimated one-time income tax charge of $19.8 million related to the
enactment of U.S. Tax Reform. This charge is related to the re-measurement of our deferred tax assets and
liabilities arising from a lower U.S. corporate tax rate and shift to a territorial tax regime as well as a charge
related to the deemed repatriation of unremitted earnings of foreign subsidiaries. Excluding the impact of Tax
Reform, net income in fiscal 2018 would have been $75.3 million.(1)
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 61% of total expenses in fiscal 2018 compared
to 53% in the prior year period. Non-variable expenses declined $30.7 million versus the prior year. However,
excluding the bad debt on physical coal, non-variable expenses increased $15.3 million year-over-year or 5%.
PERFORMANCE BY CLIENT TYPE
Increasingly, our business is centered on commercial clients looking to hedge and mitigate financial risks
inherent in their operating businesses, and on institutional clients looking to either invest or trade in the
financial markets. In addition, we have our Global Payments platform, which is increasingly driven by banks
and financial institutions, and in many ways is a technology-driven platform.
Commercial Clients
Through our Commercial Hedging and Physical Commodities segments, we provide our 7,000 to 10,000
commercial clients globally with a high-value-added and high-touch service that we believe differentiates us
from our competitors and maximizes the opportunity to retain them as clients. Our services are designed to
quantify and monitor commercial entities’ exposure to commodity and financial risk, develop plans to control
and hedge those risks, and provide post-trade reporting against specific client objectives. Our clients are
assisted in the execution of their hedging strategies through a wide range of products, from listed exchange-
(1) A reconciliation between GAAP and non-GAAP amounts shown is provided in Appendix A.
2018 ANNUAL REPORT I 17
CHIEF EXECUTIVE’S LETTER
traded futures and options to basic OTC instruments that offer greater flexibility to structured OTC products
that are customized to suit the client’s individual risk profile and needs. To our mid-sized clients, we offer
structured products that are usually reserved for the largest clients of global banks, as well as high-touch risk
management consulting traditionally associated with smaller boutiques. These clients include producers/
end-users, wholesalers and merchants, corporations, introducing brokers, grain elevators, merchandisers, and
importers/exporters across many industries globally.
Our services span a majority of 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), as well as in base and precious metals 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 clients that are seeking cost-effective hedging strategies.
To further complement these capabilities, we also have a physical commodities capability in both metals and
agricultural markets where we can, on a selective base, assist our clients in procuring or selling commodities
or by-products, arrange logistics support and financing for these products, or embed risk management
programs in physical contracts to enable our clients to bypass the accounting complexities involved in using
derivatives.
This set of exchange-listed, OTC and structured products, combined with our physical capabilities, is
unmatched by our competitors, and we are seeing more extensive use of these capabilities by our commercial
clients. Again, this creates the kind of “sticky” relationships that are 1) more meaningful for our clients, as we
can solve most, if not all, of their hedging requirements, and 2) more valuable to us, as they create annuity-
type revenue streams.
While our offering to these commercial clients is “high touch,” with a relatively large education and advisory
component, we are developing the technology to do this more efficiently and thus better leverage the
experience and expertise of our brokers. For example, we are looking to launch a digitized interface for all
of our clients, giving them a 360-degree view of all of their touchpoints with our organization. At the same
time, this interface will give our brokers the entire integrated view of a client’s relationship with us. We have
already digitized our market intelligence offering, which allows us to track the usefulness of each individual
report, as well as identify potential marketing leads from reader patterns.
During 2018, we launched a platform that enables clients to build structured products online from a set of
building blocks, and simulate outcomes to potentially determine the most suitable combination of products
relative to their needs, all with live pricing. Our precious metals business offers an industry-leading trading
platform that is driving volumes, as well as a first-in-industry online platform for physical trading of gold and
other precious metals. This platform prices available metal to desired locations and currency – inclusive of
foreign exchange and logistics costs. All of these tools are customized to meet client needs and to provide
them with greater convenience and added value.
Aggregate net operating revenue from our commercial clients in fiscal 2018 was $271.2 million (Commercial
Hedging - $226.4 and Physical Commodities - $44.8). This aggregate revenue was up 17% for the year and
constituted approximately 47% of total net operating revenue.
Aggregate net segment income from our commercial clients in fiscal 2018 was $113 million (Commercial
Hedging - $96.4 million and Physical Commodities - $16.6 million) and constituted approximately 43% of total
net segment income.
18 I 2018 ANNUAL REPORT
Institutional Clients
Through our Securities and Clearing and Execution Services segments, we service our global institutional
clients by providing liquidity and trade execution, as well as electronic access (through a wide variety of
technology platforms) to a number of important global markets. These include more than 40 derivatives
exchanges and most global securities exchanges, as well as a variety of global execution facilities and
liquidity sources. Our clients include professional traders, funds, institutional money managers, commercial
bank trust and investment departments, broker-dealers, insurance companies, introducing broker dealers and
their clients.
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 believe we are one of the leading
market makers in foreign securities, as we make markets in more than 5,000 ADRs, GDRs and foreign ordinary
shares – of which 3,600-plus trade in the OTC markets. In addition, we will, on request, make prices in more
than 10,000 unlisted foreign securities. We provide value-added solutions that facilitate cross-border trading
and believe our clients value our ability to manage complex transactions, including foreign exchange, utilizing
our understanding of local market convention, liquidity and settlement protocols around the world.
We act as an institutional dealer in fixed income securities, including United States Treasury, United States
government agency, agency mortgage-backed and asset-backed securities. We are also a broker-dealer in
Argentina, where we are active in providing institutional execution in the local capital markets. Through our
London-based Europe, Middle East and Africa oil voice brokerage business, we provide brokerage services
across the fuel, crude and middle distillates markets to more than 200 commercial and institutional clients
throughout these regions.
We also 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. We also actively trade in a variety of international debt instruments, as well as operate an asset
management business.
As part of our integrated offering, we provide competitive and efficient clearing on major futures and
securities exchanges globally, as well as prime brokerage in major foreign currency pairs and swap
transactions. Additionally, we provide clearing of foreign exchange transactions, in addition to clearing of a
wide range of OTC products.
Over the last three years, we have significantly expanded our institutional capabilities and client footprint
via some key strategic acquisitions. Our acquisition of Sterne Agee’s Correspondent Clearing and Wealth
Management businesses added correspondent securities clearing and wealth management capabilities
to our product and service offering. The acquisition of G.X. Clarke & Co., an institutional dealer in United
States government securities, federal agency and mortgage-backed securities, helped deepen relationships
with approximately 650 institutional accounts. More recently, our 2018 acquisition of Carl Kliem S.A., a
Luxembourg-based and EU-regulated inter-dealer broker with more than 400 institutional relationships,
expands our institutional market coverage in Europe. We also increased our offering with the purchase of U.S-
based broker-dealer GMP Securities LLC (formerly Miller Tabak Roberts), which adds new products and more
than 2,400 institutional relationships.
Finally, during late 2018, we started an agency execution business in U.S. equities – a significant market where
we have little presence but some name recognition as a result of our leading position as a market-maker in
foreign securities. We have been recruiting experienced people with deep institutional relationships who would
be able to leverage our expertise and name recognition. We also have started to leverage our clearing and
custody capabilities into a prime brokerage capability for hedge funds, which is a new client segment for us.
2018 ANNUAL REPORT I 19
CHIEF EXECUTIVE’S LETTER
Aggregate net operating revenue from our institutional clients in fiscal 2018 was $217.2 million (Clearing and
Execution - $122.6 million and Securities - $94.6 million). This aggregate revenue was up 10% for the year and
constituted approximately 37% of total net operating revenue.
Aggregate net segment income from our institutional clients in fiscal 2018 was $89.1 million (Clearing and
Execution - $48.3 million and Securities - $40.8 million). This aggregate segment income was up 16% for the
year and constituted around 34% of total segment income.
Global Payments
We provide global payment solutions to banks and commercial businesses, as well as charities and both
government and nongovernmental organizations, or NGOs. We offer competitive and transparent pricing in
approximately 140 currencies, which we believe is more than any other payments solution provider.
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 non-G20 currencies. FIX
functionality allows clients to view real-time market rates for various currencies, execute and manage orders
in real-time, and view the status of their payments through an 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 centers and global banks seeking more competitive international payments services.
Three factors have opened opportunities for competitors in this market: 1) the general lack of transparency in
bank offerings in the global payments market with regard to fees and exchange rates, 2) the banks’ often more
expensive services, and 3) the lack of systematic regulation in and across destination countries. We believe
that we are a disrupter here, offering significant value to our bank, corporate and NGO/charities clients by
providing competitive and transparent payments solutions (in particular to non-G20 currencies) through an
efficient technology platform.
During 2018, we upgraded our regulatory status in Brazil and now have a fully-fledged domestic payments
capability handling both in-bound and out-bound payments. This is one of the major payments corridors
globally, and we saw an immediate and noticeable uptick in the volume and size of in-bound payments. Over
the medium term, we hope to see the same for out-bound payments.
Increasing globalization and the growth of international trade, as well as the need of corporations,
institutions, and individuals to move money across borders efficiently, have driven growing activity in the
global payments industry. Volume growth in the global payments market has been steady, driving revenue
growth for cross-border payments providers. Increasingly, this volume growth comes from transactions to
emerging economies, benefiting those few providers (such as us) that have a strong competitive position
in those emerging economies and an extensive correspondent bank network, which would be difficult to
replicate.
Net operating revenue from our Global Payments business was $93.5 million, up 16% for the year and
constituted approximately 16% of total net operating revenue.
Net segment income was $59.8 million, up 18% for the year and constituted around 23% of total segment
income.
LOOKING AHEAD
Our core business performed well during 2018, as better market conditions unleashed the true earnings power
of our business model. Our return on equity was 11.6%. When adjusted for the impact of U.S. Tax Reform, it was
16.0%(1), which is above our long-term target and a best-in-class performance, in our estimation.
(1) A reconciliation between GAAP and non-GAAP amounts shown is provided in Appendix A.
20 I 2018 ANNUAL REPORT
We plan to continue to leverage our unique “all-through-one” business model and product offering, as we
believe it will continue to draw clients to our platform as industry consolidation continues, as well as enable
us to create deep client relationships, grow client balances, and increase clearing and execution revenues.
We continue to see gains in market share and attract new clients that are underserved by the global banks,
capitalizing on our position as one of the few publicly listed mid-sized financial services companies that offers
clients futures and options products through our well-capitalized independent FCM, structured products
through our swaps dealer, and securities through our broker-dealer division.
Management’s priority is to remain laser-focused on our goal of becoming a best-in-class financial franchise
by relentlessly pursuing the following objectives:
• Adding products and capabilities, either organically or through disciplined acquisition, to make us a
counterparty of choice for commercial and institutional clients looking to access markets with efficient
execution as well as post trade clearing, settlement and custody services.
• Expanding into client segments and geographies where we are under-represented, by acquiring suitable
talent through recruitment or disciplined acquisition of teams.
• More tightly integrating our offerings, platforms, marketing strategy and customer experience in order to
make the relationship more meaningful for the customer, “stickier” for the company, and more valuable to
us both.
•
Investing in client-facing technology – through an efficient mix of proprietary and industry-standard
platforms to better leverage our intellectual capital in driving revenue growth and providing customers
easier and more efficient access to our products and services
• Create a scalable execution and clearing infrastructure where costs per transaction are decreasing in
absolute terms.
• Robust environment to dynamically allocate capital and resources to create maximum long-term value for
shareholders.
• Multi-layered risk management to ensure that we achieve the best risk-adjusted return for our business.
We believe that we have made significant strides over the last couple years, as evidenced by our financial
performance, and have becoming increasingly recognized as a broker and counterparty of choice globally.
We are well positioned and excited about the prospects ahead.
On behalf of the executive management team, I want to firstly and most importantly thank all of our clients
for without you we have no business; we know we have to earn your trust every day by adding value to your
business. Thanks also to everyone on our amazing INTL FCStone team 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
2018 ANNUAL REPORT I 21
INTL FCSTONE INC.
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 nine non-executive
directors, all nine 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 at least 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.
22 I 2018 ANNUAL REPORT
Executive Director
Sean O’Connor
Chief Executive Officer/President
Officers
William Dunaway
Chief Financial Officer
Xuong Nguyen
Chief Operating 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
Diane Cooper
Director
Bruce Krehbiel
Member Audit Committee
Member Nominating & Governance Committee
Chief Executive Officer, Kanza Cooperative Association
Eric Parthemore
Chairman Nominating & Governance
Member Compensation Committee
Independent Consultant
Edward J. Grzybowski
Chairman Risk Committee
Member Audit Committee
Independent Consultant
Steve Kass
Member Audit Committee
Member Risk Committee
Independent Consultant
Corporate Headquarters And
Stockholder Relations
708 Third Avenue, Suite 1500
New York, NY 10017, USA
Tel: +1 212 485 3500
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
2018 ANNUAL REPORT I 23
APPENDIX A
OFFICE LOCATIONS
The tables below present net income and diluted earnings per share as reported in accordance with Generally Accepted
Accounting Principles (“GAAP”). The tables below also present reconciliations to adjusted net income, adjusted diluted
earnings per share and adjusted ROE, which are non-GAAP measures.
The adjusted non-GAAP amounts reflect each item after removing the impacts of Tax Reform for the year ended
September 30, 2018 and the bad debt on physical coal, net of incentive recapture for the years ended September 30, 2017
and 2018. Management believes that presenting our results excluding Tax Reform and the bad debt on physical coal, net
of incentive recapture is meaningful, as it increases the comparability of period-to-period results.
(in millions)
Reconciliation of net income to adjusted
non-GAAP amounts:
For the Year Ended
September 30, 2018
Net income as reported (GAAP)
Bad debt on physical coal, net of
incentive recapture, net of tax
Impact of Tax Reform
Adjusted net income (non-GAAP)
$ 55.5
1.0
19.8
$ 76.3
(in millions)
For the Year Ended
Calculation of adjusted diluted earnings per
share:
September 30, 2018
Adjusted net income (non-GAAP)
Less: Allocation to participating
securities (c)
Adjusted net income allocated to common
stockholders (non-GAAP)
Divided by diluted weighted-average common
shares used in the calculation of adjusted
diluted earnings per share
Adjusted diluted earnings per share
(non-GAAP)
(in millions)
Reconciliation of net income to adjusted
non-GAAP amounts:
$ 76.3
(1.2)
$75.1
18,934,830
$ 3.98
September 30, 2014
September 30, 2015
September 30, 2016
September 30, 2017
September 30, 2018
For the Year Ended
Net income, as reported (GAAP)
$ 19.3
$ 55.7
$ 54.7
Bad debt on physical coal, net of incentive
recapture, net of tax
Impact of Tax Reform
-
-
-
-
-
-
Adjusted net income (non-GAAP)
$ 19.3
$ 55.7
$ 54.7
Stockholders’ Equity, beginning of fiscal year
Stockholders’ Equity, end of fiscal year
Average of Stockholders’ Equity
Adjusted ROE
$ 335.3
$ 345.4
$ 340.4
5.7%
$ 345.4
$ 397.1
$ 371.3
15.0%
$ 397.1
$ 433.8
$ 415.5
13.2%
$ 6.4
39.4
-
$ 45.8
$ 433.8
$ 449.9
$ 441.9
10.4%
$ 55.5
1.0
19.8
$ 76.3
$ 449.9
$ 505.3
$ 477.6
16.0%
24 I 2018 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, 2018
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, every Interactive Data File required to be submitted 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 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, 2018, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $565.4 million.
As of December 10, 2018, there were 18,915,667 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 13, 2019 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 ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������23
ITEM 2
Properties ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������23
ITEM 3
Legal Proceedings ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������23
ITEM 4 Mine Safety Disclosures �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������23
PART II
24
ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������24
ITEM 6
Selected Financial Data �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������25
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations ����������������26
ITEM 7A Quantitative and Qualitative Disclosures about Market Risk ���������������������������������������������������������������������������������������������������������������������������55
ITEM 8
Financial Statements and Supplementary Data ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������57
ITEM 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ��������107
ITEM 9A Controls and Procedures ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������107
ITEM 9B Other Information �������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������108
PART III
109
ITEM 10 Directors, Executive Officers and Corporate Governance ������������������������������������������������������������������������������������������������������������������������������������109
ITEM 11 Executive Compensation ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������109
ITEM 12
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ��������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������110
ITEM 13 Certain Relationships and Related Transactions, and Director Independence ������������������������������������������������������������110
ITEM 14 Principal Accountant Fees and Services �����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������110
PART IV
111
ITEM 15 Exhibits and Financial Statement Schedules ������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������111
SIGNATURES ���������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������114
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 brokerage and financial services firm
providing execution, risk management and advisory services, market
intelligence and clearing services with significant asset class coverage
and significant market coverage globally. We help our clients to access
market liquidity, maximize profits and manage risk. Our revenues are
derived primarily from financial products and advisory services intended
to fulfill our clients’ commercial needs and provide bottom-line
benefits to their businesses. Our businesses are supported by our
global infrastructure of regulated operating subsidiaries, our advanced
technology platform and our team of more than 1,700 employees as of
September 30, 2018. We believe our client-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 offer a vertically integrated product suite, including high-touch
execution, electronic access through a wide variety of technology
platforms in a number of important global markets, and insightful
market intelligence and advice, as well as post-trade settlement, clearing
and custody services. We believe this is a unique product suite offering
outside of bulge bracket banks, which creates sticky relationships with
our clients. Our business model has created a revenue stream that is
diversified by asset class, client type and geography, with a significant
portion of recurring revenue derived from monetizing non-trading
client activity including consistent and predictable interest and fee
earnings on client balances, while also earning both commissions and
spreads as clients execute transactions across our financial network.
We currently serve more than 20,000 commercial and institutional
clients, located in more than 130 countries. We believe we are the
third largest independent, non-bank futures commission merchant
(“FCM”) in the United States (“U.S.”) based upon our approximately
$2.6 billion in client segregated assets as of September 30, 2018, and
one of the top ranked market makers in foreign securities by dollar
volume as determined through the three-year period ended December
31, 2017, making markets in approximately 5,000 different foreign
securities. We are one of only nine Category One ring dealing members
of the London Metals Exchange (the “LME”). Our clients include
commercial entities, asset managers, regional, national and introducing
broker-dealers, insurance companies, brokers, institutional investors and
professional traders, commercial and investment banks and government
and non-governmental organizations (“NGOs”). We believe our clients
2
value us for our attention to 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 correspondent clearing
and independent wealth management businesses include approximately
60 correspondent clearing relationships representing more than 80,000
underlying individual securities accounts as of September 30, 2018.
We engage in direct sales efforts to seek new clients, with a strategy
of extending our services to potential clients that are similar in size
and operations to our existing client base. In executing this strategy,
we intend to both target new geographic locations and expand the
services offered in geographic locations in which we currently operate
where there is an unmet need for our services, particularly in those
locations where commodity price controls have been recently lifted.
In addition, we selectively pursue small- to medium-sized acquisitions,
focusing primarily on targets that satisfy specified criteria, including
client-centric organizations that may help us expand into new asset
classes, client segments and geographies where we currently have
small or limited market presence.
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 our daily operations and making non-interest
expenses variable, to the greatest extent possible. 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 more scalable and significantly
larger organization that embraces an entrepreneurial approach to
business, supported and underpinned by strong centralized financial
and compliance controls.
INTL FCStone Inc. is a Delaware corporation formed in October 1987.
- Form 10-K PART I
ITEM 1 Business
Available Information
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.
Capabilities
We provide our clients access to financial markets and liquidity sources
globally to enable them to efficiently hedge their risk and/or gain
exposure. Our financial network connects over 20,000 commercial
and institutional clients and over 80,000 retail clients to 36 derivatives
exchanges, most global securities exchanges and a multitude of bilateral
liquidity sources.
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.
Execution
We provide high-touch execution as well as electronic access through
a wide variety of technology platforms in a number of 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.
Clearing
We provide competitive and efficient clearing on major futures and
securities exchanges globally, as well as prime brokerage in major
foreign currency pairs and swap transactions. Additionally, we provide
clearing of foreign exchange transactions, in addition to clearing of a
wide range of over-the-counter “(OTC”) products.
Global Payments
We have built a scalable platform to provide end-to-end global
payment solutions to banks and commercial businesses, as well as
charities, NGOs and government organizations. We offer payments
services in approximately 140 currencies. In this business, we
primarily act as a principal in buying and selling foreign currencies
on a spot basis deriving revenue from the difference between the
purchase and sale prices. Through our comprehensive platform
and our commitment to client service, we provide simple and
fast execution, delivering funds in any of these countries quickly
through our global network of more than 300 correspondent
banking relationships.
Advisory Services
We provide value-added advisory services and high-touch trade
execution across a variety of financial markets, including commodities,
foreign currencies, interest rates, institutional asset management
and independent wealth management. For commercial clients with
We also participate in the underwriting and trading of municipal
securities in domestic markets as well as asset-backed securities in our
Argentinian operations. Through our asset management activities,
we leverage our specialist expertise in niche markets to provide
institutional investors with tailored investment products. Through
our independent wealth management business, we provide advisory
services to the growing retail investor market.
Physical Trading
We act as a principal to support the needs of our clients 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
activities, we have the ability to offer a simplified risk management
approach to our commercial clients by embedding more complex
hedging structures as part of each physical contract to provide clients
with enhanced price risk mitigation. We also offer clients efficient
off-take or supply services, as well as logistics management.
OTC / Market-Making
We offer clients access to the OTC markets for a broad range of traded
commodities, foreign currencies and interest rates, as well as to global
securities markets. For clients with commodity price and financial
risk, our customized and tailored 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.
We provide market-making and execution in a variety of financial
products including commodity derivatives, 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
U.S. Treasury, U.S. government agency, agency mortgage-backed,
asset-backed and corporate securities.
3
- Form 10-K PART I
ITEM 1 Business
Operating Segments
Our business activities are managed as operating segments and organized into reportable segments as follows:
Commercial Client Focused Segments
•– Other —
Commercial Hedging
We serve our commercial clients 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 clients. 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 client objectives. Our clients 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.
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 clients who are seeking cost-effective
hedging strategies. Generally, our clients direct their own trading
activity, and our risk management consultants do not have discretionary
authority to transact trades on behalf of our clients.
Within this segment, our risk management consultants organize their
marketing efforts into client industry product lines, and currently
serve clients in the following areas:
•• Financial Agricultural (“Ag”) & 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.
•– 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.
•■ 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.
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.
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.
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.
Institutional Client Focused Segments
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 major foreign currency pairs and swap transactions. Through our
platform, client orders are accepted and directed to the appropriate
exchange for execution. We then facilitate the clearing of clients’
transactions. Clearing involves the matching of client’ trades with the
exchange, the collection and management of client margin deposits
to support the transactions, and the accounting and reporting of the
transactions to clients.
4
- Form 10-K PART I
ITEM 1 Business
As of September 30, 2018, we held $2.6 billion in required client
segregated assets, which we believe makes us the third largest non-bank
FCM in the U.S., as measured by required client segregated assets.
We seek to leverage our capabilities and capacity by offering facilities
management or outsourcing solutions to other FCM’s.
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 client base including asset managers,
commercial bank trust and investment departments, broker-dealers
and insurance companies.
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 client experience through the clearing and settlement
process. Our independent wealth management business, which
offers a comprehensive product suite to retail clients nationwide,
clears through this platform. We believe we are one of the leading
mid-market clearers in the securities industry, with approximately
60 correspondent clearing relationships with over $15 billion in assets
under management or administration as of September 30, 2018.
Within this segment, we also maintain what we believe is 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 clients 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 FX desk that arbitrages the exchange-traded
foreign exchange markets with the cash markets.
Through our London-based Europe, Middle East and Africa (“EMEA”)
oil voice brokerage business, we employ over 30 employees providing
brokerage services across the fuel, crude and middle distillates markets
with over 200 commercial and institutional clients throughout Europe,
the Middle East and Africa.
Securities
We provide value-added solutions that facilitate cross-border
trading and believe our clients 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 clients include U.S.-based regional
and national broker-dealers and institutions investing or executing
client 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 5,000 ADRs, GDRs and foreign ordinary shares, of which over
3,600 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 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.
Payments Segment
Global Payments
We provide global payment solutions to banks and commercial
businesses as well as charities and non-governmental and government
organizations. We offer payments services in approximately 170 countries
and 140 currencies, which we believe is more than any other payments
solution provider, and provide 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 clients 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 client 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 clients 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.
5
- Form 10-K PART I
ITEM 1 Business
Acquisitions during Fiscal Year 2018
PayCommerce Financial Solutions, LLC
Carl Kliem S.A.
On September 5, 2018, we acquired all of the outstanding membership
interests of PayCommerce Financial Solutions, LLC. PayCommerce
Financial Solutions, LLC is a fully accredited SWIFT Service Bureau
provider. The acquisition enables us to act as a SWIFT Service Bureau for
our 300-plus correspondent banking network, thus providing another
important service for delivering local currency, cross-border payments
to the developing world. The purchase price was approximately $3.8
million and was not material to us. Subsequent to the acquisition,
we have renamed PayCommerce Financial Solutions, LLC to INTL
Technology Services LLC.
On June 12, 2018, we executed a sale and purchase agreement to
acquire Carl Kliem S.A. Carl Kliem S.A. is an independent interdealer
broker based in Luxembourg, a leading European financial hub,
providing foreign exchange, interest rate and fixed income products
to a diverse, institutional client base across the European Union. Carl
Kliem S.A. employs approximately 40 people and has over 400 active
institutional clients. The closing of the agreement was conditional upon
approval of the Luxembourg financial sector supervisory authority,
the Commission de Surveillance du Secteur Financier (“CSSF”). In
November 2018, the Company received regulatory approval from the
CSSF to complete the acquisition. The purchase price is equal to the
net tangible book value on the completion date minus restructuring
costs and is not expected to be material to us.
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 more than 30 front office employees across
the fuel, crude, middle distillates, futures and options desks that have
relationships with over 200 commercial and institutional clients
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 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 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 compared to the allocation of fair value
to the net assets at closing was reflected as a bargain purchase gain
on the transaction within “other gains” in the Consolidated Income
Statement for the year ended September 30, 2016.
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
6
- Form 10-K PART I
ITEM 1 Business
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
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 clients 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 client transactions
and solidify client 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
client 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.
INTL FCStone DTVM Ltda., our broker-dealer subsidiary based
in Brazil, clears its securities transactions through BM&F Bovespa.
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
reporting to exchange clearing organizations, internal risk controls, and
reporting to government and regulatory entities, corporate managers,
risk managers and clients. 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 client funds in relation to certain of our activities. In regulated
entities, these client funds are segregated, but in unregulated entities
they are not. For a further discussion of client segregated funds
in our regulated entities, please see the “Client Segregated Assets”
discussion below.
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, InterContinental Exchange, Inc.
(“ICE”) Futures US, ICE Europe Ltd, the New Zealand Exchange
and the Minneapolis Grain Exchange. These regulatory bodies protect
clients by imposing requirements relating to capital adequacy, licensing
of personnel, conduct of business, protection of client 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. In connection with our
wealth management business, one of our subsidiaries, SA Stone
Investment Advisors Inc., is registered with, and subject to oversight
by, the SEC as an investment adviser. As such, in its relations with its
advisory clients, SA Stone Investment Advisers Inc. is subject to the
fiduciary and other obligations imposed on investment advisers under
the Investment Advisers Act of 1940 and the rules and regulations
promulgated thereunder, as well as various state securities laws. These
laws and regulations include obligations relating to, among other
things, custody and management of client assets, marketing activities,
self-dealing and full disclosure of material conflicts of interest, and
generally grant the SEC and other supervisory bodies administrative
powers to address non-compliance. Failure to comply with these
requirements could result in a variety of sanctions, including, but not
limited to, revocation of an advisory firm’s registration, restrictions or
7
- Form 10-K PART I
ITEM 1 Business
limitations on its ability to carry on its investment advisory business
or the types of clients with which it can deal, suspensions of individual
employees and significant fines.
The Financial Conduct Authority (“FCA”), the regulator of the financial
services industry in the United Kingdom, regulates our subsidiary,
INTL FCStone Ltd, as a Markets in Financial Instruments Directive
(“MIFID”) investment 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
client money and other assets which, under certain circumstances
for certain classes of clients must be segregated from the firm’s own
assets. INTL FCStone Ltd is a member of the LME, ICE Europe
Ltd, Euronext Amsterdam, Euronext Paris, 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 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.
Effective September 2016, CFTC margin rules came into effect,
imposing new requirements on registered swap dealers (such as our
subsidiary, INTL FCStone Markets, LLC) and certain counterparties
to exchange initial and variation margin, with an implementation
period ending in 2020. 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 clients 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. EMIR has imposed
Net Capital Requirements
new requirements on our European entities, including (a) reporting
derivatives trades to trade repositories; (b) setting up enhanced
risk management procedures for OTC derivative transactions; and
(c) changes to our clearing account models and increased central
counterparty margin requirements. Reporting requirements 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. We comply with the
enacted provisions and will continue to do so when pending EMIR
provisions are finalized as relevant to our activities.
In addition to the EMIR, European Union financial market legislation
Markets in Financial Instruments Directive II (“MIFID II”) and
the Markets in Financial Instruments Regulation (“MIFIR”) took
effect on January 3, 2018. Principal areas of impact related to these
regulatory texts involve the emergence and oversight of organized
trade facilities (“OTF’s”) for trading OTC non-equity products, client
categorization, enhanced investor protection, conflicts of interest and
execution policies, transparency obligations and extended transaction
reporting requirements. We will continue to monitor all applicable
regulatory developments.
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.
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 clients’ 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.
SA Stone Wealth Management Inc. (formerly Sterne Agee Financial
Services, Inc.) is subject to the SEC Uniform Net Capital Rule 15c3-1
under the Exchange Act.
8
- Form 10-K INTL FCStone Ltd, a financial services firm regulated by the FCA
is subject to a net 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.
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 regulate INTL FCStone DTVM Ltda. (“INTL FCStone
DTVM”) and INTL FCStone Banco de Cambio S.A. They are
a registered broker-dealer and registered foreign exchange bank,
respectively, and are subject to capital adequacy requirements.
Segregated Client Assets
INTL FCStone Financial maintains client segregated deposits from
its clients 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 client 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
clients segregated depositories (“segregated assets”) to the firm’s total
segregated assets held on deposit from clients (“segregated liabilities”).
The amount of client segregated assets must be in excess of the segregated
liabilities owed to clients and any shortfall in such assets must be
immediately communicated to the CFTC. As of September 30, 2018,
INTL FCStone Financial maintained $57.3 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 client segregated
assets. This regulation allows for the investment of client 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 guaranteed by the U.S. under the Temporary
Liquidity Guarantee Program, interest in money market mutual funds,
Secured Client Assets
PART I
ITEM 1 Business
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.
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, 2018. Additional
information on these net capital and minimum net capital requirements
can be found in Note 12 to the Consolidated Financial Statements.
and repurchase transactions with unaffiliated entities in otherwise
allowable securities. INTL FCStone Financial predominately invests
its client segregated assets in U.S. Treasury securities and money
market mutual funds.
In addition, INTL FCStone Financial in its capacity as a securities
clearing broker-dealer, clears transactions for clients and certain
proprietary accounts of broker-dealers (“PABs”). In accordance with
Rule 15c3-3 of the Securities Exchange Act of 1934 (“Rule 15c3-3”),
the Company maintains special reserve bank accounts (“SRBAs”) for
the exclusive benefit of securities clients and PABs. As of September 30,
2018, we prepared reserve computations for the clients accounts and
PAB accounts, in accordance with the client reserve computation
guidelines set forth in Rule 15c3-3. Based upon these computations,
there was no PAB reserve requirement as of September 30, 2018. The
customer reserve requirement was $6.4 million as of September 30,
2018. As of September 30, 2018, amounts held on deposit in SRBAs for
the benefit of clients and PABs were $0 and $0.3 million, respectively.
An additional deposit of $11.4 million was made to the client SRBA
on October 2, 2018 to meet the client segregation requirements.
INTL FCStone Ltd is subject to certain business rules, including
those that govern the treatment of client money and other assets
which under certain circumstances for certain classes of client must
be segregated from the firm’s own assets. As of September 30, 2018,
INTL FCStone Ltd was in compliance with the applicable segregated
funds requirements.
INTL FCStone Financial maintains client secured deposits from its
clients 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 clients trading foreign futures and
foreign options on foreign commodity exchanges or boards of trade,
which are designated as secured clients’ accounts. As of September 30,
2018, INTL FCStone Financial maintained $16.1 million in secured
assets in excess of its secured liabilities.
9
- Form 10-K PART I
ITEM 1A Risk Factors
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.
FCStone Commodity Services (Europe), Ltd. is domiciled in Ireland
and subject to regulation by the Central Bank of Ireland.
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. and
INTL FCStone Banco de Cambio S.A. 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.
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, 2018, we employed 1,701 people globally: 1,092 in the U.S., 270 in the United Kingdom, 143 in Brazil, 76 in Argentina,
53 in Singapore, 12 in Dubai, 10 in the Republic of Ireland, 10 in Australia, 9 in Paraguay, 9 in China, 4 in Hong Kong, 9 in Mexico and
4 in Canada. 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, 2018 we recorded net
income of $55.5 million, compared to net income of $6.4 million
in fiscal 2017 and $54.7 million in fiscal 2016.
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;
10
- Form 10-K •• 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;
•• reduction in fee revenues from client trading and wealth management
services;
•• 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.
The manner in which we account for certain of our
precious metals and energy 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 and energy commodities inventory held by
subsidiaries that are not broker-dealers. Our precious metals and energy
inventory held in subsidiaries which are not broker-dealers is stated
at the lower of cost or net realizable 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 and energy 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 level of indebtedness could adversely affect our
financial condition.
As of September 30, 2018, our total consolidated indebtedness was
$355.2 million, and we may increase our indebtedness in the future
as we continue to expand our business. Our indebtedness could have
important consequences and significant effects on our business, 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 indebtedness, thereby reducing
our ability to use our cash flow to fund working capital, capital
expenditures, acquisitions, investments and general corporate
requirements;
•• making it difficult for us to optimally manage the cash flow for
our businesses;
•• limiting our ability to obtain additional financing to fund future
working capital, capital expenditures, acquisitions, investments and
general corporate requirements;
•• limiting our flexibility in planning for, or reacting to, changes in
our business and the markets in which we operate; and
PART I
ITEM 1A Risk Factors
•• subjecting us to a number of restrictive covenants that, among other
things, limit our ability to pay dividends and make distributions,
make acquisitions and dispositions, borrow additional funds and
make capital expenditures and other investments.
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 $594.5 million, consisting of:
•• a $262.0 million facility available to the Company, for general
working capital requirements, committed until March 18, 2019.
•• a $75.0 million facility available to INTL FCStone Financial, for
short-term funding of margin to commodity exchanges, committed
until April 4, 2019.
•• a $232.5 million committed facility available to our wholly owned
subsidiary, FCStone Merchant Services, LLC, for financing traditional
commodity financing arrangements and commodity repurchase
agreements, committed until November 1, 2019.
•• 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 January 31, 2019.
Of our committed credit facilities, $362 million are scheduled to
expire during the 12-month period beginning with the filing date of
this Annual Report on Form 10-K. There is no guarantee that we will
be successful in renewing, extending or rearranging these facilities.
The Company’s business requires substantial cash to support its operating
activities. Our business involves the establishment and carrying of
substantial open positions for clients 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 clients 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 clients. We have systems
in place to collect margin and other deposits from clients on a same-
day basis; however, 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 clients. As such, the Company may be dependent on its lines of
credit and other financing facilities in order to fund margin calls and
other operating activities.
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 on terms favorable to us or at all. 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.
11
- Form 10-K PART I
ITEM 1A Risk Factors
Our failure to successfully integrate the operations of
businesses acquired could have a material adverse effect
on our business, financial condition and operating
results.
From time to time, we may seek to expand our product offerings
and /or geographic presence through acquisitions of complementary
businesses, technologies or services. Our ability to engage in suitable
acquisitions will depend on our ability to identify opportunities
for potential acquisitions that fit within our business model, enter
into the agreements necessary to take advantage of these potential
opportunities and obtain any necessary financing. We may not be
able to do so successfully. We are regularly evaluating potential
acquisition opportunities.
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 clients 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 clients, (2) the ability to sell the services and products
of the acquired companies to the existing clients of our other
business segments, and (3) the ability to sell the services and
products of our other business segments to the existing clients 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
clients, 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 clients 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.
12
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 clients;
•• the efficiency of our order execution;
•• the sophistication of our trading technology; and
•• the quality of our client service.
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.
Fluctuations in currency exchange rates could
negatively impact our earnings.
A significant portion of our international business is conducted in
currencies other than the U.S. dollar, and changes in foreign exchange
rates relative to the U.S. dollar can therefore affect the value of our
non-U.S. dollar net assets, revenues and expenses. Although we
closely monitor potential exposures as a result of these fluctuations in
currencies and adopt strategies designed to reduce the impact of these
fluctuations on our financial performance, there can be no assurance
that we will be successful in managing our foreign exchange risk.
Our exposure to currency exchange rate fluctuations will grow if the
relative contribution of our operations outside the U.S. increases. Any
material fluctuations in currencies could have a material effect on our
financial condition, results of operations and cash flows.
- Form 10-K We are exposed to certain risks as a result of operating in
countries with high levels of inflation.
We are exposed to risks as a result of operating in countries with
high levels of inflation. These risks include the risk that the rate of
price increases will not keep pace with the cost of inflation, adverse
economic conditions may discourage business growth which could
affect demand for our services, the devaluation of the currency may
exceed the rate of inflation and reported U.S. dollar revenues and
profits may decline, and these countries may be deemed “highly
inflationary” for U.S. GAAP purposes.
For example, we have wholly owned subsidiaries in Argentina which
employed 76 people as of September 30, 2018, and primarily conduct
debt trading and asset management business activities for clients.
The Argentinian economy was recently determined to be highly
inflationary. For U.S. GAAP purposes, a highly inflationary economy
is one where the cumulative inflation rate for the three years preceding
the beginning of the reporting period, including interim reporting
periods, is in excess of 100 percent. Argentina’s inflation rate reached
this threshold during the quarterly period ended June 30, 2018. For
periods through June 30, 2018, the functional currency for certain
of our subsidiaries was the Argentinian peso, the local currency of
these subsidiaries. In accordance with this designation, effective July 1,
2018 we report the financial results of the subsidiaries in Argentina
at the functional currency of their parent, which is the U.S. dollar.
Going forward, fluctuations in the Argentinian peso to U.S. dollar
exchange rate could negatively impact our earnings.
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 clients in which we act as a principal
counterparty. We endeavor to simultaneously offset the underlying
risk of the instruments, such as commodity price risk, 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 effective to fully eliminate the 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 reference assets or rates 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.
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.
PART I
ITEM 1A Risk Factors
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 our or 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 generally only be modified or
terminated only by mutual consent of the parties to any such transaction
(other than in certain limited default and other specified situations (e.g.,
market disruption events)) 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.
In addition, we note that as a result of rules recently adopted by
U.S. regulators concerning certain financial contracts (including
OTC derivatives) entered into with our counterparties that have been
designated as global systemically important banking organizations, we
may be restricted in our ability to terminate such contracts following
the occurrence of certain insolvency-related default events. The rules
are being progressively implemented between January 1, 2019 and
January 1, 2020.
Changes to the U.S. corporate tax system have had and
may in the future continue to have a significant effect
on the carrying value of our net deferred tax assets and
will result in additional U.S. corporate tax liabilities
on unremitted earnings from deemed repatriation of
earnings of our foreign subsidiaries.
The recent reform of the U.S. tax system includes changes to corporate
tax rates, a one-time mandatory repatriation transition tax on previously
untaxed accumulated and current earnings and profits of certain of
our foreign subsidiaries and also establishes new tax laws that will
affect the fiscal year ending September 30, 2019 and subsequent
fiscal years, including, but not limited to, (1) elimination of the
corporate alternative minimum tax, (2) a new provision designed
to tax global intangible low-taxed income, (3) limitations on the
utilization of net operating losses incurred in tax years beginning after
September 30, 2018 to 80% of taxable income per tax year, (4) the
creation of the base erosion anti-abuse tax, (5) a general elimination
of U.S. federal income taxes on dividends from foreign subsidiaries,
and (6) limitations on the deductibility of interest expense and certain
executive compensation.
As of September 30, 2018, the remeasurement of the deferred tax assets
and liabilities resulted in $8.6 million of tax expense. The accounting
for this amount is considered complete.
13
- Form 10-K PART I
ITEM 1A Risk Factors
The transition tax requires us to determine, in addition to other
factors, the amount of post 1986 earnings and profits of the relevant
subsidiaries, as well as the amount of non-US income taxes paid on
such earnings. We made a reasonable estimate of the transition tax and
recorded a provisional transition tax obligation as of September 30,
2018 of $11.2 million. While we can make reasonable estimates
for the deemed repatriation transition tax, the final tax impact may
differ from these estimates, due to, among other things, changes in
our interpretations and assumptions, additional guidance that may
be issued by taxing authorities, and actions we may take.
Most state and local income tax jurisdictions have updated their
conformity or issued guidance on their level of conformity with the
U.S. federal income tax changes as of September 30, 2018. We are
able to calculate the impact of the reduction in corporate rate and
the deemed repatriation transition tax for state and local income tax
purposes and the impact on tax expense is immaterial.
We may have difficulty managing our growth.
We have experienced significant growth in our business. Our operating
revenues grew from $490.9 million in fiscal 2014 to $975.8 million
in fiscal 2018. This growth may continue, including as a result of
any acquisitions we have recently undertaken or may undertake in
the future.
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, or if growth is at a rate lower than our expectations,
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.
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; however, there can be no assurances
that such procedures will be effective.
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.
As an SEC reporting company, we are required to maintain a system
of effective 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.
14
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 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 clients’ and counterparties’ 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 clients’ and counterparties’ positions and
the associated risks.
Our policies and procedures used to identify, monitor and mitigate
a variety of risks, including risks related to human error, client
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.
- Form 10-K We are exposed to the credit risk of our clients 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
securities transactions as principal with institutional counterparties.
We clear the majority of our principal securities transactions through
unaffiliated clearing brokers or banks, who also are the custodian
of the majority of our principal equity and debt securities. In these
transactions, we may suffer losses as a result of 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. Adverse
changes in market conditions related to securities 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 clients 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 client’s margin loan may decline below the client’s obligation
to us. In the event, the client 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 clients, 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 clients for all trades consummated on exchanges. We must pay
initial and variation margin to the exchanges before we receive the
required payments from our clients. Accordingly, we are responsible
for our clients’ obligations with respect to these transactions, including
margin payments, which exposes us to significant credit risk. Client
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 client’s position in a
manner which does not result in a deficit in that clients account. A
substantial part of our working capital is at risk if clients 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 derivative transactions (including
commodity, foreign exchange and interest rate transaction), which
exposes us to both the credit risk of our clients and the counterparties
with which we offset the client’s position. As with exchange-traded
transactions, our OTC transactions require that we meet initial and
variation margin payments on behalf of our clients before we receive
the required payment from our clients. 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 client will not be collected
from the respective counterparty with which the transaction was
offset. Clients 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.
PART I
ITEM 1A Risk Factors
We act as a principal in our physical commodities trading activities
which exposes us to the credit risk of our counterparties and clients
in these activities.
Although we have procedures for reviewing credit exposures to specific
clients 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 exchange price levels. Some of our risk management methods
depend upon the evaluation of information regarding markets, clients
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 clients and counterparties.
In our securities, commodities and derivatives trading businesses we
rely on the ability of our clearing brokers and banks 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 or bank 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 clearing houses in the U.S. and abroad,
we are also exposed to clearing member credit risk. 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 of the applicable clearing house. 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 derivative
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 other assets, and
interest 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, commodities and other assets held in inventory.
Sudden sharp changes in fair values of securities, commodities and
other assets can result in:
•• illiquid markets;
•• fair value losses arising from positions held by us;
•• the failure of buyers and sellers of securities, commodities and other
assets to fulfill their settlement obligations;
15
- Form 10-K PART I
ITEM 1A Risk Factors
•• 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.
Our net operating revenues may decrease due to
changes in client trading volumes which are dependent
in large part on commodity prices and commodity
price volatility.
Client 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 client balances held on deposit, which
in turn may reduce the amount of interest revenue and account fees
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:
16
•• 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.
Any one or more of these factors may reduce the level of activity in any
of these markets in which we conduct business, 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 clients, could
- Form 10-K cause us to enter into transactions that clients 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 clients are not able to settle their transactions on a
timely basis due to employee error, 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.
Internal or third party computer and communications
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
clients.
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 client’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, client 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 clients;
•• slower response times;
•• delays in our clients’ trade execution;
•• failed settlement of trades;
•• decreased client satisfaction with our services;
•• incomplete, untimely or inaccurate accounting, recording, reporting
or processing of trades;
•• financial losses;
•• litigation or other client claims; and
•• regulatory sanctions.
In addition, in connection with our business, we collect and retain
personally identifiable information of our clients. The continued
occurrence of high-profile data breaches provides evidence of the serious
threats to information security. Our clients expect that we will adequately
protect their personal information, and the regulatory environment
surrounding information security and privacy is increasingly demanding.
Protecting against security breaches, including cyber-security attacks, is
an increasing challenge, and penetrated or compromised data systems
or the intentional, inadvertent or negligent release or disclosure of data
could result in theft, loss or fraudulent or unlawful use of client or
company data. It is possible that our security controls over personally
PART I
ITEM 1A Risk Factors
identifiable information, our training of employees on data security
and other practices we follow may not prevent the improper disclosure
of personally identifiable information that we store and manage.
The occurrence of degradation or failure of the communications
and computer systems on which we rely, or the significant theft,
loss or fraudulent use of client information, may lead to financial
losses, litigation or arbitration claims filed by or on behalf of our
clients 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, or theft, loss or fraudulent
use of client information, could also have a negative effect on our
reputation, which in turn could cause us to lose existing clients to
our competitors or make it more difficult for us to attract new clients
in the future. Further, any financial loss that we suffer as a result of
such degradations or failures in the performance of our computer
and communications systems and networks 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 derivatives industries are subject to extensive
regulation under federal, state and foreign laws. In addition, the SEC,
the CFTC, FINRA, the MSRB, the FCA, the NFA, the CME Group,
Inc. and other self-regulatory organizations (commonly referred to as
SROs), state securities commissions, and foreign securities 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.
As participants in various financial markets and exchanges, we may
be subject to regulation concerning certain aspects of our business,
including without limitation:
•• risk management;
•• trade practices;
•• the way we communicate with, market our products and services
to, and disclose risks to, clients;
•• financial, transaction and other reporting requirements and practices;
•• client identification and anti-money laundering requirements;
•• capital structure;
•• record creation and retention;
•• safeguarding and management of client assets and personal
information;
•• conflicts of interest; 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 been subject to claims arising from acts that regulators
asserted were in contravention of these laws, rules and regulations.
17
- Form 10-K PART I
ITEM 1A Risk Factors
These claims resulted in the payment of fines and/or other settlement
terms (including requiring us to rectify any deficiencies identified by
the applicable regulator - for example, amending our policies and
procedures). It is possible that we, 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 and/or other settlement terms 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.
Any rule changes, additional legislation or regulations (including
changes required under 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, NFA 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, NFA 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 on our business. Our business, financial
condition and operating results may be materially affected by both
regulations that are directly applicable to us and/or our counterparties
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.
We have incurred significant additional operational
and compliance costs to meet regulatory requirements.
These requirements have significantly affect our
business and will continue to do so in the future.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
(the “Dodd-Frank Act”) was signed into law on July 21, 2010. The
Dodd-Frank Act represents a comprehensive change to financial
regulation in the U.S., and affects virtually every area of the capital
markets, including, 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 market participants
such as “swap dealers”. Implementation of the Dodd-Frank Act has
required, and will continue to require, many lengthy rulemaking
processes resulting in the adoption of a multitude of new regulations
applicable to entities which transact business in the U.S. or with U.S.
persons outside the U.S. The Dodd-Frank Act affects many aspects,
in the U.S. and internationally, of our business, including OTC
derivatives and other financial activities, and will have an effect on our
18
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.
The Dodd-Frank Act granted 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. A substantial majority of the
OTC derivatives transactions in which our subsidiaries and affiliates
engage are subject to regulation by the CFTC, which has finalized
and implemented most of the rules required under the Dodd-Frank
Act. However, because the regulatory program for OTC derivatives is
comparatively new, it is difficult to predict the extent to which we and
our subsidiaries and affiliates will be affected by these implementing
regulations as they come into effect. 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.
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 continued enhancement of our technology relating
to many facets of our business, including 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 have been, and that will continue to be made to, our
OTC and clearing businesses in order to comply with our regulatory
obligations have impacted the way be conduct these businesses and
may adversely impact our current and future results of operations. As
a result of the increased financial regulation (including as a result of
the Dodd-Frank Act), the markets for cleared and non-cleared swaps
may become less robust, there may be less volume and liquidity in
these markets and there may be less demand for our services. This
may occur as a result of, for example, certain banks and other large
institutions being limited in their conduct of proprietary trading
and being limited or prohibited from trading in certain derivatives.
These rules, including the restrictions and limitations on the trading
activities of certain banks and large institutions, may impact transaction
volumes and liquidity in the markets in which we operate and our
revenues would be adversely impacted as a result.
These changes to our OTC derivatives and clearing businesses may also
adversely impact our cash flows and financial condition. Registration
requirements have and will continue to impose substantial regulatory
requirements upon certain of our entities including, among other
things, capital and margin requirements, business conduct standards,
initial and variation margin requirements, and record keeping and
data reporting obligations. Increased regulatory oversight has also
imposed 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 on registered swap dealers (such as our subsidiary,
INTL FCStone Markets, LLC) and certain of their counterparties
to exchange initial and variation margin, with an implementation
period ending in September 2020.
- Form 10-K The European Markets Infrastructure Regulation (“EMIR”) is the
European regulation on OTC derivatives, central counterparties and
trade repositories. EMIR has been implemented across the European
Economic Area member states. EMIR has imposed new requirements
on our European entities, including (a) reporting derivatives trades
to trade repositories; (b) setting up enhanced risk management
procedures for OTC derivative transactions; and (c) changes to our
clearing account models and increased central counterparty margin
requirements. Reporting requirements 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. 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 EMIR, European Union financial market legislation
MiFID II and MiFIR took effect on January 3, 2018. Principal areas
of impact related to these regulatory texts involve the emergence and
oversight of organized trading facilities (“OTFs”) for trading OTC non-
equity products, client categorization, enhanced investor protection,
conflicts of interest and execution policies, transparency obligations
and extended transaction reporting requirements. We will continue
to monitor all applicable regulatory developments.
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.
SA Stone Wealth Management Inc. (formerly Sterne Agee Financial
Services, Inc.) is subject to the SEC Uniform Net Capital Rule 15c3-1
under the Securities Exchange Act of 1934.
The FCA requires our United Kingdom 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.
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 regulate INTL FCStone DTVM Ltda. and INTL FCStone
Banco de Cambio S.A. They are a registered broker-dealer and
registered foreign exchange bank, respectively, and are subject to
capital adequacy requirements.
The Comision Nacional de Valores regulates INTL Gainvest S.A. and
INTL CIBSA S.A., and they are subject to net capital and capital
PART I
ITEM 1A Risk Factors
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.
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.
The CFTC has also proposed capital requirements requiring registered
swap dealers (such as our subsidiary, INTL FCStone Markets, LLC)
to maintain specific levels of net capital. If implemented as proposed,
failure to maintain the required net capital may result in suspension or
revocation of registration by the CFTC and suspension or expulsion
by the NFA and various exchanges of which it is a member.
Ultimately, any failure to meet capital requirements by our dually
registered broker-dealer/FCM subsidiary, or our other broker-dealer
subsidiaries, could result in liquidation of the subsidiary. 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.
Furthermore, 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.
In addition to the net capital requirements, INTL FCStone Financial
Inc. is subject to the deposit and/or collateral requirements of the
clearing houses in which it participates (such as The Depository Trust
& Clearing Corporation and The Options Clearing Corporation).
These requirements may fluctuate significantly from time to time
based upon the nature and size of client trading activity. Failure to
meet such requirements could result in our inability to continue to
participate in the clearing house, which would have a material adverse
effect on the Company’s results of operation and financial condition.
We are subject to margin funding requirements on
short notice.
Our business involves establishment and carrying of substantial open
positions for clients 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 clients 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 clients. 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 clients on a
same-day basis; however, 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 clients. Generally, if a client is unable to meet its margin call,
we promptly liquidate the client’s account. However, there can be
19
- Form 10-K PART I
ITEM 1A Risk Factors
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 clients. As of
September 30, 2018, we had $2.6 billion in client segregated assets, the
majority of which are generally invested in U.S. Treasury securities. In
addition, in our correspondent securities clearing business, we earn fee
income in lieu of interest income on client 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 client deposits. If
short-term interest rates remain low or start to decline further, our
revenues derived from interest will correspondingly 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.
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, commodities and derivatives law
liability.
We face significant legal risks in our businesses, including risks related
to currently pending litigation involving us. Many aspects of our
business involve substantial risks of liability, including liability under
federal and state securities, commodities and derivatives laws, other
federal, state and foreign laws and court decisions, as well as rules
and regulations promulgated by the SEC, the CFTC, FINRA, the
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 11 - Commitments and Contingencies
in the Consolidated Financial Statements.
20
We are subject to intense competition.
We derive a significant portion of our revenues from market-making
and trading activities involving securities, commodities and foreign
exchange. 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 client bases.
These competitors may be able to respond more quickly to new or
evolving opportunities and client requirements. They may also be
able to undertake more extensive promotional activities and offer
more attractive terms to clients. 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 client 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 clients or attract new
clients.
The success of our business depends, in part, on our ability to maintain
and increase our client base. Clients 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
- Form 10-K PART I
ITEM 1A Risk Factors
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 clients 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;
•• 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.
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 clients desire. In addition, once our
risk management consulting clients 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 clients, including IRMP
clients, 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 clients or be unable to attract new clients. Our failure
to maintain or attract clients 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 clients.
The failure to maintain and develop additional relationships with
introducing brokers could adversely affect our business. We have
relationships with introducing brokers who assist us in establishing
new client relationships and provide marketing and client service
functions for some of our clients. These introducing brokers receive
compensation for introducing clients 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 client relationships or minimum levels
of transaction volume. Our failure to maintain these relationships
with these introducing brokers, to develop new relationships with
introducing brokers or the failure of these introducing brokers to
establish and maintain client relationships would result in a loss of
revenues, which could adversely affect our business.
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.
21
- Form 10-K PART I
ITEM 1A Risk Factors
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.
We are exposed to risks and uncertainties inherent in doing business
in international markets. We may conduct business in countries that
are the subject of actual or threatened war, terrorist activity, political
instability, civil strife and other geopolitical uncertainty, economic and
financial instability, unexpected changes in regulatory requirements,
tariffs and other trade barriers, exchange rate fluctuations, applicable
currency controls, the imposition of restrictions on currency conversion
or the transfer of funds and difficulties in staffing and managing foreign
operations, including reliance on local experts. As a result of these
and other factors, the currencies of these countries may be unstable.
Future instability in such currencies or the imposition of governmental
or regulatory restrictions on such currencies or on business in such
countries could impede our foreign business.
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 clients’
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. 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.
Our operations are required to comply with U.S. laws
and regulations applicable to companies conducting
business internationally, and if we violate these laws
and regulations, it could adversely affect our business
and subject us to broader liability.
Our international business operations are subject to various anti-
corruption laws and regulations, including restrictions imposed by
the Foreign Corrupt Practices Act (the “FCPA”) and trade sanctions
administered by the U.S. Treasury Department’s Office of Foreign
Assets Control (“OFAC”). The FCPA is intended to prohibit bribery
of foreign officials and requires companies whose securities are listed
in the U.S. to keep books and records that accurately and fairly
reflect those companies’ transactions and to devise and maintain an
adequate system of internal accounting controls. OFAC administers
and enforces economic and trade sanctions based on U.S. foreign
policy and national security goals against designated foreign states,
organizations and individuals. Though we have policies in place designed
to comply with applicable OFAC sanctions, rules and regulations as
well as the FCPA and equivalent laws and rules of other jurisdictions,
there can be no assurance that, in the future, the operations of our
businesses will not violate these laws and regulations, and we could
be exposed to claims for damages, financial penalties, reputational
harm, incarceration of employees and restrictions on our operations
and cash flows.
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 Treaty on European Union (“Brexit”). This officially confirmed
the U.K.’s intention withdraw its membership to the E.U. and the
start for a two year 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 or the actual withdrawal by the U.K. from the E.U.
If we are unable to manage any of these risks effectively, our business
could be adversely affected.
22
- Form 10-K PART I
ITEM 4 Mine Safety Disclosures
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 2018 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; 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; Campo Grande, 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; Toronto, Canada; Sydney,
Australia; Luxembourg, Luxembourg; and Frankfurt, Germany. 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.
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.
A further amount of $2.0 million was held by the bankruptcy trustee
in reserve in the name of FCStone, LLC.
In August 2008, the bankruptcy trustee of Sentinel filed adversary legal
proceedings against FCStone, LLC and a number of other FCMs, seeking
recovery of pre- and post-petition transfers totaling $15.5 million.
On April 23, 2018, following ten years of legal proceedings and a
final ruling by the United States Court of Appeals for the Seventh
Circuit against the trustee and in favor of INTL FCStone Financial,
the United States Supreme Court denied the trustee’s petition for
writ of certiorari. Following this, on May 1, 2018, INTL FCStone
Financial received funds from the reserve account in the amount
of $2.0 million. This amount is presented in ‘other gains’ in the
consolidated income statement.
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.
23
- 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, 2018, there were approximately 317 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 2018 and 2017 were as follows:
Price Range
High
Low
$
$
$
$
$
$
$
$
57.00 $
53.57 $
46.96 $
44.91 $
39.71 $
39.37 $
41.10 $
44.71 $
48.06
41.14
38.58
38.14
33.11
33.45
35.75
34.61
Value over 5 years of $100 invested on September 30, 2013 in each
of the company’s stock (“INTL”), S&P 500 Index and NYSE/Arca Securities Broker/Dealer Index
2018:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2017:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
250
200
150
100
50
0
2013
2014
INTL
2015
2016
2017
2018
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.
24
- Form 10-K
PART II
ITEM 6 Selected Financial Data
On September 30, 2018, the previously authorized repurchase of up to 1.0 million shares of our outstanding common stock from time to time
in open market purchases and private transactions expired. As of the date of this filing, no additional authorization by our Board of Directors
has occurred. Previously approved plans were 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, 2018 was as follows:
Period
July 1, 2018 to July 31, 2018
August 1, 2018 to August 31, 2018
September 1, 2018 to September 30, 2018
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, management and account fees
Interest 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
Trading systems and market information
Occupancy and equipment rental
Professional fees
Travel and business development
Non-trading technology and support
Depreciation and amortization
Communications
Bad debts and impairments
Bad debt on physical coal
Other
Total compensation and other expenses
Other gains
Income from continuing operations, before tax
Income tax expense
Net income from continuing operations
Loss from discontinued operations, net of tax
Net income
2018
2017
2016
2015
2014
Year Ended September 30,
26,682.4
389.1
356.8
71.1
123.3
27,622.7
26,646.9
975.8
179.7
133.8
80.7
581.6
337.7
34.7
16.5
18.1
13.8
13.9
11.6
5.4
3.1
1.0
26.3
482.1
2.0
101.5
46.0
55.5
—
55.5
$
$
28,673.3
332.2
283.4
65.0
69.7
29,423.6
28,639.6
784.0
136.3
113.0
42.1
492.6
295.7
34.4
15.2
15.2
13.3
11.6
9.8
5.0
4.3
47.0
25.9
477.4
—
15.2
8.8
6.4
—
6.4
$
$
14,112.0
321.2
224.3
42.2
55.2
14,754.9
14,083.9
671.0
129.9
68.9
28.3
443.9
263.9
28.0
13.3
14.0
11.5
7.1
8.2
4.7
4.4
—
22.3
377.4
6.2
72.7
18.0
54.7
—
54.7
$
$
34,089.9
328.6
192.5
42.8
39.4
34,693.2
34,068.9
624.3
122.7
52.7
17.1
431.8
251.1
23.5
13.5
12.5
10.5
4.7
7.2
4.6
7.3
—
18.8
353.7
—
78.1
22.4
55.7
—
55.7
$
$
33,546.4
244.5
180.7
42.8
8.0
34,022.4
33,531.5
490.9
108.5
49.9
10.5
322.0
201.9
21.5
12.3
14.9
9.9
3.9
7.3
4.3
5.5
—
14.5
296.0
—
26.0
6.4
19.6
(0.3)
19.3
$
$
25
- 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
Other Data:
2018
2017
2016
2015
2014
Year Ended September 30,
$
$
2.93
2.87
$
$
0.32
0.31
$
$
2.94
2.90
$
$
2.94
2.87
$
$
1.01
0.98
18,549,011
18,934,830
18,395,987
18,687,354
18,410,561
18,625,372
18,525,374
18,932,235
18,528,302
19,132,302
Return on average stockholders’ equity
Employees, end of period
Compensation and benefits as a percentage of operating revenues
11.6%
1,701
34.6%
1.5%
1,607
37.7%
13.2%
1,464
39.3%
15.0%
1,231
40.2%
5.7%
1,141
41.1%
SELECTED BALANCE SHEET INFORMATION
(in millions, except share and per share amounts)
September 30,
2018
September 30,
2017
September 30,
2016
September 30,
2015
September 30,
2014
Total assets
Lenders under loans
Senior unsecured notes
Stockholders’ equity
$
$
$
$
7,824.7
355.2
$
$
— $
$
505.3
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
45.5
345.4
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.
Overview
We are a diversified global brokerage and financial services firm
providing execution, risk management and advisory services, market
intelligence and clearing services with significant asset class coverage
and significant market coverage globally. We help our clients to access
market liquidity, maximize profits and manage risk. Our revenues
are derived primarily from financial products and advisory services
intended to fulfill our clients’ commercial needs and provide bottom-
line benefits to their businesses. Our businesses are supported by our
global infrastructure of regulated operating subsidiaries, our advanced
technology platform and our team of more than 1,700 employees as of
September 30, 2018. We believe our client-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 report our operating segments based on services provided to
clients. Our business activities are managed as operating segments
and organized into five reportable segments, including Commercial
Hedging and Physical Commodities, which are commercial client
focused; Clearing & Execution Services (“CES”) and Securities, which
are institutional client focused; and Global Payments. See Segment
Information for a listing of our operating segment components.
26
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 come 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 on registered swap dealers (such as our subsidiary,
INTL FCStone Markets, LLC) and certain of their counterparties
to exchange initial and variation margin, with an implementation
period ending in September 2020. 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 clients and counterparties.
The European Markets Infrastructure Regulation (“EMIR”) is the
European regulations on OTC derivatives, central counterparties and
trade repositories. EMIR has been implemented across the European
Economic Area member states. EMIR has imposed new requirements
on our European entities, including (a) reporting derivatives to trade
repositories, (b) setting up enhanced risk management procedures
for OTC derivative transactions, (c) changes to our clearing account
Recent Events Affecting the Company
During the week ended November 16, 2018, balances in approximately
300 accounts of the FCM division of our wholly owned subsidiary,
INTL FCStone Financial, declined below required maintenance
margin levels, primarily as a result of significant price fluctuations
in the natural gas markets. All positions in these accounts, which
were managed by OptionSellers.com Inc. (“OptionSellers”), an
independent Commodity Trading Advisor (“CTA”), were liquidated in
accordance with the INTL FCStone Financial’s customer agreements
and obligations under market regulation standards.
A CTA is by definition registered with the CFTC and a member of,
and subject to audit by, the NFA. OptionSellers is registered under
a CFTC Rule 4.7 exemption for “qualified eligible persons”, which
requires the account holders authorizing OptionSellers to act as their
CTA to meet or exceed certain minimum financial requirements.
OptionSellers, in its role as a CTA, had been granted by each of
its customers full discretionary authority to manage the trading in
the customer accounts, while INTL FCStone Financial acted solely
as the clearing firm in its role as the FCM, at all times meeting its
obligations as the FCM to these accounts.
INTL FCStone Financial’s customer agreements conform to NFA
guidance, disclose the risks to which account-holders are exposed,
hold account-holders liable for all losses in their accounts, and
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the President of the United States (“U.S.”)
signed and enacted into law H.R. 1, the Tax Cuts and Jobs Act (the “Tax
Reform”). Among the significant changes to the U.S. Internal Revenue
Code, the Tax Reform lowers the U.S. federal corporate income tax
rate from 35% to 21%, effective January 1, 2018. We will compute
our income tax expense (benefit) for the September 30, 2018 tax year
models and increased central counterparty margin requirements.
Reporting requirements 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. European Securities and Markets Authority (“ESMA”) is
continuing to evaluate and set clearing obligations for certain OTC
derivatives. 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, European Union financial market legislation
Markets in Financial Instruments Directive (“MIFID”) II and Markets
in Financial Instruments Regulation (“MIFIR”) took effect on
January 3, 2018. Principal areas of impact related to these regulatory
texts involve the emergence and oversight of organized trade facilities
(“OTF’s”) for trading OTC non-equity products, client categorization,
enhanced investor protection, conflicts of interest and execution
policies, transparency obligations and extended transaction reporting
requirements. We will continue to monitor all applicable regulatory
developments.
obligate the account holders to reimburse INTL FCStone Financial
for any account deficits in their accounts. INTL FCStone Financial
continues to pursue collection of these receivables in the ordinary
course of business. INTL FCStone Financial intends both to enforce
and to defend its rights aggressively, and to claim interest and costs
of collection where applicable. INTL FCStone Financial’s standard
customer agreements provide for arbitration of disputes between parties.
As of December 10, 2018, the aggregate receivable from these customer
accounts, net of collections and other allowable deductions thus far,
is $31.3 million, with no individual account receivable exceeding
$1.4 million. The exposure to losses from these customer accounts is
not yet determinable, as collection efforts are in early stages, given the
timing of events that lead to the receivable balances disclosed above.
Depending on future collections and an assessment to be made under
U.S. GAAP, any provisions for bad debts and actual losses ultimately
may or may not be material to our financial results. We believe that
these accounts receivable balances, along with possible exposure to
losses from these customer accounts, will not impact our ability to
comply with our ongoing liquidity, capital, and regulatory requirements.
using a U.S. statutory tax rate of 24.5%. The 21% U.S. statutory tax
rate will apply to fiscal years ending September 30, 2019 and thereafter.
The Tax Reform also imposes a one-time mandatory repatriation
transition tax on previously untaxed accumulated and current earnings
and profits (“E&P”) of certain of our foreign subsidiaries.
27
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”),
which provides guidance on accounting for the tax effects of the Tax
Reform. SAB 118 provides a measurement period that should not
extend beyond one year from the Tax Reform enactment date for
companies to complete the accounting under Accounting Standards
Codification (“ASC”) 740 - Income Taxes (“ASC 740”). In accordance
with SAB 118, a company must reflect the income tax effects of
those aspects of the Tax Reform for which the accounting under
ASC 740 is complete. To the extent that a company’s accounting
for certain income tax effects of the Tax Reform is incomplete but
it can determine a reasonable estimate, it must record a provisional
estimate in the financial statements. If a company cannot determine
a provisional estimate to be included in the financial statements, it
should continue to apply ASC 740 based on the tax laws that were in
effect immediately before the enactment of the Tax Reform.
Our accounting for certain elements of the Tax Reform is incomplete.
However, as of September 30, 2018, our accounting for the
remeasurement of the deferred tax assets and liabilities is complete.
The remeasurement of the deferred tax assets and liabilities resulted
in $8.6 million of tax expense, which increased the effective tax rate
by 8.5% during the year ended September 30, 2018.
To determine the amount of the transition tax, we must determine,
in addition to other factors, the amount of post 1986 E&P of the
relevant subsidiaries, as well as the amount of non-U.S. income taxes
Fiscal 2018 Highlights
•• Realized records in both operating revenues of $975.8 million and
pre-tax income of $101.5 million.
•• Our subsidiary INTL FCStone DTVM Ltda. was granted a full-
service broker-dealer license in Brazil allowing expansion of its
offering to its substantial existing institutional client base, as well as
provide clients outside of Brazil greater access to that local market.
•• Our Global Payments business significantly enhanced its regulatory
capability in Brazil with an FX Bank license, making the Company
one of the few foreign companies with that status, which has led to
an immediate three-fold increase in payments in that key market.
Executive Summary
paid on such earnings. We can make a reasonable estimate of the
transition tax and recorded a provisional transition tax obligation of
$11.2 million, which increased the effective tax rate by 11% during
the year ended September 30, 2018. While we can make reasonable
estimates for the deemed repatriation transition tax, the final tax
impact may differ from these estimates, due to, among other things,
changes in our interpretations and assumptions, additional guidance
that may be issued by taxing authorities, and actions we may take.
The Tax Reform also establishes new tax laws that will affect the
fiscal year ending September 30, 2019, including, but not limited to,
(1) elimination of the corporate alternative minimum tax, (2) a new
provision designed to tax global intangible low-taxed income (GILTI),
(3) limitations on the utilization of net operating losses incurred in tax
years beginning after September 30, 2018 to 80% of taxable income
per tax year, (4) the creation of the base erosion anti-abuse tax (BEAT),
(5) a general elimination of U.S. federal income taxes on dividends
from foreign subsidiaries, and (6) limitations on the deductibility of
interest expense and certain executive compensation. The Company
has not yet determined the potential tax impact of provisions that are
not yet effective, such as GILTI, BEAT, and the elimination of U.S.
tax on dividends of future foreign earnings. The Company expects
to make the policy election to treat GILTI as a period expense in the
fiscal year ending September 30, 2019.
•• Agreed to purchase Carl Kliem S.A., an independent inter-dealer
broker based in Luxembourg, which upon closing will provide a
strong European client base and a European Union based footprint
for us, post Brexit.
•• Acquired the fully accredited SWIFT Service Bureau from
PayCommerce in the fourth quarter, which will enable the Company
to act as a SWIFT Service Bureau for its more than 300 correspondent
clearing banks.
We achieved strong operating revenue growth of 24%, or $191.8 million,
to $975.8 million in fiscal 2018 compared to the prior year. The
return of periods of market volatility in our key markets resulted
in increased client activity and a widening of spreads in fiscal 2018,
which combined with increases in short term interest rates and average
client balances resulted in record operating revenues in all five of our
reporting segments.
Overall segment income increased 55%, with Commercial Hedging
and Clearing & Execution Services (“CES”) adding $23.6 million
and $17.9 million, respectively. In addition, our Global Payments
segment added $9.2 million, while the Physical Commodities segment
increased segment income by $48.0 million versus the prior year.
These increases were modestly offset by a $5.8 million decline in
Securities segment income.
Commercial Hedging segment income increased 32%, to $96.4 million,
primarily as a result of strong growth in both exchange-traded and
OTC revenues as well as a $9.5 million increase in interest income.
A $1.3 million increase in interest expense was partially offset by a
$0.7 million decline in non-variable direct expenses compared to
the prior year.
CES segment income increased 59%, to $48.3 million, primarily
as a result of the increase in operating revenues, most notably a
60% increase in our Exchange-Traded Futures & Options business,
driven by a 35% increase in exchange-traded volumes as well as an
$11.5 million increase in interest income. In addition, cost savings
initiatives in our FX Prime Brokerage and Correspondent Clearing
businesses resulted in a $4.1 million decline in non-variable direct
expenses in this segment.
28
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Global Payments segment income increased 18%, to $59.8 million,
primarily as a result of the increase in operating revenues, driven
by a 13% increase in the average revenue per trade versus the prior
year period. In addition, introducing broker commissions declined
$2.6 million versus the prior year, which was partially offset by a
$1.4 million increase in non-variable direct expenses.
Segment income in Physical Commodities was $16.6 million in fiscal
2018 compared to a segment loss of $31.4 million in the prior year.
Segment income in the prior year includes a $47.0 million charge to
earnings for an allowance for doubtful accounts recorded in the fourth
quarter of 2017 related to our physical coal business, discussed further
below. Fiscal 2018 segment income includes a related $1.0 million
charge to earnings, recorded in the first quarter of fiscal 2018 upon
our exit of the physical coal business.
While operating revenues in our Securities segment increased 29%,
segment income declined $5.8 million, impacted by weaker performance
in our domestic institutional fixed income business including a
$17.8 million increase in interest expense which more than offset the
growth in operating revenues in that business. In addition, difficult
market conditions led to a decline in performance in our Argentinian
operations versus the prior year. Also, the prior year period included a
$2.5 million realized gain on the sale of exchange shares in Argentina.
On the expense side, we continue to focus on maintaining our variable
cost model and limiting the growth of our non-variable expenses. To
that end, variable expenses were 61% of total expenses in fiscal 2018
compared to 53% in the prior year period. Non-variable expenses
declined $30.7 million versus the prior year, however excluding the bad
debt on physical coal, non-variable expenses increased $15.3 million
year-over-year.
The fiscal 2018 results include $5.5 million in operating revenues,
presented in ‘trading gains, net’, related to economic hedges in place
against the effect of the devaluation of the Argentine peso on our
Argentine operations. The Argentine peso has historically served as
our functional currency in the Argentine operations, and as such the
revaluation of the net assets of our Argentine subsidiaries was recorded
as a component of accumulated other comprehensive loss, net in
the consolidated balance sheets. Recently, the Argentinian economy
was determined to be highly inflationary and as such, beginning
July 1, 2018, the functional currency for our Argentine subsidiaries
is the U.S. dollar and prospectively the corresponding revaluations of
the net assets of these subsidiaries are recorded in earnings each quarter
in the consolidated income statements while the highly inflationary
designation continues.
Finally, during fiscal 2018 we recorded a $2.0 million gain related to
a judgment received in final settlement of our claim in the Sentinel
Selected Summary Financial Information
Results of Operations
Management Group Inc. bankruptcy proceeding. Please see Note 11 -
Commitments and Contingencies for additional information on the
Sentinel litigation.
Net income increased $49.1 million to $55.5 million in fiscal 2018
compared to fiscal 2017, primarily related to the growth in operating
revenues as well as the reduction in bad debt related to physical coal
discussed below. Net income in fiscal 2018 includes an estimated one-
time income tax charge of $19.8 million related to the enactment of
the Tax Reform. This charge is related to the re-measurement of our
deferred tax assets and liabilities arising from a lower U.S. corporate
tax rate and shift to a territorial tax regime as well as a charge related to
the deemed repatriation of unremitted earnings of foreign subsidiaries.
Excluding the impact of Tax Reform, net income in fiscal 2018, would
have been $75.3 million.
Bad Debt on Physical Coal
During the first quarter of fiscal 2018 and the fourth quarter of fiscal
2017, we recorded charges to earnings of $1.0 million and $47.0 million,
respectively, 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 clients; reimbursement of demurrage claims, dead
freight and other charges paid and payable by INTL Asia Pte. Ltd. to
its clients; reimbursement due for deficiencies in the quality of coal
delivered to clients; and losses incurred related to the cancellation of
open sales contracts.
We received an acknowledgment of debt and a note from the supplier,
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 continue to pursue all legal avenues available
to us regarding this matter. We have presented the bad debt on
physical coal separately as a component of income from operations
in our consolidated income statements. We have completed our exit
of the physical coal business. INTL Asia Pte. Ltd. was recapitalized
following the bad debt in order for its other businesses to operate
in normal course.
On November 22, 2018, we reached a settlement with a client, paying
$5.1 million related to demurrage, dead freight, and other penalty
charges regarding coal supplied during fiscal 2017. The settlement
amount paid was less than the accrued liability for the transactions
recorded during fiscal 2017, and accordingly we will record a recovery
on the bad debt on physical coal of $1.7 million in the three months
ending December 31, 2018.
Set forth below is our discussion of the results of our operations, as viewed by management, for the fiscal years ended September 30, 2018,
2017, and 2016.
29
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Overview
The following table shows an overview of our financial results:
(UNAUDITED)
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting, management and account fees
Interest 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
Other gains
Income before tax
2018
$ 26,682.4
389.1
356.8
71.1
123.3
27,622.7
26,646.9
975.8
179.7
133.8
80.7
581.6
337.7
3.1
1.0
140.3
482.1
2.0
101.5
$
Year Ended September 30,
2017
% Change
% Change
(7)% $
17%
26%
9%
77%
(6)%
(7)%
24%
32%
18%
92%
18%
14%
(28)%
n/m
8%
1%
n/m
568% $
28,673.3
332.2
283.4
65.0
69.7
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
103% $
3%
26%
54%
26%
99%
103%
17%
5%
64%
49%
11%
12%
(2)%
n/m
20%
26%
n/m
(79)% $
2016
14,112.0
321.2
224.3
42.2
55.2
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
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 Capital Markets (gross dollar volume, millions)
Debt Capital Markets (gross dollar volume, millions)
FX Prime Brokerage volume (U.S. notional, millions)
Average assets under management in Argentina (U.S. dollar, millions)
Average client equity - futures and options (millions)
2018
129,486.5
1,582.9
639.5
251,530.2
$ 117,771.7
$ 134,032.0
$ 401,116.9
424.9
$
2,180.4
$
Year Ended September 30,
2017
% Change
% Change
2016
31%
12%
(1)%
83%
34% $
99,148.4
1,410.0
648.9
137,235.3
87,789.8
1% $ 133,352.3
(35)% $ 620,917.8
564.9
(25)% $
2,015.9
8% $
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% $
Operating Revenues
Year Ended September 30, 2018 Compared to Year
Ended September 30, 2017
Operating revenues increased 24% to a record $975.8 million in fiscal
2018 compared to $784.0 million in the prior year. All segments of our
business achieved growth in operating revenues versus the prior year,
with the largest growth coming in our CES segment which added
$72.6 million in operating revenues. In addition, Commercial Hedging
segment operating revenues increased $42.1 million, while operating
revenues in our Securities segment added $44.5 million versus the
prior year. Our Physical Commodities and Global Payment segments
grew $12.1 million and $10.0 million, respectively.
Operating revenues for the prior year included 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, while fiscal 2018
includes no unrealized gain/losses on this program as all interest rate
swaps and U.S. Treasury notes were liquidated during fiscal 2017.
On a segment basis, these unrealized losses were reported in the
Corporate unallocated segment, while the amortized earnings on
these investments were included in the Commercial Hedging and
CES segments.
Operating revenues in our CES segment increased 28% to
$332.4 million in fiscal 2018, primarily as a result of 60% growth
in Exchange-Traded Futures & Options revenues, to $183.4 million,
driven by increases in contract volumes, the average rate per contract
earned and a $11.6 million, or 138%, increase in interest income.
Our Correspondent Clearing business added $2.1 million versus the
prior year, while the Derivative Voice Brokerage and Independent
Wealth Management businesses added $1.5 million and $1.0 million
in operating revenues, respectively compared to the prior year. These
increases were modestly offset by a $0.5 million decline in our FX Prime
Brokerage business.
30
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operating revenues in Commercial Hedging increased 17% in fiscal
2018 to $286.7 million, as exchange-traded revenues increased
$14.4 million and OTC revenues increased $17.6 million. Client
exchange-traded volumes increased 16%, driven by increased activity
from clients in the domestic grain and energy and renewable fuels
markets, as well as an increase in exchange-traded revenues from
omnibus relationships introduced by our commercial hedging
employees. OTC revenues increased as a result of both a 12% increase
in OTC volumes and a 10% increase in the average rate per contract
compared to the prior year. These increases were driven by increased
activity from Brazilian agricultural clients as well as increased activity
in food service, dairy and soft commodity markets. In addition,
interest income in this segment increased $9.5 million, or 71%, as
a result of an increase in short term interest rates on relatively flat
average client equity balances.
Operating revenues in our Global Payments segment increased 11%
in fiscal 2018 to a record $99.2 million, as a result of a 13% increase
in the average revenue per trade. The number of global payments
made declined 1% as certain commercial clients switched from doing
individual high volume but low value payments through our platform,
to doing aggregated higher value funding payments on our platform.
Irrespective of this, we experienced increased volumes of payments
made by financial institutions, governmental and non-governmental
organizations and other commercial clients versus the prior year.
Our Physical Commodity segment operating revenues increased 27%
to $56.9 million in fiscal 2018, primarily as a result of an $8.3 million
increase in Physical Ag & Energy operating revenues as well as a
$3.8 million increase in Precious Metals operating revenues.
Operating revenues in our Securities segment increased 29% to
$196.2 million in fiscal 2018 compared to the prior year. Our Equity
Capital Markets business, which we formerly referred to as Equity
Market-Making, increased 64%, to $93.2 million, as the gross dollar
volume traded increased 35% as a result of increased market volatility,
the on-boarding of new clients and increased market share. Operating
revenues in our Debt Capital Markets business, which now includes
both our Debt Trading and Investment Banking businesses discussed
in prior filings, increased 15%, to $95.3 million versus the prior
year, with increases in activity in our municipal securities business
as well as an increase in interest income in our domestic institutional
fixed income business, partially offset by lower operating revenues
in Argentina. The prior year period included a $2.5 million realized
gain on the sale of exchange shares in Argentina. Asset Management
operating revenues declined 35% to $7.7 million in fiscal 2018, as
the average assets under management declined 25%. Our Securities
segment operating revenues benefited from a $26.7 million increase in
interest income, primarily in our domestic institutional fixed income
and securities lending activities.
Overall interest income increased $53.6 million to $123.3 million in
fiscal 2018 compared to prior year, primarily driven by the $26.7 million
increase in our Securities segment interest income. In addition, average
client equity in the Financial Ag & Energy and Exchange-Traded
Futures & Options components of our Commercial Hedging and CES
segments increased 8% to $2.2 billion in fiscal 2018 compared to the
prior year, which combined with an increase in short term interest rates
resulted in an aggregate $21.1 million increase in interest income in
these businesses. Included in interest income in the prior year period
was a $4.8 million unrealized loss on U.S. Treasury notes held as part
of our interest rate management strategy.
Finally, operating revenues for fiscal 2018 include gains of $5.5 million
related to economic hedges in place against the effect of the devaluation
of the Argentina Peso on our Argentine operations, reported in the
Corporate unallocated segment.
See Segment Information below for additional information on activity
in each of the segments.
Year Ended September 30, 2017 Compared to Year
Ended September 30, 2016
Operating revenues increased 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 included 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 were reported in
the Corporate unallocated segment, while the amortized earnings on
these investments were 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
2018. 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 2018 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 client 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.
31
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
trading activities, including interest on short-term financing facilities
of subsidiaries, was $70.5 million and $32.7 million, respectively,
and interest expense related to corporate funding purposes was
$10.2 million and $9.4 million, respectively.
Operating revenues in our Securities segment declined 13% to
$151.7 million in fiscal 2017 compared to the prior year. The Debt
Capital Markets and Asset Management businesses declined $11.5 and
$6.3 million, respectively, as the prior year period reflected strong
performance in our Argentine operations in these businesses following
the devaluation of the Argentine Peso in December 2015. Investment
Banking, now included within Debt Capital Markets, had a decline
in operating revenues of $1.0 million due both to weaker results in
Argentina and management’s decision to exit our domestic investment
banking business. In addition, Equity Capital Markets operating
revenues declined $5.7 million as a result of a narrowing of spreads
due to lower market volatility.
Overall 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 Capital Markets interest income. In addition, average
client 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 2018 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.
Interest and Transactional Expenses
Year Ended September 30, 2018 Compared to Year
Ended September 30, 2017
Transaction-based clearing expenses: Transaction-based clearing
expenses increased 32% to $179.7 million in fiscal 2018 compared to
$136.3 million in fiscal 2017, and were 18% of operating revenues in
fiscal 2018 compared to 17% in fiscal 2017. The increase in expense
is primarily related to higher volumes in our Financial Ag & Energy,
Exchange-Traded Futures & Options and Equity Capital Markets
components, partially offset by lower costs in our LME Metals, FX
Prime Brokerage and Correspondent Clearing components.
Introducing broker commissions: Introducing broker commissions
increased 18% to $133.8 million in fiscal 2018 compared to
$113.0 million in fiscal 2017, and were 14% of operating revenues
in fiscal 2018 and fiscal 2017. The increase in expense is primarily
due to increased business activity and improved performance in our
Exchange-Traded Futures & Options and Financial Ag & Energy
components, partially offset by lower costs in Global Payments and
Equity Capital Markets.
Interest expense: Interest expense increased 92% to $80.7 million
in fiscal 2018 compared to $42.1 million in fiscal 2017. During
fiscal 2018 and fiscal 2017, interest expense directly attributable to
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 $17.8 million, and the increased
activity of our securities lending business, started up during fiscal 2017
in our Equity Capital Markets component, which resulted in higher
interest expense of $11.9 million. Also, an increase in short-term rates
resulted in higher costs in our Exchange-Traded Futures & Options and
Financial Ag & Energy components. Additionally, higher short-term
rates along with higher average borrowings outstanding on our physical
commodities financing facilities resulted in increased expense.
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 Capital Markets component and lower Debt Capital
Markets 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 Capital Markets
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. During
fiscal 2017 and fiscal 2016, interest expense directly attributable to
trading activities, including interest on short-term financing facilities
of subsidiaries, was $32.7 million and $19.5 million, respectively, and
interest expense related to corporate funding purposes was $9.4 million
and $8.8 million, respectively.
32
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 Capital Markets component.
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 clients 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, 2018 Compared to Year
Ended September 30, 2017
Net operating revenues increased $89.0 million, or 18%, to
$581.6 million in fiscal 2018 compared to $492.6 million in fiscal 2017.
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.
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:
Trading systems and market information
Occupancy and equipment rental
Professional fees
Travel and business development
Non-trading technology and support
Depreciation and amortization
Communications
Bad debts
Bad debt on physical coal
Other expense
Total compensation and other expenses
Year Ended September 30,
2018
% Change
2017
% Change
2016
$
$
163.6
174.1
337.7
34.7
16.5
18.1
13.8
13.9
11.6
5.4
3.1
1.0
26.3
144.4
482.1
4% $
26%
14%
1%
9%
19%
4%
20%
18%
8%
(28)%
(98)%
2%
(21)%
1% $
157.0
138.7
295.7
34.4
15.2
15.2
13.3
11.6
9.8
5.0
4.3
47.0
25.9
181.7
477.4
24% $
1%
12%
23%
14%
9%
16%
63%
20%
6%
(2)%
n/m
16%
60%
26% $
126.5
137.4
263.9
28.0
13.3
14.0
11.5
7.1
8.2
4.7
4.4
—
22.3
113.5
377.4
Year Ended September 30, 2018 Compared to Year
Ended September 30, 2017
Compensation and Other Expenses: Compensation and other
expenses increased $4.7 million, or 1%, to $482.1 million in fiscal
2018 compared to $477.4 million in fiscal 2017.
Compensation and Benefits: Total compensation and benefits
expenses increased 14% to $337.7 million in fiscal 2018 compared
to $295.7 million in fiscal 2017. Total compensation and benefits
were 35% of operating revenues in fiscal 2018 compared to 38% of
operating revenues in fiscal 2017. The variable portion of compensation
and benefits increased 26% to $174.1 million in fiscal 2018 compared
to $138.7 million in fiscal 2017. Variable compensation and benefits
were 30% of net operating revenues in fiscal 2018 compared to 28%
in fiscal 2017. Administrative, centralized operations and executive
incentive compensation was $24.6 million in fiscal 2018 compared to
$16.7 million in fiscal 2017, primarily due to current year performance,
as there was no executive team incentive compensation in fiscal 2017
due to the bad debt on physical coal.
The fixed portion of compensation and benefits increased 4% to
$163.6 million in fiscal 2018 compared to $157.0 million in fiscal
2017. Non-variable salaries increased $3.2 million, or 3%, primarily
across operations and administrative areas. Contract labor costs increased
$0.8 million. Employee benefits, excluding share-based compensation,
increased $4.1 million in fiscal 2018, primarily related to higher accruals
for executive management related to a cash-based long-term incentive
plan and higher employer payroll and retirement costs. Share-based
compensation is a component of the fixed portion, and includes stock
33
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
option and restricted stock expense. Share-based compensation was
$6.6 million in fiscal 2018 compared to $6.3 million in fiscal 2017.
The number of employees increased 6% to 1,701 at the end of fiscal
2018 compared to 1,607 at the end of fiscal 2017.
Other Non-Compensation Expenses: Other non-compensation
expenses decreased by 21% to $144.4 million in fiscal 2018 compared
to $181.7 million in fiscal 2017. Professional fees increased 19%,
primarily due to higher legal fees related to the bad debt on physical
coal and higher consulting fees primarily related to administrative
system evaluations. Depreciation and amortization increased primarily
due to depreciation of the new trading system for certain OTC
commodities business activities, placed in service during the fourth
quarter of fiscal 2017.
Excluding the bad debt on physical coal discussed below, bad debts
decreased $1.2 million year-over-year. During fiscal 2018, bad debts
were $3.1 million, primarily related to $2.8 million of agricultural
OTC client account deficits in our Commercial Hedging segment
and $0.4 million of exchange-traded client account deficits in our
Clearing & Execution Services segment. During fiscal 2017, bad debts
were $4.3 million, primarily related to $3.9 million in LME Metals
client deficits in our Commercial Hedging segment and $0.2 million
of uncollectible client receivables in our Physical Ag & Energy and
Derivative Voice Brokerage components.
Bad Debt on Physical Coal: During the first quarter of fiscal 2018
and the fourth quarter of fiscal 2017, we recorded charges to earnings
of $1.0 million and $47.0 million, respectively, to record an allowance
for doubtful accounts related to the bad debt incurred in our physical
coal business, conducted solely in our Singapore subsidiary, INTL
Asia Pte. Ltd., with a coal supplier. We have completed our exit of
the physical coal business.
Other Gains
The fiscal 2018 results include a contingent gain of $2.0 million
related to a judgment received in final settlement of our claim in the
Sentinel Management Group Inc. bankruptcy proceeding. Please see
Note 11 - Commitments and Contingencies for additional information
on the Sentinel litigation.
Income Taxes
The effective income tax rate on income from operations was 45%
in fiscal 2018 compared to 58% in fiscal 2017. The discrete expense
of $19.8 million related to the Tax Reform increased the effective
tax rate by 20%. The effective tax rate for fiscal 2018 excluding the
impacts of Tax reform was 26%. The effective tax rate decreased 0.5%
due to excess tax benefits on share-based compensation recognized
during the period related to the adoption of ASU 2016-09. Our
effective income tax rate during 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. The effective income
tax rate can vary from period to period depending on, among other
factors, the geographic and business mix of our earnings.
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.
34
- Form 10-K PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
client deficits in our Commercial Hedging segment and $0.2 million
of uncollectible client 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 client deficits in
our Commercial Hedging segment, $0.4 million of uncollectible client
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
clients; reimbursement of demurrage claims, dead freight and other
charges paid by INTL Asia Pte. Ltd. to its clients; reimbursement due
for deficiencies in the quality of coal delivered to clients; 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 clients’ vessels. We took
title of the coal when it was loaded onto barges and maintained title
until it was offloaded onto clients’ vessels. The logistics related to the
delivery of coal to the clients’ vessels was out-sourced to our coal supplier,
and we determined that certain purchased coal was not delivered to
our clients’ vessels during the fourth quarter ended September 30,
2017. Furthermore, we determined that our supplier was unable to
deliver such purchased coal to our clients. Demurrage claims, dead
freight, and other penalty charges paid and payable by INTL Asia Pte.
Ltd. to its clients 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 exited the physical coal business. All remaining open sales contracts
have been canceled. There were no long-lived or intangible assets
related to the physical coal business, and accordingly no impairment
charges were recorded. The loss has not adversely affected our on-
going profitability as the physical coal business had not contributed
significantly to income from operations. Additional exit costs were
not material to our consolidated financial statements. INTL Asia Pte.
Ltd. was recapitalized following the bad debt in order for its other
businesses to operate in normal course.
On November 22, 2018, we reached a settlement with a client, paying
$5.1 million related to demurrage, dead freight, and other penalty
charges regarding coal supplied during fiscal 2017. The settlement
amount paid was less than the accrued liability for the transactions
recorded during fiscal 2017, and accordingly we will record a recovery
on the bad debt on physical coal of $1.7 million in the three months
ending December 31, 2018.
Other Gains: 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 compared to the preliminary allocation of fair value
to the net assets at closing was reflected as an “other gain” in the
Consolidated Income Statement for fiscal 2016.
Income 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.
35
- 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:
Trading systems and market information
Occupancy and equipment rental
Professional fees
Travel and business development
Non-trading technology and support
Depreciation and amortization
Communications
Other expense
Total compensation and other expenses
2018
63.9
22.4
86.3
3.0
16.5
10.5
3.3
10.9
9.3
5.0
17.4
75.9
162.2
$
$
Year Ended September 30,
2017
% Change
% Change
7% $
51%
16%
15%
9%
25%
3%
27%
13%
11%
43%
21%
18% $
59.7
14.8
74.5
2.6
15.1
8.4
3.2
8.6
8.2
4.5
12.2
62.8
137.3
31% $
(44)%
4%
37%
14%
8%
33%
51%
22%
10%
(13)%
13%
8% $
2016
45.4
26.5
71.9
1.9
13.2
7.8
2.4
5.7
6.7
4.1
14.0
55.8
127.7
Year Ended September 30, 2018 Compared to Year
Ended September 30, 2017
Year Ended September 30, 2017 Compared to Year
Ended September 30, 2016
Total unallocated costs and other expenses increased $24.9 million
to $162.2 million in fiscal 2018 compared to $137.3 million in fiscal
2017. Compensation and benefits increased $11.8 million, or 16% to
$86.3 million in fiscal 2018 compared to $74.5 million in fiscal 2017.
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.
During fiscal 2018, the increase in compensation and benefits is
primarily related to accruals for executive management for incentives
based on current year performance, as well as a cash-based long-term
incentive plan. Additionally, there were no executive team incentive
compensation in fiscal 2017 due to the bad debt on physical coal.
The increase in other expense is primarily related to our internal bi-
annual global sales meeting held during January 2018.
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 performance in fiscal 2017, primarily due to the bad debt on
physical coal, and its impact on executive incentive compensation.
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
36
2018
% of Total
2017
% of Total
2016
% of Total
Year Ended September 30,
$
$
174.1
179.7
133.8
487.6
163.6
140.3
3.1
1.0
308.0
795.6
22% $
23%
16%
61%
21%
18%
—%
—%
39%
100% $
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%
- 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, 2018, 2017, and 2016.
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 61% in fiscal 2018,
53% in fiscal 2017 and 58% in fiscal 2016.
The decline in the percentage of variable expenses in fiscal 2017 was
primarily due to the Bad Debt on Physical Coal - see the discussion 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 Capital
Markets
- Debt Capital
Markets
- 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 clients.
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.
37
- 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, management and account fees
Interest income
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
Fixed compensation and benefits
Other fixed expenses
Bad debts
Bad debt on physical coal
Total non-variable direct expenses
Segment income
% of
Operating
Revenues
Year Ended September 30,
% of
Operating
Revenues
2017
% of
Operating
Revenues
2016
$
100%
18%
14%
8%
15%
18%
$
28,673.3
329.4
282.9
63.8
80.3
29,429.7
28,639.6
790.1
133.9
112.9
34.3
509.0
122.0
387.0
83.5
83.2
4.3
47.0
218.0
169.0
$
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
68.0
68.6
4.4
—
141.0
206.0
100%
19%
10%
3%
16%
21%
2018
$ 26,682.4
377.8
357.5
69.1
131.5
27,618.3
26,646.9
971.4
178.7
133.7
77.1
581.9
149.5
432.4
84.2
82.2
3.1
1.0
170.5
261.9
$
Year Ended September 30, 2018 Compared to Year
Ended September 30, 2017
The net contribution of all our business segments increased 12% to
$432.4 million in fiscal 2018 compared to $387.0 million in fiscal
2017. Segment income increased 55% to $261.9 million in fiscal
2018 compared to $169.0 million in fiscal 2017.
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.
Commercial Hedging
We serve our commercial clients 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 clients. 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 client objectives. Our clients 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.
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 clients who are seeking cost-effective
hedging strategies. Generally, our clients direct their own trading
activity, and our risk management consultants do not have discretionary
authority to transact trades on behalf of our clients.
38
- Form 10-K
2016
—
118.7
95.1
13.8
8.5
236.1
—
236.1
27.9
19.6
0.4
188.2
53.8
134.4
29.4
32.7
3.6
65.7
68.7
2016
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, management and account fees
Interest income
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
Fixed compensation and benefits
Other fixed expenses
Bad debts
Non-variable direct expenses
Segment income
2018
—
132.3
116.2
15.4
22.8
286.7
—
286.7
36.9
21.5
1.9
226.4
61.7
164.7
31.1
34.4
2.8
68.3
96.4
$
$
Year Ended September 30,
2017
% Change
% Change
—
$
15%
14%
5%
71%
17%
—
17%
24%
8%
217%
17%
18%
16%
4%
(3)%
(26)%
(1)%
32% $
—
114.8
101.8
14.7
13.3
244.6
—
244.6
29.8
19.9
0.6
194.3
52.5
141.8
29.8
35.4
3.8
69.0
72.8
—
$
(3)%
7%
7%
56%
4%
—
4%
7%
2%
50%
3%
(2)%
6%
1%
8%
6%
5%
6% $
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 client 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,
2017
% Change
% Change
9% $
28%
(2)%
100%
11% $
71.8
6.7
50.1
7.3
135.9
3% $
18%
1%
7%
3% $
69.6
5.7
49.5
6.8
131.6
16%
(4)% $
—% $
23,785.7
5.61
938.1
4%
(1)% $
2% $
22,810.2
5.66
923.6
OTC
Year Ended September 30,
2017
% Change
% Change
2016
42% $
(21)%
(13)%
22% $
53.4
18.4
8.9
80.7
1% $
(5)%
(10)%
(2)% $
52.9
19.4
9.9
82.2
2018
78.1
8.6
49.0
14.6
150.3
27,586.8
5.36
938.0
2018
76.0
14.6
7.7
98.3
1,582.9
60.08
12%
10% $
1,410.0
54.61
2%
(5)% $
1,380.8
57.50
For information about the assets of this segment, see Note 21 to the Consolidated Financial Statements.
39
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Year Ended September 30, 2018 Compared to Year
Ended September 30, 2017
was offset by lower spreads across virtually all commodity sectors
leading to a 5% decline in the average rate per contract.
Operating revenues increased 17% to $286.7 million in fiscal 2018
compared to $244.6 million in fiscal 2017. Exchange-traded revenues
increased 11% to $150.3 million in fiscal 2018, driven by increased
activity from clients in the domestic grain and energy and renewable
fuels markets as well as an increase in exchange-traded revenues
from omnibus relationships introduced by our commercial hedging
employees, which are reflected in the ‘Other’ category above. Those
increases were partially offset by a modest decline in LME metals.
Overall exchange-traded contract volume increased 16%, while the
average rate per contract declined to $5.36.
OTC revenues increased 22%, to $98.3 million in fiscal 2018 driven
by both a 12% increase in OTC volumes and a 10% increase in the
average rate per contract compared to the prior year. OTC volumes
grew to 1.58 million contracts in fiscal 2018 compared to 1.41 million
in fiscal 2017, driven by growth in agricultural commodity markets,
primarily with Brazilian grain clients as well as increased activity in food
service and dairy markets and soft commodities. These increases were
offset by lower interest rate swap, energy and renewable fuels revenues.
Consulting, management and account fees increased 5% to
$15.4 million in fiscal 2018 compared to $14.7 million in fiscal
2017 while interest income increased 71%, to $22.8 million, in
fiscal 2018 compared to $13.3 million in fiscal 2017. The increase
in interest income was driven by an increase in short term interest
rates, as average client equity was relatively flat with the prior fiscal
year at $938.0 million.
Segment income increased 32% to $96.4 million in fiscal 2018
compared to $72.8 million in fiscal 2017, driven by the growth
in operating revenues and a $1.0 million reduction in bad debt
expense. This growth was partially offset by a $1.3 million increase
in interest expense. Variable expenses, excluding interest, expressed
as a percentage of operating revenues were unchanged at 42% in
fiscal 2018 and fiscal 2017.
Year Ended September 30, 2017 Compared to Year
Ended September 30, 2016
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
Consulting, management and account 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 client 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.
Global Payments
We provide global payment solutions to banks and commercial
businesses as well as charities and non-governmental and government
organizations. We offer payments services in more than 170 countries
and 140 currencies, which we believe is more than any other payments
solution provider, and provide 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 clients 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 client 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 clients 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.
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 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, management and account fees
Interest income
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
Fixed compensation and benefits
Other fixed expenses
Bad debts
Non-variable direct expenses
Segment income
Selected data:
Global Payments (# of payments, 000’s)
Average revenue per trade
$
$
$
2018
—
95.0
3.9
0.2
0.1
99.2
—
99.2
4.3
1.2
0.2
93.5
18.5
75.0
6.7
8.5
—
15.2
59.8
Year Ended September 30,
2017
% Change
% Change
—
$
10%
56%
—
—
11%
—
11%
(7)%
(68)%
—%
16%
14%
16%
29%
(1)%
n/m
10%
18% $
—
86.7
2.5
—
—
89.2
—
89.2
4.6
3.8
0.2
80.6
16.2
64.4
5.2
8.6
—
13.8
50.6
—
$
22%
19%
—
—
22%
—
22%
7%
9%
100%
23%
24%
23%
13%
10%
n/m
11%
27% $
2016
—
71.1
2.1
—
—
73.2
—
73.2
4.3
3.5
0.1
65.3
13.1
52.2
4.6
7.8
—
12.4
39.8
639.5
155.12
(1)%
13% $
648.9
137.46
46%
(16)% $
444.9
164.53
For information about the assets of this segment, see Note 21 to the Consolidated Financial Statements.
Year Ended September 30, 2018 Compared to Year
Ended September 30, 2017
Year Ended September 30, 2017 Compared to Year
Ended September 30, 2016
Operating revenues increased 11% to $99.2 million in fiscal 2018
compared to $89.2 million in fiscal 2017. The volume of payments
made declined 1%, versus the prior year period while the average revenue
per trade increased by 13%. The volume of payments has declined
while the average revenue per trade has increased compared to fiscal
2017, as certain commercial clients who had previously transacted
their individual high-volume but low-value payments through our
platform, opened their own bank accounts in certain countries to
which we had made payments into on their behalf. Although this
process change may lower our number of payments, we still provide
the foreign currency funding payments into these clients’ accounts
on an aggregated basis in these countries, which reduces our overall
variable expenses due to the lower number of payments made. Overall,
operating revenues increased in fiscal 2018 compared to fiscal 2017
as a result of an increase in both the number of active clients and the
dollar value of the payments made versus the prior year.
Segment income increased 18% to $59.8 million in fiscal 2018
compared to $50.6 million in fiscal 2017. This increase primarily
resulted from the increase in operating revenues and a decline in variable
introducing broker commissions, partially offset by a $1.4 million
increase in non-variable direct expenses versus the prior year period,
driven in large part by higher non-variable compensation and trade
system costs. Variable expenses, excluding interest, expressed as a
percentage of operating revenues was 24% in fiscal 2018 compared
to 28% in fiscal 2017.
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 clients utilizing our electronic
transaction order system, however this was partially offset by a 16%
decrease in the average revenue per trade.
Segment income decreased 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.
Securities
We provide value-added solutions that facilitate cross-border trading
and believe our clients 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 clients include U.S.-based regional and national broker-
dealers and institutions investing or executing client 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 5,000 ADRs, GDRs and
41
- Form 10-K
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
foreign ordinary shares, of which over 3,600 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 client base including asset managers,
commercial bank trust and investment departments, broker-dealers
and insurance companies.
We originate, structure and place debt instruments in the international
and domestic capital markets. These instruments include complex
asset-backed securities (primarily in Argentina) and domestic municipal
securities. On occasion, we may invest our own capital in debt
instruments before selling them. We also actively trade in a variety of
international debt instruments as well as operate an asset management
business in which we earn fees, commissions and other revenues for
management of third party assets and investment gains or losses on
our investments in funds and proprietary accounts managed either
by our investment managers or by independent investment managers.
The following table provides the financial performance for Securities for the periods indicated.
(in millions)
Revenues:
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting, management and account fees
Interest income
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
Fixed compensation and benefits
Other fixed expenses
Bad debts
Non-variable direct expenses
Segment income
2018
—
94.2
19.6
9.7
72.7
196.2
—
196.2
40.6
5.2
55.8
94.6
25.5
69.1
18.0
10.3
—
28.3
40.8
$
$
Year Ended September 30,
2017
% Change
% Change
— $
15%
88%
(29)%
58%
29%
—
29%
66%
(35)%
127%
—%
34%
(9)%
(4)%
—%
n/m
(2)%
(12)% $
—
81.7
10.4
13.6
46.0
151.7
—
151.7
24.5
8.0
24.6
94.6
19.0
75.6
18.7
10.3
—
29.0
46.6
$
—
(25)%
(3)%
(22)%
20%
(13)%
—
(13)%
(6)%
(32)%
60%
(22)%
(22)%
(22)%
7%
—%
(100)%
3%
(33)% $
The following table sets forth operating revenues by product line and selected data for Securities for the periods indicated.
2016
—
108.6
10.7
17.5
38.4
175.2
—
175.2
26.1
11.8
15.4
121.9
24.4
97.5
17.4
10.3
0.4
28.1
69.4
2016
Operating revenues by product line (in millions):
Equity Capital Markets
Debt Capital Markets
Asset Management
Selected data:
Equity Capital Markets (gross dollar volume, millions)
Equity Capital Markets revenue per $1,000 traded
Debt Capital Markets (principal dollar volume, millions)
Debt Capital Markets revenue per $1,000 traded
Average assets under management in Argentina (millions)
2018
$
$
93.2
95.3
7.7
196.2
$ 117,771.7
$
0.67
$ 134,032.0
0.71
$
424.9
$
Year Ended September 30,
2017
% Change
% Change
64% $
15%
(35)%
29% $
56.7
83.1
11.9
151.7
(9)% $
(12)%
(35)%
(13)% $
62.4
94.6
18.2
175.2
87,789.8
34% $
3% $
0.65
1% $ 133,352.3
0.62
15% $
564.9
(25)% $
88,518.8
(1)% $
(7)% $
0.70
24% $ 107,747.4
(30)% $
0.88
562.4
—% $
For information about the assets of this segment, see Note 21 to the Consolidated Financial Statements.
42
- Form 10-K
PART II
Item 7 management’s Discussion and Analysis of
Financial Condition and Results of Operations
PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
Year ended September 30, 2018 Compared to Year
ended September 30, 2017
Operating revenues increased 29% to $196.2 million in fiscal 2018
compared to $151.7 million in fiscal 2017.
Operating revenues in Equity Capital Markets, which we formerly
referred to as Equity Market-Making, increased 64%, to $93.2 million
in fiscal 2018 compared to fiscal 2017, as a result of a 34% increase in
the gross dollar volume traded as well as a 3% increase in the average
revenue per $1,000 traded. An increase in market volatility led to
increases in both the gross dollar volume traded as well as the average
revenue per $1,000 traded, while gross dollar volume also benefited
from the on-boarding of new clients and an increase in market share.
Equity Capital Markets 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 Capital Markets, which now includes both
our Debt Trading and Investment Banking businesses discussed in
prior filings, increased 15% to $95.3 million in fiscal 2018 compared
to fiscal 2017, primarily as a result of an increase in interest income in
our domestic institutional fixed income business as well as increased
activity in our municipal securities businesses. Operating revenues
in the prior year period included a $2.1 million gain on the sale of
exchange shares held in Argentina. Asset Management operating
revenues in fiscal 2018 decreased 35% to $7.7 million in fiscal 2018
versus $11.9 million in fiscal 2017 as a result of difficult market
conditions in Argentina. Average assets under management in Argentina
were $424.9 million in fiscal 2018 compared to $564.9 million in
fiscal 2017.
Segment income decreased 12% to $40.8 million in fiscal 2018
compared to $46.6 million in fiscal 2017, as strong performance
in Equity Capital Markets was more than offset by declines in our
domestic institutional fixed income business as a result of an increase
in interest expense, as well as weaker performance in our Argentine
operations in both Debt Capital Markets and Asset Management.
Variable expenses, excluding interest, expressed as a percentage of
operating revenues increased to 36% in fiscal 2018 compared to 34%
in fiscal 2017, primarily as a result of an increase in transaction-based
clearing expenses.
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 Capital Markets 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 Capital Markets 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 Capital Markets 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 Capital Markets, 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.
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.
Physical Commodities
This segment consists of our physical Precious Metals trading and
Physical Ag & Energy commodity businesses. In Precious Metals, we
provide a full range of trading and hedging capabilities, including
OTC products, to select producers, consumers, and investors. In our
trading activities, we act as a principal, committing our own capital
to buy and sell precious metals on a spot and forward basis.
In our Physical Ag & Energy commodity business, we act as a principal
to facilitate financing, structured pricing and logistics services to
clients across the commodity complex, including energy commodities,
grains, oil seeds, cotton, coffee, cocoa, edible oils and feed products.
We provide financing to commercial commodity-related companies
against physical inventories. We use sale and repurchase agreements
to purchase commodities evidenced by warehouse receipts, subject
to a simultaneous agreement to sell such commodities back to the
original seller at a later date.
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.
43
- 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, management and account fees
Interest income
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
Fixed compensation and benefits
Other fixed expenses
Bad debts
Bad debt on physical coal
Non-variable direct expenses
Segment (loss) income
2018
26,682.4
11.2
1.8
1.3
7.1
26,703.8
26,646.9
56.9
1.0
0.2
10.9
44.8
13.0
31.8
8.0
6.3
(0.1)
1.0
15.2
16.6
$
$
Year Ended September 30,
2017
% Change
% Change
(7)% $
460%
80%
8%
3%
(7)%
(7)%
27%
25%
(50)%
73%
20%
29%
17%
16%
58%
(114)%
(98)%
(74)%
(153)% $
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
6.9
4.0
0.7
47.0
58.6
(31.4)
103% $
(386)%
—%
—%
(1)%
103%
103%
22%
14%
(20)%
62%
18%
25%
16%
28%
(7)%
75%
n/m
480%
(336)% $
2016
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
5.4
4.3
0.4
—
10.1
13.3
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
2018
25,779.2
25,749.3
29.9
251,530.2
0.12
2018
924.5
897.5
27.0
$
$
$
$
$
% Change
% Change
Precious Metals
Year Ended September 30,
2017
27,958.9
27,932.8
(8)% $
(8)%
15% $
26.1
104% $
105%
9% $
2016
13,674.2
13,650.3
23.9
83%
(37)% $
137,235.3
0.19
49%
(27)% $
92,073.7
0.26
Physical Ag & Energy
Year Ended September 30,
2017
% Change
% Change
2016
27% $
27%
44% $
725.6
706.9
18.7
63% $
63%
47% $
446.3
433.6
12.7
For information about the assets of this segment, see Note 21 to the Consolidated Financial Statements.
Year ended September 30, 2018 Compared to Year
ended September 30, 2017
Operating revenues increased 27% to $56.9 million in fiscal 2018
compared to $44.8 million in fiscal 2017.
Precious metals operating revenues increased 15% to $29.9 million
in fiscal 2018 compared to $26.1 million in fiscal 2017. Operating
revenues increased as a result of an 83% increase in the number of
ounces traded, which was partially offset by a 37% decline in the
average revenue per ounce traded.
Operating revenues in Physical Ag & Energy increased 44% to
$27.0 million in fiscal 2018 compared to $18.7 million in fiscal 2017.
The increase in operating revenues is primarily due to continued
growth in our U.S. subsidiary FCStone Merchant Services, LLC,
resulting in increased transactions in edible oils, industrial feedstock
for biodiesel facilities, energy products, cotton and cocoa along with
an increase in its commodity financing programs with clients from
both existing and new client relationships.
Segment income was $16.6 million in fiscal 2018 compared to a
segment loss of $(31.4) million in fiscal 2017. Segment income in
44
- Form 10-K
PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
fiscal 2018 includes a $1.0 million charge to earnings for an allowance
for doubtful accounts recorded in the first quarter of 2018, for bad
debt incurred in our physical coal business. The segment loss in fiscal
2017 included a $47.0 million charge to earnings for an allowance
for doubtful accounts recorded in the fourth quarter of 2017, for a
bad debt incurred in our physical coal business. We have exited the
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. Variable expenses,
excluding interest expense, expressed as a percentage of operating
revenues remained unchanged at 25% in fiscal 2018 and fiscal 2017.
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 client 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.
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.
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 major foreign currency pairs and swap transactions.
Through our platform, client orders are accepted and directed to the
appropriate exchange for execution. We then facilitate the clearing
of client transactions. Clearing involves the matching of client trades
with the exchange, the collection and management of client margin
deposits to support the transactions, and the accounting and reporting
of the transactions to clients.
As of September 30, 2018, we held $2.6 billion in required client
segregated assets, which we believe makes us the third largest non-bank
futures commission merchant (“FCM”) in the U.S., as measured by
required client segregated assets. We seek to leverage our capabilities
and capacity by offering facilities management or outsourcing solutions
to other FCM’s.
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 client experience through the clearing and settlement
process. Our independent wealth management business, which
offers a comprehensive product suite to retail clients nationwide,
clears through this platform. We believe we are one of the leading
mid-market clearer’s in the securities industry, with approximately
60 correspondent clearing relationships with over $15 billion in assets
under management or administration as of September 30, 2018.
Within this segment, we also maintain what we believe is 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 clients 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.
Through our London-based Europe, Middle East and Africa (“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 clients
throughout Europe, the Middle East and Africa.
45
- 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 Clearing and Execution Services for the periods indicated.
(in millions)
Sales of physical commodities
Trading gains, net
Commission and clearing fees
Consulting, management and account fees
Interest income
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
Fixed compensation and benefits
Other fixed expenses
Bad debts
Non-variable direct expenses
Segment income
2018
—
45.1
216.0
42.5
28.8
332.4
—
332.4
95.9
105.6
8.3
122.6
30.8
91.8
20.4
22.7
0.4
43.5
48.3
$
$
Year Ended September 30,
2017
% Change
% Change
—
$
2%
29%
24%
104%
28%
—
28%
29%
31%
219%
20%
27%
18%
(11)%
(7)%
33%
(9)%
59% $
—
44.2
167.2
34.3
14.1
259.8
—
259.8
74.2
80.8
2.6
102.2
24.2
78.0
22.9
24.4
0.3
47.6
30.4
$
—
110%
45%
304%
124%
72%
—
72%
9%
141%
160%
109%
160%
97%
73%
95%
n/m
93%
105% $
2016
—
21.0
115.3
8.5
6.3
151.1
—
151.1
67.8
33.5
1.0
48.8
9.3
39.5
13.2
12.5
—
24.7
14.8
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 client equity - futures and options (millions)
FX Prime Brokerage volume (U.S. notional, millions)
2018
183.4
18.2
29.3
73.3
28.2
332.4
$
$
101.9
1.52
$
$
1,242.4
$ 401,116.9
Year Ended September 30,
2017
% Change
% Change
2016
60% $
(3)%
8%
1%
6%
28% $
114.9
18.7
27.2
72.3
26.7
259.8
75.4
35%
1.31
16% $
15% $
1,077.8
(35)% $ 620,917.8
8% $
(11)%
386%
291%
n/m
72% $
106.1
20.9
5.6
18.5
—
151.1
76.9
(2)%
1.21
8% $
13% $
955.1
7% $ 580,426.9
For information about the assets of this segment, see Note 21 to the Consolidated Financial Statements.
Year ended September 30, 2018 Compared to Year
ended September 30, 2017
Operating revenues increased 28% to $332.4 million in fiscal 2018
compared to $259.8 million in fiscal 2017.
Operating revenues in our Exchange-Traded Futures and Options
business increased 60% to $183.4 million in fiscal 2018 compared
to $114.9 million in fiscal 2017 as a result of a 35% increase in
exchange-traded volumes and a 16% increase in the average rate per
contract. In addition, interest income in the Exchange-Traded Futures
& Options business increased $11.5 million to $20.0 million in fiscal
2018 primarily as a result of an increase in short-term rates and a
15% increase in average client equity to $1,242.4 million in fiscal
2018 compared to $1,077.8 million in fiscal 2017.
Operating revenues in our FX Prime Brokerage declined 3% to
$18.2 million in fiscal 2018 compared to $18.7 million in fiscal 2017
as a result of a 35% decline in foreign exchange volumes compared
to fiscal 2017.
Correspondent Clearing operating revenues increased 8%, to
$29.3 million in fiscal 2018 compared to the prior year, primarily
driven by a $3.1 million increase in interest income. Operating
revenues in Independent Wealth Management increased 1%, to
$73.3 million in fiscal 2018 compared to the prior year. Operating
revenues in Derivative Voice Brokerage increased 6% versus the prior
year to $28.2 million in fiscal 2018.
Segment income increased 59% to $48.3 million in fiscal 2018
compared to $30.4 million in fiscal 2017, primarily as a result of
the increase in operating revenues as well as a $4.1 million decline
46
- Form 10-K
PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
in non-variable direct expenses compared to the prior year period.
This decline in non-variable direct expenses, was primarily a result of
cost savings initiatives in the FX Prime Brokerage and Correspondent
Clearing businesses. Segment income in fiscal 2018 and fiscal 2017
includes a $3.6 million charge to compensation and benefits per the
terms of the acquisition of the oil voice brokerage business. Per the
terms of the acquisition, this charge terminates at the end of fiscal
2018. Variable expenses, excluding interest, as a percentage of operating
revenues were 70% in fiscal 2018 compared to 69% in fiscal 2017.
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 client
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.
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 clients to make
any required margin deposits the next business day, and we require
our largest clients 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 clients 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 clients’ 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 subsidiary, SA Stone Wealth Management Inc.
(formerly Sterne Agee Financial Services, Inc.) is subject to the SEC
Uniform Net Capital Rule 15c3-1 under the Securities Exchange
Act of 1934.
47
- Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2018, we had total equity capital of $505.3 million
and outstanding bank loans of $355.2 million.
A substantial portion of our assets are liquid. As of September 30,
2018, 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; client receivables, marketable
financial instruments and investments, and physical commodities
inventory. All assets that are not client 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, 2018, we had deferred tax assets totaling
$19.8 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, 2018
and September 30, 2017 was $3.5 and $4.0 million, respectively. The
valuation allowances as of September 30, 2018 and September 30,
2017 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 losses for the
years ended September 30, 2018 (excluding the mandatory deemed
repatriation dividend of foreign subsidiaries accumulated and current
earnings and profits), 2017, and 2016 of $(3.7) million, $(20.5) million,
and $(9.7) million, respectively. The differences between actual levels
of past taxable 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 $5.0 million that are scheduled
to reverse from 2019 to 2021 and $2.5 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 in less than 5 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.
Client and Counterparty Credit and
Liquidity Risk
Our operations expose us to credit risk of default of our clients and
counterparties. The risk includes liquidity risk to the extent our clients
or counterparties are unable to make timely payment of margin or
other credit support. These risks expose us indirectly to the financing
and liquidity risks of our clients and counterparties, including the
risks that our clients and counterparties may not be able to finance
their operations.
As a clearing broker, we act on behalf of our clients 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 clients. Accordingly, we are responsible for our
clients’ obligations with respect to these transactions, which exposes
us to significant credit risk. Our clients are required to make any
required margin deposits the next business day, and we require our
largest clients to make intra-day margin payments during periods of
significant price movement. Our clients 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 clients
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 clients and the counterparties
with which we offset our client positions. As with exchange-traded
transactions, our OTC transactions require that we meet initial and
variation margin payments on behalf of our clients before we receive
the required payment from our clients. OTC clients 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 clients are required to make any required margin deposits the next
business day, and we may require our largest clients to make intra-day
margin payments during periods of significant price movement. We
have the ability to increase the margin requirements for clients based
on their open positions, trading activity, or market conditions. On
a limited basis, we provide credit thresholds to certain clients, based
on internal evaluations and monitoring of client 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 client
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.
48
- Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
Excluding the bad debt on physical coal discussed below, during
the fiscal years ended September 30, 2018, 2017, and 2016, we
recorded bad debts, net of recoveries of $3.1 million, $4.3 million,
and $4.4 million, respectively. During the year ended September 30,
2018, our bad debts primarily related to $2.8 million of agricultural
OTC client account deficits in the Commercial Hedging segment
and $0.4 million of exchange-traded client account deficits in the
Clearing & Execution Services segment, partially offset by a provision
decrease in the Physical Commodities segment. During the year ended
September 30, 2017, our bad debts included $3.8 million of client
deficits in the Commercial Hedging segment, primarily related to
account deficits from South Korean and Dubai commercial LME
clients, $0.2 million of uncollectible client receivables in our Physical
Commodities segment, and $0.3 million of uncollectible client
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 client deficits in the
Commercial Hedging segment, $0.4 million of uncollectible client
receivables in the Physical Commodities segment and $0.4 million
of uncollectible service fees and notes in the Securities segment.
Additional information related to bad debts, net of recoveries, for the
fiscal years ended September 30, 2018, 2017, and 2016 is set forth
in Note 5 of the Consolidated Financial Statements.
Bad Debt on Physical Coal
During the first quarter of fiscal 2018 and fourth quarter of fiscal 2017,
we recorded charges to earnings of $1.0 million and $47.0 million,
respectively, 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 clients; reimbursement of demurrage claims, dead
freight and other charges paid by INTL Asia Pte. Ltd. to its clients;
reimbursement due for deficiencies in the quality of coal delivered to
clients; and losses incurred related to the cancellation of open sales
contracts. We have completed our exit of the physical coal business.
INTL Asia Pte. Ltd. was 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 client requirements, economic and market conditions
and our growth. Our total assets as of September 30, 2018 and
September 30, 2017, were $7.8 billion and $6.2 billion, respectively.
Our operating activities generate or utilize cash as a result of net income
or loss earned or incurred during each period and fluctuations in our
assets and liabilities. The most significant fluctuations arise from changes
in the level of client activity, commodities prices and changes in the
balances of financial instruments and commodities inventory. INTL
FCStone Financial and INTL FCStone Ltd occasionally utilize their
margin line credit facilities, on a short-term basis, to meet intraday
settlements with the commodity exchanges prior to collecting margin
funds from their clients.
The majority of the assets of INTL FCStone Financial and INTL
FCStone IFL are restricted from being transferred to its parent or
other affiliates due to specific regulatory requirements. This restriction
has no impact on our ability to meet our cash obligations, and no
impact is expected in the future.
We have liquidity and funding policies and processes in place that are
intended to maintain significant flexibility to address both company-
specific and industry liquidity needs. The majority of our excess
funds are held with high-quality institutions, under U.S. government
obligations, interest earning cash deposits, AA-rated money market
investments and highly liquid reverse repurchase agreements.
As of September 30, 2018, we had $354.7 million in undistributed
foreign earnings. The Company recognized the one-time U.S.
repatriation tax due under Tax Reform and, as a result, repatriation
of these amounts would not be subject to additional U.S. federal
income tax but would be subject to applicable withholding taxes in
the relevant jurisdictions. Our intent is to permanently reinvest these
funds outside of the United States, with the exception of $13.0 million
that will be distributed in fiscal year 2019. Foreign withholding tax
is not applicable to this distribution.
As of September 30, 2018, we had four committed bank credit facilities,
totaling $594.5 million, of which $336.2 million was outstanding.
The credit facilities include:
•• A three-year syndicated loan facility, committed until March 18,
2019, under which we are entitled to borrow up to $262.0 million,
subject to certain terms and conditions of the credit agreement. The
loan proceeds are used to finance 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.
•• An unsecured syndicated loan facility, committed until April 4, 2019,
under which our subsidiary, INTL FCStone Financial is entitled to
borrow up to $75.0 million, subject to certain terms and conditions
of the credit agreement. This facility is intended to provide short-term
funding of margin to commodity exchanges as necessary.
•• A syndicated borrowing facility, committed until November 1,
2019, under which our subsidiary, FCStone Merchant Services,
LLC is entitled to borrow up to $232.5 million, subject to certain
terms and conditions of the credit agreement. The loan proceeds
are used to finance traditional commodity financing arrangements
and commodity repurchase agreements.
•• An unsecured syndicated loan facility, committed until January 31,
2019, under which our subsidiary, INTL FCStone Ltd is entitled to
borrow up to $25.0 million, subject to certain terms and conditions
of the credit agreement. This facility is intended to provide short-term
funding of margin to commodity exchanges as necessary.
Additional information regarding the committed bank credit facilities
can be found in Note 10 of the Consolidated Financial Statements. As
reflected above, $362.0 million of our committed credit facilities are
scheduled to expire during the 12-month period beginning with the
filing date of this Annual Report on Form 10-K. 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.
49
- Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
As of September 30, 2018, we had six uncommitted bank credit
facilities with an outstanding balance of $17.8 million. The credit
facilities include:
•• A secured uncommitted loan facility under which INTL FCStone
Financial may borrow up to $75.0 million, collateralized by
commodity warehouse receipts, to facilitate U.S. commodity exchange
deliveries of its clients, subject to certain terms and conditions of
the credit agreement.
•• A secured uncommitted loan facility under which INTL FCStone
Financial may borrow up to $100.0 million for short term funding
of firm and client margin requirements, subject to certain terms and
conditions of the agreement. The borrowings are secured by first
liens on firm owned marketable securities or client owned securities
which have been pledged to us under a clearing arrangement.
•• A secured uncommitted loan facility under which INTL FCStone
Financial may borrow up to $50.0 million for short term funding
of firm and client margin requirements, subject to certain terms and
conditions of the agreement. The borrowings are secured by first
liens on firm owned marketable securities or client owned securities
which have been pledged to us under a clearing arrangement.
•• A secured uncommitted loan facility under which INTL FCStone
Financial may borrow requested amounts for short term funding of
firm and client 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 client owned securities which have been pledged to us
under a clearing arrangement.
•• A secured uncommitted loan facility under which INTL FCStone
Ltd may borrow up to £20.0 million, collateralized by commodity
warehouse receipts, to facilitate financing of commodities under
repurchase agreement services to its clients, subject to certain terms
and conditions of the credit agreement.
•• A secured uncommitted loan facility under which FCStone Merchant
Services, LLC may borrow up to $15.0 million, collateralized by a
first priority security interest in the goods and inventory of FCStone
Merchant Services, LLC that is either located outside of the U.S. and
Canada or in transit to a destination outside the U.S. or Canada,
to facilitate the financing of inventory of commodities and other
products or goods approved by the lender in its sole discretion, subject
to certain terms and conditions of the loan facility agreement. In
December 2018, the Company executed an amendment to increase
the availability under this uncommitted loan facility to $20.0 million.
Our facility agreements contain certain financial covenants relating
to financial measures on a consolidated basis, as well as on a certain
stand-alone subsidiary basis, including minimum tangible net worth,
minimum regulatory capital, minimum net unencumbered liquid
assets, maximum net loss, minimum fixed charge coverage ratio and
maximum funded debt to net worth ratio. Failure to comply with any
such covenants could result in the debt becoming payable on demand.
As of September 30, 2018, we and our subsidiaries are in compliance
with all of our financial covenants under the outstanding facilities.
Cash Flows
Our cash and cash equivalents increased from $314.9 million as of
September 30, 2017 to $342.3 million as of September 30, 2018,
a net increase of $27.4 million. Net cash of $74.0 million was used
in operating activities, $15.4 million was used in investing activities
and net cash of $120.9 million was provided by financing activities,
of which $125.8 million was drawn on lines of credit, net, and
increased the amounts payable to lenders under loans. Fluctuations
in exchange rates caused a reduction of $4.1 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 client 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
clients 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 $12.5 million in fiscal 2018, $16.1 million
in fiscal 2017 and $15.4 million in fiscal 2016. Capital expenditures
over the past three years has included core information technology
hardware acquisitions and leasehold improvements on office space.
Additionally, over the past three years, we have been undergoing a
trade system conversion intended to replace an internally developed
system as well as a current third-party provided system. We have
capitalized $17.0 million of direct costs of materials and third-party
services related to obtaining and developing the trade system over
this three year period. On August 1, 2017, we implemented the first
phase of the trade system related to our OTC commodities business
in our Commercial Hedging segment, and the next phase of the
system related to our FX Prime Brokerage activities, in our Clearing
and Execution Services segment, is in the application development
stage, and is expected to be placed into service during fiscal 2019.
We estimate the useful lives for the trade systems to be ten years.
During fiscal 2018 and 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.
On September 30, 2018, the previously authorized repurchase of up
to 1.0 million shares of our outstanding common stock from time to
time in open market purchases and private transactions expired. As
of the date of this filing, no additional authorization by our Board
of Directors has occurred. Previously approved plans were 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.
50
- Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
Other Capital Considerations
Our activities are subject to various significant governmental regulations
and capital adequacy requirements, both in the U.S. and in the
international jurisdictions in which we operate. Certain 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, 2018. Additional information on
these net capital and minimum net capital requirements can be found
in Note 12 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. We will continue to monitor all applicable developments in
the ongoing implementation of the Dodd-Frank Act.
Contractual Obligations
The following table summarizes our cash payment obligations as of September 30, 2018:
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)
Payable to lenders under loans
Other
$
5.6
—
—
2.0
7.6
(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, 2018 fair values. The purchase commitments for less than one year will be partially offset
by corresponding sales commitments of $1,406.0 million.
43.4 $
1,203.7
355.2
6.5
1,608.8 $
10.1 $
1,203.7
226.8
1.0
1,441.6 $
17.4 $
—
128.4
1.7
147.5 $
10.3 $
—
—
1.8
12.1 $
$
Total contractual obligations exclude defined benefit pension obligations.
We comply with the minimum funding requirements, and accordingly
contributed $1.0 million to our defined benefit pension plans during
the year ended September 30, 2018. In fiscal 2019, we anticipate
making contributions of $0.1 million to the defined benefit plans.
Additional information on the funded status of these plans can be
found in Note 15 of the Consolidated Financial Statements.
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.
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 To Be Announced (TBA) securities and interest
rate swaps. 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
balance sheet. 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.
A significant portion of these instruments are primarily the execution
of orders for commodity futures and options on futures contracts on
behalf of our clients, 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 clients may incur. We control the risks associated with
these transactions by requiring clients to maintain margin deposits
in compliance with individual exchange regulations and internal
guidelines. We monitor required margin levels daily and, therefore,
may require clients to deposit additional collateral or reduce positions
when necessary. We also establish contract limits for clients, which
are monitored daily. We evaluate each client’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
clients are subject to netting, per the terms of the client agreements,
which reduce the exposure to us by permitting receivables and payables
with such clients to be offset in the event of a client default. Management
believes that the margin deposits held as of September 30, 2018 are
adequate to minimize the risk of material loss that could be created
by positions held at that time. 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 clients are subject to master netting agreements and the terms of
the client agreements, which reduce our exposure.
51
- Form 10-K
PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
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 clients, and
our OTC and foreign exchange trade desks will generally offset the
client’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 client.
Additionally, we hold options and futures on options contracts
resulting from market-making and proprietary trading activities in
these product lines. We assist clients 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 physical commodities trading business clients 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, borrow the financial
instruments to make good delivery, and therefore are obliged to purchase
such financial instruments at a future date in order to return the borrowed
financial instruments. We record these obligations in the consolidated
financial statements as of September 30, 2018 and September 30, 2017,
at fair value of the related financial instruments, totaling $866.5 million
and $717.6 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, net’. We will incur losses if the fair
value of the financial instruments sold, not yet purchased, increases
Critical Accounting Policies
subsequent to September 30, 2018, which might be partially or wholly
offset by gains in the value of assets held as of September 30, 2018. The
totals of $866.5 million and $717.6 million include a net liability of
$193.4 million and $317.0 million for derivatives, based on their fair
value as of September 30, 2018 and September 30, 2017, respectively.
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 we conduct 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 client 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, 2018 and 2017.
effects of Inflation
Because our assets are, to a large extent, liquid in nature, they are
not significantly affected by inflation. Increases in our expenses, such
as compensation and benefits, transaction-based clearing expenses,
occupancy and equipment rental, due to inflation, may not be readily
recoverable from increasing the prices of our services. While rising
interest rates are generally favorable for us, to the extent that inflation
has other adverse effects on the financial markets and on the value of
the financial instruments held in inventory, it may adversely affect
our financial position and results of operations.
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 due to their short-term nature or level of collateralization.
These financial instruments include: cash and cash equivalents;
cash, securities and other assets segregated under federal and other
regulations; securities purchased under agreements to resell; securities
52
- Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
borrowed; deposits with and receivables from broker-dealers, clearing
organizations, and counterparties; financial instruments owned;
securities sold under agreements to repurchase; securities loaned;
and financial instruments sold, but not yet purchased. Unrealized
gains and losses related to these financial instruments, which are not
client owned positions, are reflected in earnings. Where available,
we use prices from independent sources such as listed market prices,
third-party pricing services, 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 their 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 and total liabilities. 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 consolidated 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 financial instruments
owned and financial instruments 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
clients 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 client, and the following
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 income taxes and in evaluating
tax positions, including evaluating income tax 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 for deferred tax assets, 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 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 August 2018, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles -
Goodwill and Other - Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract”, which clarifies
that implementation costs incurred by customers in cloud computing
arrangements are deferred if they would be capitalized by customers
in software licensing arrangements under the internal-use software
guidance. This ASU is effective for public business entities for annual
and interim periods in fiscal years beginning after December 15, 2019.
53
- Form 10-K PART II
Item 7 management’s Discussion and Analysis of Financial Condition and Results of Operations
Early adoption is permitted. We expect to adopt this guidance in the
first quarter of fiscal year 2021. We are continuing to evaluate the
impact that the adoption of this guidance will have on our consolidated
financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation -
Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20):
Disclosure Framework - Changes to the Disclosure Requirements for
Defined Benefit Plans”, which aims to improve the overall usefulness of
disclosures to financial statement users and reduce unnecessary costs
to companies when preparing defined benefit plan disclosures. This
ASU is effective for public business entities for financial statements
issued for fiscal years ending after December 15, 2020. Retrospective
adoption is required and early adoption is permitted. We expect to
adopt this guidance in the first quarter of fiscal year 2021. We do
not expect the adoption of this guidance to have a material impact
on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement”, which aims to
improve the overall usefulness of disclosures to financial statement users
and reduce unnecessary costs to companies when preparing fair value
measurement disclosures. The ASU adds certain additional fair value
measurement disclosures as well as eliminating or modifying certain
existing fair value measurement disclosures. This ASU is effective for
all entities for annual and interim periods in fiscal years beginning after
December 15, 2019. Retrospective adoption is required except for
changes in disclosures related to changes in unrealized gains and losses
included in other comprehensive income for Level 3 instruments, the
range and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements, and the narrative description
of measurement uncertainty. Early adoption is permitted. An entity
may early adopt eliminated or modified disclosure requirements
and delay adoption of the additional disclosure requirements until
their effective date. In the fourth quarter of fiscal year 2018, we
early adopted the eliminated disclosure requirements related to the
amount of and reasons for transfers between Level 1 and Level 2
of the fair value hierarchy, the timing of transfers between levels of
the fair value hierarchy, and the valuation processes for Level 3 fair
value measurements. We expect to adopt the additional and modified
disclosure requirements in the first quarter of fiscal year 2021. We
do not expect the modified or additional disclosure requirements to
have a material impact on our consolidated financial statements or
related disclosures.
In February 2018, the FASB issued ASU No. 2018-02, “Income
Statement - Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income”. The ASU provides that the stranded tax
effects from the Tax Reform on the balance of other comprehensive
income may be reclassified to retained earnings. The ASU is effective
for periods beginning after December 15, 2018, with an election to
adopt early. We expect to adopt this guidance starting with the first
quarter of fiscal year 2020. We do not expect the adoption of this ASU
to have a material impact on our consolidated financial statements.
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
54
(IFRS). ASU 2014-09 supersedes nearly all existing revenue recognition
guidance under U.S. GAAP. In August 2015, the FASB issued ASU
2015-14, “Revenues from Contracts with Customers: Deferral of the
Effective Date”, which deferred the effective date for implementation
of ASU 2014-09 by one year. 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. We adopted
the provisions of this guidance on October 1, 2018. 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. We will adopt the new standard using the
modified retrospective method. However, as we have not identified
any material revenues from contracts with customers that result in a
change in the timing of revenue recognition under ASU 2014-09, there
will be no cumulative effect adjustment as of the date of adoption.
We have performed an assessment of our revenue contracts as well
as worked with industry participants and reviewed industry specific
guidance on matters of interpretation and application and have not
identified any material changes to the timing or amount of our revenue
recognition under ASU 2014-09. Our accounting policies did not
change materially as a result of applying the principles of revenue
recognition from ASU 2014-09 and are largely consistent with existing
guidance and current practices applied. We will provide additional
qualitative and quantitative disclosures, including a disaggregation
of revenue, a description of performance obligations, and other
disclosures in accordance with ASU 2014-09.
In February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842)”, which supersedes ASC 840, Leases. We will adopt this
guidance starting with the first quarter of fiscal year 2020 using a
modified retrospective transition approach. This accounting update
will require the Company as a lessee to recognize on the consolidated
balance sheet all leases with terms exceeding one year, which results in
the recognition of a right of use asset and corresponding lease liability,
including for those leases that we currently classify as operating leases.
The right of use asset and lease liability will initially be measured
using the present value of the remaining rental payments. In July 2018,
the FASB issued ASU No. 2018-10, “Codification Improvements
to Topic 842, Leases” and ASU No. 2018-11, “Leases (Topic 842)
Targeted Improvements”. ASU 2018-10 provides certain amendments
that affect narrow aspects of the guidance issued in ASU 2016-02.
ASU 2018-11 allows all entities adopting ASU 2016-02 to choose an
additional (and optional) transition method of adoption, under which
an entity initially applies the new leases standard at the adoption date
and recognizes a cumulative-effect adjustment to the opening balance
of retained earnings in the period of adoption. ASU 2018-11 also
allows lessors to not separate non-lease components from the associated
lease component if certain conditions are met. We are in the process
of identifying the population of leases affected by the guidance and
evaluating the impact ASU 2016-02 will have on our consolidated
financial statements and related disclosures.
- 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 4 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 client-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 client 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, 2018.
Marked-to-Market Revenues
56
46
40
42
27
14
s
y
a
D
f
o
r
e
b
m
u
N
60
50
40
30
20
10
0
15
8
$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
Daily Revenues ($000’s)
6
>$4,500
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.
55
- Form 10-K
PART II
Item 7A Quantitative and Qualitative Disclosures about market Risk
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.
Derivative instruments, which consist of futures, mortgage-backed
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 client 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.
Currently we hold no U.S. Treasury notes or interest rate swap
derivative contracts as part of this strategy. During fiscal 2018,
operating revenues include no unrealized gains or losses on the fair
value of U.S. Treasury notes and interest rate swaps, while fiscal
2017 and 2016 operating revenues included unrealized losses of
$5.8 million and $0.7 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 were not designated for
hedge accounting treatment, and changes in their fair values, which
are volatile and can fluctuate from period to period, were included
in operating revenues in the current periods.
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. The weighted-average time to maturity of
the portfolio, excluding cash deposits and our investments in AA-rated
money market funds, is less than three months.
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. The debt instruments are carried at their unpaid principal
balance which approximates fair value. As of September 30, 2018,
$354.0 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, 2018, we had $1.2 million outstanding
in fixed-rate long-term debt. There are no earnings or liquidity risks
associated with our fixed-rate debt.
56
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
ITEM 8 Financial Statements and Supplementary Data
PART II
ITEM 8 Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
INTL FCStone Inc.:
Opinion on the Consolidated Financial Statements
Basis for Opinion
We have audited the accompanying consolidated balance sheets of INTL
FCStone Inc. and subsidiaries (the Company) as of September 30, 2018
and 2017, the related consolidated income statements, consolidated
statements of comprehensive income, consolidated statements of cash
flows, and consolidated statements of stockholders’ equity for each
of the years in the three-year period ended September 30, 2018, and
the related notes and financial statement schedule (collectively, the
consolidated financial statements). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial
position of the Company as of September 30, 2018 and 2017, and
the results of its operations and its cash flows for each of the years
in the three-year period ended September 30, 2018, in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of September
30 2018, 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 11,
2018 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits. We are
a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on
a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2010.
Kansas City, Missouri
December 11, 2018
57
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
INTL FCStone Inc.:
Opinion on Internal Control Over Financial
Reporting
We have audited INTL FCStone Inc.’s and subsidiaries’ (the Company)
internal control over financial reporting as of September 30, 2018,
based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission. In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting
as of September 30, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of September 30, 2018
and 2017, and the related consolidated income statements, consolidated
statements of comprehensive income, consolidated statements of
cash flows, and consolidated statements of stockholders’ equity for
each of the years in the three-year period ended September 30, 2018,
and related notes and financial statement schedule (collectively, the
consolidated financial statements), and our report dated December 11,
2018 expressed an unqualified opinion on those consolidated financial
statements.
Management’s assessment of the effectiveness of the Company’s
internal control over financial reporting as of September 30, 2018
excluded PayCommerce Financial Solutions, LLC, acquired with
effect from September 5, 2018. Our audit of internal control over
financial reporting of the Company also excluded an evaluation of the
internal control over financial reporting of PayCommerce Financial
Solutions, LLC.
Basis for Opinion
The Company’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
the Company’s internal control over financial reporting based on our
audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the
PCAOB. 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 of internal control over financial reporting 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.
Definition and Limitations of Internal Control
Over Financial Reporting
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.
/s/ KPMG LLP
Kansas City, Missouri
December 11, 2018
58
- Form 10-K 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 $643.3 and
$54.5 at fair value at September 30, 2018 and September 30, 2017 respectively)
Collateralized transactions:
Securities purchased under agreements to resell
Securities borrowed
Deposits with and receivables from broker-dealers, clearing organizations and counterparties, net
(including $517.4 and $204.7 at fair value at September 30, 2018 and September 30, 2017, respectively)
Receivables from clients, 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 $123.0 and $19.4 at September 30, 2018 and September 30, 2017, respectively)
Physical commodities inventory, net (including $156.9 and $73.2 at fair value at September 30, 2018
and September 30, 2017, 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 $0.0 and $1.0 at fair value at September 30,
2018 and September 30, 2017, respectively)
Payable to:
Clients
Broker-dealers, clearing organizations and counterparties (including $0.0 and $4.8 at fair value at
September 30, 2018 and September 30, 2017, respectively)
Lenders under loans
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; 21,030,497 issued and
18,908,540 outstanding at September 30, 2018 and 20,855,243 issued and 18,733,286
outstanding at September 30, 2017
Common stock in treasury, at cost - 2,121,957 shares at September 30, 2018 and 2017
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.
$
$
$
PART II
ITEM 8 Financial Statements and Supplementary Data
September 30, 2018
September 30, 2017
$
342.3
$
1,408.7
870.8
225.5
2,234.5
288.0
3.8
0.3
2,054.8
222.5
19.8
42.4
59.8
51.5
7,824.7
$
314.9
518.8
406.6
86.6
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
145.4
$
135.6
3,639.6
3,072.9
89.5
355.2
8.6
1,936.7
277.9
866.5
7,319.4
125.7
230.2
7.3
1,393.1
111.1
717.6
5,793.5
—
—
0.2
(46.3)
267.5
317.0
(33.1)
505.3
7,824.7
$
0.2
(46.3)
259.0
261.5
(24.5)
449.9
6,243.4
59
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
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
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
Trading systems and market information
Occupancy and equipment rental
Professional fees
Travel and business development
Non-trading technology and support
Depreciation and amortization
Communications
Bad debts
Bad debt on physical coal
Other
Total compensation and other expenses
Other gains
Income before tax
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Year Ended September 30,
2017
2018
2016
$
$
$
$
26,682.4
389.1
356.8
71.1
123.3
27,622.7
26,646.9
975.8
179.7
133.8
80.7
581.6
337.7
34.7
16.5
18.1
13.8
13.9
11.6
5.4
3.1
1.0
26.3
482.1
2.0
101.5
46.0
55.5
2.93
2.87
$
$
$
$
28,673.3 $
332.2
283.4
65.0
69.7
29,423.6
28,639.6
784.0
136.3
113.0
42.1
492.6
295.7
34.4
15.2
15.2
13.3
11.6
9.8
5.0
4.3
47.0
25.9
477.4
—
15.2
8.8
6.4 $
0.32 $
0.31 $
14,112.0
321.2
224.3
42.2
55.2
14,754.9
14,083.9
671.0
129.9
68.9
28.3
443.9
263.9
28.0
13.3
14.0
11.5
7.1
8.2
4.7
4.4
—
22.3
377.4
6.2
72.7
18.0
54.7
2.94
2.90
Weighted-average number of common shares outstanding:
Basic
Diluted
See accompanying notes to consolidated financial statements.
18,549,011
18,934,830
18,395,987
18,687,354
18,410,561
18,625,372
60
- 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:
2018
Year Ended September 30,
2017
2016
$
55.5
$
6.4
$
Foreign currency translation adjustment
Pension liabilities adjustment
Reclassification of adjustment for losses (gains) included in net income:
Periodic pension costs (included in compensation and benefits)
Income tax expense from reclassification adjustments (included in income tax expense)
Reclassification adjustment for losses (gains) included in net income
Other comprehensive (loss) income
Comprehensive income
See accompanying notes to consolidated financial statements.
$
(9.0)
0.3
0.1
—
0.1
(8.6)
$
46.9
(1.4)
1.2
0.4
(0.1)
0.3
0.1
$
6.5
54.7
(7.4)
(0.2)
0.5
—
0.5
(7.1)
47.6
61
- 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 (used in) provided by operating
activities:
2018
Year Ended September 30,
2017
2016
$
55.5
$
6.4
$
54.7
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
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 clients, 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 clients
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 (used in) provided by operating activities
Cash flows from investing activities:
Cash paid for acquisitions, net
Purchase of exchange memberships and common stock
Sale of clearing organization common stock
Purchase of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net change in payable to lenders under loans
Deferred payments on acquisitions
Repayment of senior unsecured notes
Repayment of note payable
Share repurchase
Debt issuance costs
Exercise of stock options
Withholding taxes on stock option exercises
Income tax benefit on stock options and awards
Net cash provided by financing activities
62
1.0
11.6
3.1
22.3
1.0
(0.3)
6.6
—
—
(928.8)
(464.9)
(138.8)
408.8
(24.3)
6.8
(1.3)
(308.7)
(98.7)
(3.3)
18.6
520.0
(27.8)
3.2
543.7
166.8
153.9
(74.0)
(3.7)
—
0.8
(12.5)
(15.4)
125.8
(5.5)
—
(0.8)
—
(0.4)
2.6
(0.8)
—
120.9
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
- Form 10-K (in millions)
Effect of exchange rates on cash and cash equivalents
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 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
Escrow releases and deposits related to acquisitions
See accompanying notes to consolidated financial statements.
PART II
ITEM 8 Financial Statements and Supplementary Data
2018
Year Ended September 30,
2017
2016
(4.1)
27.4
314.9
342.3
78.9
22.2
$
$
$
3.9
$
— $
$
1.7
(1.9)
(0.2) $
— $
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
$
$
$
$
$
$
$
$
63
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
Consolidated Statements of Stockholders’ Equity
Common
Stock
Treasury
Stock
Additional
Paid-in
Capital
$
0.2 $
(26.8)
$
240.8
Retained
Earnings
$
200.4 $
54.7
Accumulated
Other
Comprehensive
Loss
Total
0.2
(19.5)
(46.3)
3.5
5.1
—
249.4
0.2
(46.3)
$
0.2 $
(46.3)
$
3.3
6.3
259.0
1.9
6.6
267.5
255.1
6.4
261.5
55.5
$
317.0 $
(33.1) $
(17.5)
$
(7.1)
(24.6)
0.1
(24.5)
(8.6)
397.1
54.7
(7.1)
3.5
5.1
(19.5)
433.8
6.4
0.1
3.3
6.3
449.9
55.5
(8.6)
1.9
6.6
505.3
(in millions)
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 loss
Exercise of stock options
Share-based compensation
Balances as of September 30, 2017
Net income
Other comprehensive income
Exercise of stock options
Share-based compensation
Balances as of September 30, 2018
See accompanying notes to consolidated financial statements.
64
- Form 10-K
Notes to Consolidated Financial Statements
PART II
ITEM 8 Financial Statements and Supplementary Data
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 brokerage and financial services firm providing execution, risk
management and advisory services, market intelligence and clearing
services with significant asset class coverage and significant market
coverage globally. The Company helps its clients to access market
liquidity, maximize profits and manage risk. The Company’s revenues
are derived primarily from financial products and advisory services
intended to fulfill its clients’ commercial needs and provide bottom-
line benefits to their businesses. The Company’s services include
comprehensive risk management advisory services for commercial
clients; 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 commercial and institutional clients and over 80,000 retail
clients located in more than 130 countries, including commercial
entities, asset managers, regional, national and introducing broker-
dealers, insurance companies, brokers, institutional investors and
professional traders, commercial and investment banks and government
and non-governmental organizations (“NGOs”).
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 2018, fiscal 2017,
and fiscal 2016 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
transactional volumes. Introducing broker commissions include
commission paid to non-employee third parties that have introduced
clients 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.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of 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, revenue recognition, the
provision for probable losses from bad debts, valuation of inventories,
valuation of goodwill and intangible assets, and 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, the Company merged its wholly-owned regulated
United States (“U.S.”) subsidiary, Sterne Agee & Leach, Inc., into the
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.
Reclassifications
During the year ended September 30, 2018, the Company separately
classified non-trading technology and support costs that were previously
included within ‘Other’ on the consolidated income statements.
Additionally, during the year ended September 30, 2018, the Company
separately classified communications related expenses from trading
systems and market information related costs. In performing these
reclassifications, the Company has made immaterial, retrospective
adjustments to conform to the current period presentation. For the
years ended September 30, 2017 and 2016, ‘Other’ expenses included
$11.6 million and $7.1 million, respectively, of expenses that are now
included within ‘Non-trading technology and support’ on the consolidated
income statements. For the years ended September 30, 2017 and 2016,
‘Trading systems and market information’ included $5.0 million and
$4.7 million, respectively, of expenses that are now included within
‘Communications’ on the consolidated income statements.
Foreign Currency Translation
The Company’s consolidated financial statements are reported in U.S.
dollars. The Company’s foreign subsidiaries maintain their records either
in U.S. dollars or in certain instances the currency of the country in
65
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
which they operate. The method of translating local currency financial
information into U.S. dollars depends on whether the economy in
which the foreign subsidiary operates has been designated as highly
inflationary or not. Economies with a three-year cumulative inflation
rate of more than 100% are considered highly inflationary.
Assets and liabilities of foreign subsidiaries in non-highly inflationary
economies are translated into U.S. dollars using rates of exchange at
the balance sheet date. Translation adjustments are recorded in other
comprehensive income (loss). Revenues and expense are translated
at rates of exchange in effect during the year. Transaction gains and
losses are recorded in earnings.
Foreign subsidiaries that operate in highly inflationary countries use the
U.S. dollar as their functional currency. Local currency monetary assets
and liabilities are remeasured into U.S. dollars using rates of exchange
as of each balance sheet date, with remeasurement adjustments and
other transaction gains and losses recognized in earnings. Nonmonetary
assets and liabilities do not fluctuate with changes in the local currency
exchange rates to the dollar as the translated amounts for nonmonetary
assets and liabilities at the end of the accounting period in which the
economy becomes highly inflationary becomes the accounting basis
for those assets and liabilities in the period of change and subsequent
periods. Revenues and expenses are translated at rates of exchange in
effect during the year.
The Company operates asset management and debt trading businesses
in Argentina through various wholly owned subsidiaries. Operating
revenues from the Argentinean subsidiaries represented approximately
3% of the consolidated operating revenues for the year ended
September 30, 2018. The operating environment in Argentina
continues to present business challenges, including ongoing devaluation
of the Argentine peso and significant inflation. For the year ended
September 30, 2018, the Argentine peso declined approximately
139% (from 17.3 to 41.3 pesos to the U.S. dollar). Based upon
inflationary data published by the International Practices Task Force
of the Center for Audit Quality, the economy of Argentina became
highly inflationary during the three months ended June 30, 2018.
Beginning July 1, 2018, the Company has designated Argentina’s economy
as highly inflationary for accounting purposes. As a result, the Company
has accounted for the Argentinean entities using the U.S. dollar as their
functional currency beginning in the quarter ending September 30,
2018. Argentine peso-denominated monetary assets and liabilities are
remeasured at each balance sheet date to the currency exchange rate
then in effect, with currency remeasurement gains and loses recognized
in earnings. The translated balances for nonmonetary assets and liabilities
as of June 30, 2018, became the accounting basis for those assets in the
period of change and subsequent periods. As a result of Argentina’s highly
inflationary status, the Company recorded translation losses through
earnings of $3.4 million for the quarter ended September 30, 2018.
At September 30, 2018, the Company had net monetary assets
denominated in Argentine pesos of $11.6 million, including cash
and cash equivalents of $1.4 million. At September 30, 2018, the
Company had net nonmonetary assets denominated in Argentine
pesos of $1.0 million.
Cash and Cash Equivalents
The Company considers cash held at banks and all highly liquid
investments not held for trading purposes, with original or acquired
maturities of 90 days or less, including certificates of deposit, to be
66
cash and cash equivalents. Cash and cash equivalents consist of cash,
foreign currency, and certificates of deposit not deposited with or
pledged to exchange-clearing organizations, broker-dealers, clearing
organizations or counterparties, or segregated under federal or other
regulations. Certificates of deposit are stated at cost plus accrued
interest, which approximates fair value, and may be withdrawn at
any time at the discretion of the Company without penalty.
Cash, Securities and Other Assets Segregated
under Federal and other Regulations
Pursuant to requirements of the Commodity Exchange Act and
Commission Regulation 30.7 of the U.S. Commodity Futures
Trading Commission (“CFTC”) 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 (“CASS”) rules in the Financial Services Authority
(“FSA”) handbook, funds deposited by clients relating to futures
and options on futures contracts in regulated commodities must
be carried in separate accounts which are designated as segregated
client accounts. Additionally, in accordance with Rule 15c3-3 of
the Securities Exchange Act of 1934 (“Rule 15c3-3”), the Company
maintains separate accounts for the exclusive benefit of securities
clients and proprietary accounts of broker dealers (“PABs”). Rule
15c3-3 requires the Company to maintain special reserve bank
accounts (“SRBAs”) for the exclusive benefit of securities clients
and PABs. The deposits in segregated client accounts and SRBAs
are not commingled with the funds of the Company. Under the
FSA’s rules, certain categories of clients may choose to opt-out of
segregation. As of September 30, 2018 and 2017, cash, securities,
and other assets segregated under federal and other regulations
consisted of cash held at banks of approximately $765.4 million
and $464.3 million, respectively, U.S. Treasury obligations of
approximately $600.4 million and $33.5 million, respectively, and
commodities warehouse receipts of approximately $42.9 million
and $21.0 million, respectively (see fair value measurements
discussion in Note 3).
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.
- Form 10-K Securities Borrowed and Loaned
The Company enters into securities borrowed and securities loaned
transactions primarily to meet counterparties’ needs. 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.
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 CFTC and the aforementioned
FSA handbook, client funds received to margin, guarantee, and/or
secure commodity futures and futures on options transactions are
segregated and accounted for separately from the general assets of the
Company. Deposits with broker-dealers, clearing organizations, and
counterparties pertain primarily to deposits made to satisfy margin
requirements on client 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 with broker-dealers,
clearing organizations, and counterparties. The Company also deposits
cash margin with various securities clearing organizations, and these
deposits are also included in deposits with broker-dealers, clearing
organizations, and counterparties. Deposits with and receivables from
broker-dealers, clearing organizations, and counterparties are reported
gross, except where a right of offset exists. As of September 30, 2018
and 2017, the Company had cash and cash equivalents on deposit with
or pledged to broker-dealers, clearing organizations, and counterparties
of approximately $1.5 billion and $2.3 billion, respectively.
Deposits with and receivables from broker-dealers, clearing
organizations, and counterparties also include securities pledged to
exchange-clearing organizations as collateral in lieu of cash margin
by the Company on behalf of clients and client-owned securities that
are pledged directly. It is the Company’s practice to include client-
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 agreements. Securities pledged primarily
include U.S. Treasury obligations, foreign government obligations,
and certain exchange-traded funds (“ETFs”). Securities that are not
client-owned are adjusted to fair value with associated changes in
unrealized gains or losses recorded through current period earnings.
For client-owned securities, the change in fair value is offset against
the payable to clients with no impact recognized in the consolidated
income statements. The fair value of these securities included within
deposits with and receivables from broker-dealers, clearing organizations,
and counterparties was $785.8 million and $251.4 million as of
September 30, 2018 and 2017, respectively.
PART II
ITEM 8 Financial Statements and Supplementary Data
Management has considered guidance required by Accounting
Standards Codification (“ASC”) 860 - Transfers and Servicing as it
relates to securities pledged by clients to margin their accounts within
the FCM Division of INTL FCStone Financial. Based on a review of
the agreements with the client, 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 client collateral assets
and corresponding liabilities in the Company’s consolidated balance
sheets as of September 30, 2018 and 2017.
In addition to cash margin, deposits with and receivables from broker-
dealers, clearing organizations, and counterparties include guaranty
deposits with exchange-clearing organizations. 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 client 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 with and receivables from broker-
dealers, clearing organizations, and counterparties.
Deposits with and receivables from broker-dealers, clearing
organizations, and counterparties also include 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 and represent the settlement
of futures positions.
Deposits with 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 clients
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 with and receivables from broker-dealers, clearing
organizations, and counterparties also includes amounts due from
exchange-clearing organizations for unrealized gains and losses
associated with clients’ options on futures contracts. See discussion
in the Financial Instruments section below for additional information
on the Company’s accounting policies for derivative contracts. For
client-owned derivative contracts, the fair value is offset against the
payable to clients with no impact recognized on the consolidated
income statements.
67
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
Receivable from and Payable to Clients
Receivable from clients, net of the allowance for doubtful accounts,
include the total of net deficits in individual exchange-traded futures
and OTC derivative trading accounts carried by the Company. Client
deficits arise from realized and unrealized trading losses on client
futures, options on futures, swaps and forwards and amounts due
on cash and margin transactions. Client deficit accounts are reported
gross of client accounts that contain net credit or positive balances,
except where a right of offset exists. Net deficits in individual futures
exchange-traded and OTC derivative trading accounts include both
secured and unsecured deficit balances due from clients as of the
balance sheet date. Secured deficit amounts are backed by U.S.
Treasury obligations and commodity warehouse receipts. These U.S
Treasury obligations and commodity warehouse receipts are not
netted against the secured deficit amounts, as the conditions for right
of setoff have not been met.
Receivable from clients, net also includes the net amounts receivable
from securities clients in connection with the settlement of regular-way
cash securities, margin loans to clients, and client cash debits. It is
the Company’s policy to report margin loans and payables that arise
due to positive cash flows in the same client’s accounts on a net basis
when the conditions for netting as specified in U.S. GAAP are met.
Clients’ securities transactions cleared by the Company are recorded on
a settlement date basis. Securities cleared by the Company and pledged
to the Company as a condition of the custodial clearing arrangements
are owned by the clients, including those that collateralize margin or
other similar transactions, and are not reflected on the consolidated
balance sheets as the Company does not have title to, or beneficial
interests, in those assets. In the event of uncompleted transactions
on settlement date, the Company records corresponding receivables
and payables, respectively. The carrying value of the receivables and
payables approximates fair value due to their short-term nature.
Payable to clients represent the total of client accounts with credit or
positive balances. Client accounts are used primarily in connection
with commodity, foreign exchange, precious metals, and securities
transactions and include gains and losses on open trades as well as
securities and cash margin deposits made as required by the Company,
the exchange-clearing organizations or other clearing organizations.
Client accounts with credit or positive balances are reported gross of
client deficit accounts, except where a right of offset exists.
Receivable from and payables to clients also include amounts related
to the value of clients 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 receivables from clients can be impacted
by the Company’s collection efforts, the financial stability of its
clients, 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 clients. The Company may
unilaterally close client trading positions in certain circumstances. In
addition, to evaluate client margining and collateral requirements,
client positions are stress tested regularly and monitored for excessive
concentration levels relative to the overall market size. Furthermore,
68
in certain instances, the Company is indemnified, and able to charge
back, introducing broker-dealers for bad debts incurred by their clients.
The Company generally charges off an outstanding receivable balance
when all economic means of recovery have been exhausted. That
determination considers information such as the occurrence of
significant changes in the client’s financial position such that the
client can no longer pay the obligation, or that the proceeds from
collateral will not be sufficient to pay the balance.
Notes Receivable
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 the collection of outstanding
principal is not probable.
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 related products are valued at the lower of
cost or net realizable value. Inventories of precious metals held by
subsidiaries that are not broker-dealers are valued at the lower of cost
or net realizable value, using the weighted-average price and first-in
first-out costing method.
Precious metals inventory held by INTL FCStone Ltd, a U.K. 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.
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.
- Form 10-K 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.
The Company evaluates its goodwill for impairment at the fiscal year
end (or more frequently if indicators of potential impairment exist) in
accordance with ASC 350 - Intangibles - Goodwill and Other. 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 the Company 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 the Company performs 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 is
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.
PART II
ITEM 8 Financial Statements and Supplementary Data
Financial Instruments Owned and Sold, Not Yet
Purchased
Financial instruments owned and sold, not yet purchased, at fair value
consist of financial instruments carried at fair value on a recurring
basis or amounts that approximate fair value, with related realized
and unrealized gains and losses recognized in current period earnings.
Realized and unrealized gains and losses on financial instruments owned
and sold, not yet purchased, are included in ‘Trading gains, net’ and
‘Cost of sales of physical commodities’ in the consolidated income
statements. 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.
Financial instruments owned and sold, not yet purchased are comprised
primarily of the financial instruments held by the Company’s broker-
dealer subsidiaries and the Company’s over-the-counter (“OTC”)
derivative swap dealer. Financial instruments owned and financial
instruments sold, not yet purchased, includes trading securities that
the Company holds as a principal. The Company has not classified any
financial instruments owned or sold, not yet purchased, as available-
for-sale or held-to-maturity.
Financial instruments owned and sold, not yet purchased includes
derivative instruments that the Company holds as a principal which
are primarily transacted on an OTC basis. As a derivatives dealer,
the Company utilizes derivative instruments to manage exposures
to foreign currency, commodity price and interest rate risks for the
Company and its clients. The Company’s objectives for holding
derivatives include reducing, eliminating, and efficiently managing
the economic impact of these exposures as effectively as possible.
The Company’s derivative instruments also include forward purchase
and sale commitments for the physical delivery of agricultural and
energy related commodities in a future period. Contracts to purchase
agricultural and energy commodities generally relate to the current
or future crop year. Contracts for the sale of agricultural and energy
commodities generally do not extend beyond one year.
Derivative instruments are recognized as either assets or liabilities and
are measured at fair value on a recurring basis. As the Company does
not elect hedge accounting for any derivative instruments, realized and
unrealized gains and losses from the change in fair value of derivative
instruments are recognized immediately in current period earnings.
Realized and unrealized gains and losses from the derivative instruments
in which the Company acts as a dealer are included within ‘Trading
gains, net’ on the consolidated income statements. Realized and
unrealized gains and losses on firm purchase and sale commitments
are included within ‘Cost of sales of physical commodities’ on the
consolidated income statements.
To reduce credit exposure on the derivative instruments for which
the Company acts as a dealer, the Company may enter into a master
netting arrangement that allows for settlement of all derivative
transactions with each counterparty. In addition, the credit support
annex that accompanies master netting arrangements allows parties to
the master netting agreement to mitigate their credit risk by requiring
the party which is out of the money to post collateral. The Company
accepts collateral in the form of cash or other marketable securities.
Where permitted, the Company elects to net-by-counterparty certain
derivative instruments entered into under a legally enforceable master
netting agreement and, therefore, the fair value of those derivative
69
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
instruments are netted by counterparty in the consolidated balance
sheets. As the Company elects to net-by-counterparty the fair value of
such derivative instruments, the Company also nets-by-counterparty
cash collateral exchanged as part of those derivative instruments.
The Company also brokers foreign exchange forwards, options and
cash, or spot, transactions between clients 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 client 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 client. 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 may lease commodities to or from clients or
counterparties. These commodity leases, which primarily involve
precious metals, are recorded at fair value utilizing the fair value
option based on guidance in the Financial Instruments Topic of the
ASC. These commodities leases represent hybrid financial instruments
which contain both a dollar denominated loan host contract and an
embedded forward derivative contract on the underlying commodities,
which can be settled in either cash or metals. As permitted by the fair
value option election, the entire instrument is recorded at fair value
as either an asset or liability in the consolidated balance sheets. The
corresponding change in the 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, 2018, 2017, and
2016. The Company does elect to value all of their commodities lease
agreements at fair value using the fair value option.
For further information regarding the types of financial instruments
owned and sold, not yet purchased, as well as the related valuation
techniques refer to Note 3.
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 organizations. 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, 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 Depository Trust & Clearing
Corporation (“DTCC”).
70
Exchange and clearing organization memberships and firm common
stocks required in order to conduct business on exchanges and clearing
organizations 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
exchanges are classified as trading securities included within ‘financial
instruments owned’ on the consolidated balance sheets and recorded
at fair value, with unrealized gains and losses recorded as a component
of ‘trading gains, net’ on the consolidated income statements.
The cost basis for exchange and clearing organization memberships and
firm common stock pledged for clearing purposes was $11.4 million
and $12.0 million as of September 30, 2018 and 2017, respectively.
The fair value of exchange and clearing organization memberships and
firm common stock pledged for clearing purposes was $10.3 million
and $10.2 million as of September 30, 2018 and 2017, 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 clients whereby the clients
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.
Lenders Under Loans
Lenders under loans are accounted for at amortized cost, which
approximates fair value due to their variable rates of interest.
Acquisitions
When acquiring companies, the Company recognizes separately from
goodwill most of the identifiable assets acquired and the liabilities
assumed at their acquisition date fair values. Certain contingent liabilities
acquired require remeasurement at fair value in each subsequent
reporting period. Goodwill as of the acquisition date is measured as the
- Form 10-K excess of consideration transferred and the net of the acquisition fair
values of the assets acquired and liabilities assumed. While the Company
used its best estimates and assumptions as a part of the purchase price
allocation to accurately value assets acquired and liabilities assumed
at the acquisition date, these estimates are inherently uncertain and
subject to refinement. As a result, during the remeasurement period,
which may up to one year from the acquisition date, the Company
records adjustments to the assets acquired and liabilities assumed,
with the corresponding offset to goodwill. Upon conclusion of the
measurement period or final determination of the values of assets
acquired and liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to the consolidated income statements rather
than adjusted through goodwill. 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.
Determining the fair value of certain identifiable assets acquired and
liabilities assumed 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. These
estimates and assumptions are based in part on historical experience,
market data, and information obtained from the management of the
acquired companies. Among the significant estimates used to value
certain identifiable intangible assets acquired in acquisitions include,
but are not limited to future expected cash flows from customer
relationships and discount rates.
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 statements.
An increase in the contingent consideration 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.
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 and amortization of share-based compensation.
Revenue Recognition
Sales of physical commodities
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
PART II
ITEM 8 Financial Statements and Supplementary Data
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
Trading gains, net include brokerage fees and margins generated from
OTC derivative trades executed with clients 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. These transactions may be offset simultaneously with
another client 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 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 Owned and Sold, Not Yet Purchased policy
note for revenue recognition on principal 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 on long
equity positions and dividend expense on short equity positions are
recognized net in ‘trading gains, net’ on the ex-dividend date.
Commission and clearing fees
The Company generates two types of commission revenues: sales-
based commissions and trailing commissions.
Sales-based commission revenues, which occur when the Company
executes and clears securities, futures, and options on futures transactions
on behalf of clients in an agency capacity, primarily represent commissions
that are recognized on a trade-date basis. Sales-based commissions are
generated by internal traders and brokers or by introducing broker-
dealers. Sales-based commissions are reported gross of introducing-broker
dealer and registered investment advisor commissions.
Certain 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 transactions 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 clients on a
per contract basis based on the trade-date. These fees are for clearing
clients’ trades and include fees charged to the Company by the various
futures exchanges, securities clearing organizations, and other regulatory
organizations and are reported gross of the transaction-based clearing
expenses discussed below.
71
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
Trailing commission revenues from mutual funds, annuities, and
insurance products are recorded over the period earned. Trailing
commission revenues, or commissions that are paid over time, such as
12(b)-1 fees are recurring in nature and are earned based on varying
factors that are product specific to trail-eligible assets. The Company
earns trailing commission revenues primarily on mutual funds,
annuities, and insurance products held by clients of the Company’s
registered investment advisors.
Consulting, management, and account fees
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 generally cancelable by either
party upon providing thirty days written notice to the other party
and the amounts are not variable based on client trading activities.
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 securities clearing agreements with unaffiliated
introducing-broker dealers such as transaction fees, annual account
fees, service charges, servicing fees, platform fees, 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 the Company for marketing and
administrative services and are recognized as earned.
Consulting, management, and account fees also includes fund
management fees which are earned over the period in which services
are rendered. The fund management fees earned are calculated monthly
based upon an average of net assets under management in accordance
with such investment management agreements.
Consulting, management, and account fees also includes asset
management, or administration, fees generated from the Company’s
registered investment advisor platform based upon the value of their
advisory assets. Asset management, or administration, fees are generally
billed to clients at the beginning of the quarter and are recognized as
revenue ratably over the quarter. The majority of accounts are billed
in advance using values as of the last business day of each calendar
quarter. The market value of the assets in an account on the billing
date determines the amount billed, and accordingly, the revenues
earned in the following three month period.
Additionally, the Company earns fees generated in lieu of interest
income from a multi-bank sweep program with unaffiliated banks.
Pursuant to contractual arrangements with securities introducing-broker
dealers, uninvested cash balances in the introducing -brokers client
accounts are swept into either FDIC insured cash accounts at various
banks or third-party money market funds for which the Company
earns a portion of the interest income generated by the balances.
The fees generated by the Company’s multi-bank sweep program are
reported net of the balances remitted to the introducing-brokers and
the clients of introducing-brokers.
72
Interest Income
Interest income is recognized on an accrual basis. Interest income is
generated from client funds deposited with the Company to satisfy
margin requirements which is held by banks or pledged to exchange-
clearing organizations. Interest income is also generated from the
investment of client funds in U.S. Treasury obligations. Interest income
generated from client funds is reported gross of the interest remitted
to the clients. Interest is also generated from trading fixed income
securities that the Company holds in its market-making businesses.
Interest income also includes interest generated from collateralized
transactions, including securities borrowed and securities purchased
under agreements to resell, and from extending margin loans to clients.
Revenue generally is recognized net of any taxes collected from clients
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 commitments and exchange-traded
futures and options contracts.
Interest Expense
Interest expense is recognized on an accrual basis. As noted above,
interest income is generated from client funds deposited with the
Company to satisfy margin requirements which is held by banks
or pledged to exchange-clearing organizations. Interest income is
also generated from the investment of client funds in U.S. Treasury
obligations. A portion of the interest income generated from these
funds is remitted to the clients. Interest expense is also incurred on
outstanding balances on the Company’s credit facilities. Interest expense
is also incurred on fixed income securities sold, not yet purchased,
that the Company holds in its market-marking businesses. Interest
expense is also incurred from collateralized transactions, including
securities loaned and securities sold under agreements to repurchase.
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
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
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. Forfeitures are
accounted for as they occur 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.
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 gains and losses from defined benefit pension plans and
gains and losses on foreign currency translations.
Transaction-Based Clearing Expenses
Preferred Stock
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 clients 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 clients to the Company.
Introducing brokers are individuals or organizations that maintain
relationships with clients and accept futures and options orders from
those clients. The Company directly provides all account, transaction
and margining services to introducing brokers, including accepting
money, securities and property from the clients. 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 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. 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 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. See Note
18 for further information on the Company’s income taxes.
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, 2018 and 2017, 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 March 2016, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) No. 2016-09,
“Compensation - Stock Compensation (Topic 718): Improvements
to Employee Share-Based Payment Accounting” (“ASU 2016-09”),
which simplifies several aspects of the accounting for share-based
payment transactions. Under ASU 2016-09, excess tax benefits and
tax deficiencies are recognized as income tax expense or benefit in the
income statement instead of additional paid in capital. ASU 2016-09
also provides entities with the option to elect an accounting policy
to estimate forfeitures of share-based awards over the service period
or account for forfeitures when they occur. Under ASU 2016-09,
previously unrecognized excess tax benefits should be recognized
using a modified retrospective transition. In addition, amendments
requiring recognition of excess tax benefits and tax deficiencies in the
income statement, as well as changes in the computation of weighted-
average diluted shares outstanding, should be applied prospectively.
ASU 2016-09 is effective for and was adopted by the Company in
the first quarter of 2018 and the impact of the adoption resulted in
the following:
•• During the year ended September 30, 2018, the Company recognized
excess tax benefits from share-based compensation of $0.5 million
within income tax expense on the consolidated income statement
and within net income on the consolidated cash flow statement.
Prior to adoption, the tax effect of share-based awards would have
been recognized in additional paid-in-capital on the consolidated
balance sheets and separately stated in the financing activities in
the consolidated cash flow statements. The Company has elected
to adopt this guidance prospectively.
•• The Company has elected to account for forfeitures of share-based
awards as they occur. The Company elected to account for forfeitures
as they occur using a modified retrospective transition method. The
adoption of this guidance did not have a material impact on the
consolidated financial statements.
•• The excess tax benefits from the assumed proceeds available to
repurchase shares were excluded in the computation of diluted
earnings per share for the year ended September 30, 2018. The
Company has elected to adopt this guidance prospectively.
73
- Form 10-K PART II
PART II
ITEM 8 Financial Statements and Supplementary Data
ITEM 8 Financial Statements and Supplementary Data
•• For the year ended September 30, 2018, the Company has classified
as a financing activity in the consolidated cash flow statement
$0.8 million of cash paid to taxing authorities for restricted stock
shares withheld to satisfy statutory income tax withholding obligations.
The retrospective application of this guidance had no impact on the
consolidated cash flow statements for the years ended September 30,
2017 and 2016.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying
the Measurement of Inventory (Topic 330).” Under ASU 2015-11,
inventory that is measured using the first-in, first-out (FIFO), specific
identification, or average cost methods should be measured at the lower
of cost or net realizable value. This ASU does not impact inventory
measurement under the last-in, first-out (LIFO) or retail inventory
methods. The Company adopted this ASU prospectively in the first
quarter of 2018. The adoption of this ASU did not have a material
impact on the consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value
Measurement (Topic 820): Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement”, which aims
to improve the overall usefulness of disclosures to financial statement
users and reduce unnecessary costs to companies when preparing
fair value measurement disclosures. This ASU is effective for all
entities for annual and interim periods in fiscal years beginning after
December 15, 2019. Retrospective adoption is required except for
changes in disclosures related to changes in unrealized gains and losses
included in other comprehensive income for Level 3 instruments, the
range and weighted average of significant unobservable inputs used to
develop Level 3 fair value measurements, and the narrative description
of measurement uncertainty. Early adoption is permitted. An entity
may early adopt eliminated or modified disclosure requirements and
delay adoption of the additional disclosure requirements until their
effective date. In the fourth quarter of fiscal year 2018, the Company
early adopted the eliminated disclosure requirements related to the
amount of and reasons for transfers between Level 1 and Level 2
of the fair value hierarchy, the timing of transfers between levels of
the fair value hierarchy, and the valuation processes for Level 3 fair
value measurements. The early adoption of the eliminated disclosure
requirements did not have a material impact on the Company’s fair
value measurement disclosures included within Note 3.
NOTE 2 Earnings per Share
The Company presents basic and diluted earnings per share (“EPS”)
using the two-class method which requires all outstanding unvested
share-based payment awards that contain rights to non-forfeitable
dividends and therefore participate in undistributed earnings with
common stockholders be included in computing earnings per share.
Under the two-class method, net income is 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,
2017
2018
2016
$
$
55.5
(0.9)
54.6
$
$
6.4
(0.1)
6.3
$
$
54.7
(1.0)
53.7
18,549,011
18,395,987
18,410,561
385,819
18,934,830
291,367
18,687,354
214,811
18,625,372
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 92,627, 230,135 and 910,060 shares of common
stock for fiscal years ended September 30, 2018, 2017, and 2016,
respectively, were excluded from the calculation of diluted earnings
per share because they would have been anti-dilutive.
74
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
PART II
ITEM 8 Financial Statements and Supplementary Data
NOTE 3 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
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 from 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 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 clients and broker-dealers, clearing
organizations and counterparties includes the fair value of 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 OTC forwards, swaps, and options.
Financial instruments owned and sold, not yet purchased include the
fair value of equity securities, which includes common, preferred, and
foreign ordinary shares, American Depository Receipts (“ADRs”),
Global Depository Receipts (“GDRs”), and exchange-traded funds
(“ETFs”), corporate and municipal bond, 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.
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.
75
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
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, foreign government
obligations, commodities warehouse receipts, certain equity securities
traded in active markets, physical precious metals inventory, equity
investments in exchange firms, investments in managed funds, as
well as 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
corporate and municipal bonds, U.S. government agency obligations,
agency-mortgage backed obligations, asset-backed obligations, certain
equity securities traded in less active markets, OTC commodity,
interest rate, and foreign exchange forwards, swaps, and options, and
OTC firm purchase and sale commitments related to the Company’s
agricultural and energy commodities.
Certain 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.
Physical commodities inventory includes precious metals that are a part
of the trading activities of a regulated broker-dealer subsidiary and is
recorded at net realizable value using exchange-quoted prices. Physical
commodities inventory also includes agricultural commodities that
are a part of the trading activities of a non-broker dealer subsidiary
and are also recorded at net realizable value using exchange-quoted
prices. The fair value of precious metals physical commodities inventory
is based upon unadjusted exchange-quoted prices and is, therefore,
classified within Level 1 of the fair value hierarchy. The fair value of
agricultural physical commodities inventory and the related OTC firm
sale and purchase commitments are generally based upon exchange-
quoted prices, adjusted for basis or differences in local markets,
broker or dealer quotations or market transactions in either listed
or OTC markets. Exchange-quoted prices are adjusted for location
and quality because the exchange-quoted prices for agricultural and
energy related products represent contracts that have standardized
terms for commodity, quantity, future delivery period, delivery
location, and commodity quality or grade. The basis or local market
adjustments are observable inputs or have an insignificant impact on
the measurement of fair value and, therefore, the agricultural physical
commodities inventory as well as the related OTC forward firm sale
and purchase commitments have been 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 or broker 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. As of September 30, 2017, included in Level 3
were certain equity securities and contingent liabilities. Level 3 assets
and liabilities were valued using an income approach based upon
management developed discounted cash flow projections, which
are an unobservable input. The Company had no Level 3 assets and
liabilities as of September 30, 2018, as the balances were settled during
the year ended September 30, 2018.
The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 2018 and
2017. 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.
76
- Form 10-K 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, 2018 and September 30, 2017 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, 2018 and 2017.
PART II
ITEM 8 Financial Statements and Supplementary Data
Level 1
Level 2
Level 3
Netting(1)
Total
September 30, 2018
(in millions)
ASSETS:
Certificates of deposit
Unrestricted cash equivalents - certificates of deposit
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
Equity securities
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
$
3.8 $
3.8
42.9
600.4
643.3
778.4
—
7.7
7,495.9
8,282.0
71.2
—
120.1
—
6.4
—
—
0.8
—
16.4
10.2
6.3
231.4
42.1
9,202.6 $
— $
—
—
—
—
—
5.0
—
19.6
24.6
3.0
79.1
—
472.9
—
1,022.5
42.9
514.6
29.5
—
—
—
2,164.5
114.8
2,303.9 $
— $
—
7,809.3
— $
2.1
11.6
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
— $
—
—
— $
—
—
—
—
—
(2.1)
—
(7,787.1)
(7,789.2)
—
—
—
—
—
—
—
(329.3)
(11.8)
—
—
—
(341.1)
—
(8,130.3)
$
3.8
3.8
42.9
600.4
643.3
778.4
2.9
7.7
(271.6)
517.4
74.2
79.1
120.1
472.9
6.4
1,022.5
42.9
186.1
17.7
16.4
10.2
6.3
2,054.8
156.9
3,376.2
— $
(2.1)
(7,820.9)
—
—
—
Payables to broker-dealers, clearing organizations and
counterparties
Equity securities
Corporate and municipal bonds
U.S. Treasury obligations
U.S government agency obligations
Agency mortgage-backed obligations
Derivatives
Commodities leases
—
51.5
20.1
484.8
57.2
0.2
193.4
59.3
Financial instruments sold, not yet purchased
866.5
866.5
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.
7,809.3
51.1
—
484.8
—
—
—
—
535.9
8,345.2 $
(7,823.0)
—
—
—
—
—
(494.6)
(16.2)
(510.8)
(8,333.8)
13.7
0.4
20.1
—
57.2
0.2
688.0
75.5
841.4
855.1 $
—
—
—
—
—
—
—
—
—
— $
$
$
77
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
(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
Foreign government obligations
U.S. Treasury obligations
TBA and forward settling securities
Derivatives
Deposits and receivables from broker-dealers, clearing
organizations and counterparties
Equity securities
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
40.4
28.2
60.0
—
—
—
—
1.3
—
38.5
8.3
6.0
182.7
73.2
3,167.5 $
— $
—
—
—
—
6.4
—
8.8
289.1
304.3
4.6
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
6.4
244.7
8.8
(55.2)
204.7
45.1
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
—
Payable to broker-dealers, clearing organizations and
counterparties - derivatives
Equity securities
Corporate and municipal bonds
U.S. Treasury obligations
U.S government agency obligations
Agency mortgage-backed obligations
Derivatives
Commodities leases
4.8
44.9
0.3
285.9
27.9
0.1
317.0
41.5
717.6
Financial instruments sold, not yet purchased
723.4
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.
297.7
0.9
—
—
27.9
0.1
1,427.2
191.1
1,647.2
1,944.9 $
2,476.2
44.0
0.3
285.9
—
—
—
—
330.2
2,806.4 $
(2,769.1)
—
—
—
—
—
(1,110.2)
(149.6)
(1,259.8)
(4,028.9)
—
—
—
—
—
—
—
—
—
1.0 $
$
$
Realized and unrealized gains and losses are included in ‘trading gains, net’, ‘interest income’, and ‘cost of sales of physical commodities’ in
the consolidated income statements.
78
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
Information on Level 3 Financial Assets and Liabilities
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, 2018 and 2017, including a summary of unrealized gains (losses) during the fiscal year ended on the Company’s
Level 3 financial assets and liabilities held during the periods.
(in millions)
ASSETS:
Balances at
beginning of
period
Realized gains
(losses) during
period
Level 3 Financial Assets and Financial Liabilities
For the Year Ended September 30, 2018
Unrealized
gains (losses)
during period
Purchases/
issuances
Settlements
Transfers in
or (out) of
Level 3
Balances at
end of period
Equity securities
$
0.1 $
— $
(0.1) $
— $
— $
— $
—
(in millions)
LIABILITIES:
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
Contingent liabilities
$
1.0 $
— $
— $
— $
(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, 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:
Equity securities
Corporate and municipal
bonds
(in millions)
LIABILITIES:
Contingent liabilities
$
0.8 $
— $
0.2
$
— $
— $
— $
1.0
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 was required to make additional future cash payments
based on certain financial performance measures of an acquired business.
The Company was required to remeasure the fair value of the contingent
consideration on a recurring basis. As of September 30, 2017, the
Company had classified its liability for the contingent consideration
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 arriving at fair value. The fair value of the
contingent consideration increased by $0.1 million during the year
ended September 30, 2017, with the corresponding amount classified
as ‘other’ in the consolidated income statement. The contingency
period for the contingent consideration ended as of December 31,
2017, and the accrued balance of $1.0 million was paid during the
year ended September 30, 2018.
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,
2018, the cost and fair value of the equity investments in exchange firms
is $3.7 million and $10.2 million, respectively. As of September 30,
2017, the cost and fair value of the equity investments in exchange
firms was $3.9 million and $8.3 million, respectively.
79
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
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, 2018 and 2017 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 clients, 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 clients 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.
NOTE 4 Financial Instruments with Off-Balance Sheet Risk and Concentrations
of Credit Risk
The Company is party to certain financial instruments with off-balance
sheet risk in the normal course of its business. The Company has sold
financial instruments that it does not currently own and will therefore
be obliged to purchase such financial instruments at a future date.
The Company has recorded these obligations in the consolidated
financial statements as of September 30, 2018 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, 2018. The total of $866.5 million as of
September 30, 2018 includes $193.4 million for derivative contracts,
which represent a liability to the Company based on their fair values
as of September 30, 2018.
Derivatives
The Company utilizes derivative products in its trading capacity
as a dealer in order to satisfy client 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
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. Currently, the Company
holds no U.S. Treasury notes or interest rate swap derivative contracts
as part of this strategy.
80
- Form 10-K PART II
ITEM 8 Financial Statements and Supplementary Data
Listed below are the fair values of the Company’s derivative assets and liabilities as of September 30, 2018 and 2017. Assets represent net
unrealized gains and liabilities represent net unrealized losses.
(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
OTC interest rate derivatives
Exchange-traded 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’
September 30, 2018
September 30, 2017
Assets(1)
Liabilities(1)
Assets(1)
Liabilities(1)
$
2,455.7
207.0
49.8
302.5
449.3
24.8
4,541.8
5.0
8,035.9
(8,118.5)
$
$
(268.7)
186.1
$
$
$
$
2,499.3
369.9
37.2
303.9
478.7
25.9
4,794.0
2.1
8,511.0
(8,317.6)
$
2,094.2
1,084.0
66.0
618.5
228.4
—
221.3
8.8
4,321.2
(4,205.5)
1,975.0
1,110.3
52.0
609.8
203.6
—
245.4
4.9
4,201.0
(3,879.2)
$
$
(46.4)
162.1
—
193.4
$
$
4.8
317.0
(1) As of September 30, 2018 and 2017, the Company’s derivative contract volume for open positions was approximately 10.6 million and 6.1 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 clients 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 clients with option products, including
combinations of buying and selling puts and calls. The Company mitigates
its risk by generally offsetting the client’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.
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 in the Company’s
fixed income portfolio. The fair value of these transactions is recorded
in deposits with and receivables from 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, 2018,
TBA and forward settling securities recorded within deposits with
and receivables from broker-dealers, clearing organizations, and
counterparties are summarized as follows (in millions):
Unrealized gain on TBA securities purchased
Unrealized loss on TBA securities purchased
Unrealized gain on TBA securities sold
Unrealized loss on TBA securities sold
Unrealized loss on forward settling securities purchased
Unrealized gain on forward settling securities sold
Gain/(Loss)
$
$
$
$
$
$
1.2
(0.6)
3.2
(1.5)
0.5
0.1
$
$
$
$
$
$
Notional
Amounts
721.5
293.2
(1,099.5)
(812.7)
614.3
(427.2)
The notional amounts of these instruments reflect the extent of the Company’s involvement in TBA and forward settling securities and do
not represent counterparty exposure.
81
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
The following table sets forth the Company’s net gains (losses) related to derivative financial instruments for the fiscal years ended September 30,
2018, 2017, and 2016, 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 clients. If either the client
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,
clients, broker-dealers and other financial institutions. These activities
primarily involve collateralized and uncollateralized arrangements and
may result in credit exposure in the event that a counterparty fails to
meet its contractual obligations. The Company’s exposure to credit
risk can be directly impacted by volatile financial markets, which
may impair the ability of counterparties to satisfy their contractual
obligations. The Company seeks to control its credit risk through a
variety of reporting and control procedures, including establishing
credit 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 client 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
clients, 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 clients may incur. The Company controls the risks
NOTE 5 Allowance for Doubtful Accounts
Deposits with and receivables from broker-dealers, clearing
organizations, and counterparties, net, receivables from clients,
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
82
Year Ended September 30,
2018
2017
2016
$
$
94.0
9.2
1.0
14.5
118.7
$
$
47.3
8.7
(0.1)
(2.5)
53.4
$
$
41.8
9.7
0.8
(14.4)
37.9
associated with these transactions by requiring clients to maintain
margin deposits in compliance with individual exchange regulations
and internal guidelines. The Company monitors required margin
levels daily and, therefore, may require clients to deposit additional
collateral or reduce positions when necessary. The Company also
establishes credit limits for clients, which are monitored daily. The
Company evaluates each client’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
clients and counterparties are subject to master netting, or client
agreements, which reduce the exposure to the Company by permitting
receivables and payables with such clients to be offset in the event of
a client default. Management believes that the margin deposits held
as of September 30, 2018 and September 30, 2017 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.
with and receivables from broker-dealers, clearing organizations, and
counterparties was $48.0 million and $47.0 million as of September 30,
2018 and 2017, respectively. The allowance for doubtful accounts
related to receivables from clients was $10.2 million and $7.6 million
as of September 30, 2018 and 2017, respectively. The Company had
no allowance for doubtful accounts related to notes receivable as of
September 30, 2018 and 2017.
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
During the year ended September 30, 2018, the Company recorded
bad debt expense related to clients, net of recoveries, of $3.1 million,
including provision net increases of $2.9 million, direct write-offs of
$0.3 million, and recoveries of $0.1 million. The increase in bad debts
during fiscal 2018 primarily related to $2.8 million of agricultural
OTC client account deficits in the Commercial Hedging segment
and $0.4 million of exchange-traded client account deficits in the
Clearing & Execution Services segment, partially offset by a provision
decrease in the Physical Commodities segment.
During the year ended September 30, 2017, the Company recorded
bad debt expense related to clients, net of recoveries, of $4.3 million,
including provision increases of $4.2 million and direct write-offs of
$0.1 million. The increase in bad debts during fiscal 2017 primarily
related to $3.8 million of client deficits in the Commercial Hedging
segment, primarily related to account deficits from South Korean and
Dubai commercial LME clients, $0.2 million of uncollectible client
receivables in the Physical Commodities segment, and $0.3 million of
uncollectible client receivables in the Clearing & Execution Services
segment, primarily related to our derivatives voice brokerage business.
During first quarter of fiscal 2018 and the fourth quarter of fiscal
2017, the Company recorded charges to earnings of $1.0 million and
$47.0 million, respectively, 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 (counterparty), as
further discussed in Note 17.
During the year ended September 30, 2016, the Company recorded
bad debt expense related to clients, 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
client deficits in the Commercial Hedging segment, $0.4 million
of uncollectible client receivables in the Physical Commodities
segment, and $0.4 million of uncollectible service fees and notes in
the Securities segment.
Activity in the allowance for doubtful accounts for the years ended September 30, 2018, 2017, and 2016 was as follows:
(in millions)
Balance, beginning of year
Provision for bad debts
Charge-offs
Balance, end of year
2018
2017
2016
$
$
54.6
3.9
(0.3)
58.2
$
$
9.7
51.0
(6.1)
54.6
$
$
11.2
4.2
(5.7)
9.7
NOTE 6 Physical Commodities Inventory
The Company’s inventories consist of finished physical commodities. Inventories by component of the Company’s Physical Commodities
segment are shown below.
(in millions)
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, canola, coffee, cocoa, cotton, 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 propane, gasoline, and kerosene, which
are valued at the lower of cost or net realizable value.
114.7
42.1
65.7
222.5
65.1
13.3
46.4
124.8
$
$
$
$
September 30, 2017
September 30, 2018
(2) Precious metals held by the Company’s subsidiary, INTL FCStone Ltd, a United Kingdom based broker-dealer subsidiary, is measured at net realizable value, with changes in net
realizable 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 net realizable value.
The Company has recorded lower of cost or net realizable value adjustments for certain precious metals inventory of $0.4 million and
$0.7 million as of September 30, 2018 and 2017, respectively. The adjustments are included in ‘cost of sales of physical commodities’ in the
consolidated income statements.
NOTE 7 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, 2018, 2017, and 2016, depreciation expense
was $9.4 million, $7.0 million and $6.6 million, respectively.
83
- Form 10-K
PART II
ITEM 8 Financial Statements and Supplementary Data
A summary of property and equipment, at cost less accumulated depreciation as of September 30, 2018 and 2017 is as follows:
(in millions)
Property and equipment:
Furniture and fixtures
Software
Equipment
Leasehold improvements
Total property and equipment
Less accumulated depreciation
Property and equipment, net
NOTE 8 Goodwill
September 30, 2018
September 30, 2017
$
$
8.7
30.5
24.7
17.0
80.9
(38.5)
42.4
$
$
7.2
25.3
22.6
15.4
70.5
(31.8)
38.7
Goodwill allocated to the Company’s operating segments as of September 30, 2018 and 2017 is as follows:
(in millions)
Commercial Hedging
Global Payments
Physical Commodities
Securities
Goodwill
September 30, 2018
September 30, 2017
$
$
30.3
8.9
2.4
6.8
48.4
$
$
30.7
6.3
2.4
7.7
47.1
The Company recorded $1.3 million and zero in foreign exchange translation losses on goodwill within the Commercial Hedging and Securities
operating segments for the years ended September 30, 2018 and 2017, respectively. The Company also recorded additional goodwill of
$2.6 million within the Global Payments operating segment related to the acquisition of PayCommerce Financial Solutions, LLC as discussed
further in Note 19.
NOTE 9 Intangible Assets
During the year ended September 30, 2018, the Company recorded additional client base intangible assets of $1.4 million as part of the
PayCommerce Financial Solutions, LLC 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
Client base
Total intangible assets
September 30, 2018
Accumulated
Amortization
Gross
Amount
Net
Amount
Gross
Amount
September 30, 2017
Accumulated
Amortization
Net
Amount
$
$
— $
2.7
21.4
24.1 $
— $
(2.6)
(10.1)
(12.7)
$
— $
0.1
11.3
11.4 $
— $
2.7
20.0
22.7 $
— $
(2.5)
(7.9)
(10.4)
$
—
0.2
12.1
12.3
Amortization expense related to intangible assets was $2.3 million, $2.8 million, and $1.6 million for the fiscal years ended September 30,
2018, 2017, and 2016, respectively. The estimated future amortization expense as of September 30, 2018 is as follows (in millions):
Year ending September 30,
2019
2020
2021
2022
2023 and thereafter
84
$
$
2.5
2.2
2.2
1.0
3.5
11.4
- Form 10-K
NOTE 10 Credit Facilities
Variable-Rate Credit Facilities
The Company has four committed credit facilities under which the
Company and its subsidiaries may borrow up to $594.5 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 first-lien senior secured committed syndicated loan
facility under which $262.0 million is available to the Company
for general working capital requirements and capital expenditures.
The credit facility is secured by a first priority lien on substantially
all of the assets of the Company and those of our subsidiaries that
guarantee the credit facility. 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 5.17% as of September 30, 2018. 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. The Company was in compliance
with all covenants under the loan facility as of September 30, 2018.
•• An unsecured syndicated committed line of credit under which
$75.0 million is available to the Company’s wholly owned 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 7.25% as of September 30, 2018.
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,
2018. The facility is guaranteed by the Company.
•• A syndicated committed borrowing facility under which
$232.5 million is available to the Company’s wholly owned 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 the borrowing facility require a commitment fee
of 0.38% 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 4.77% as
of September 30, 2018. The agreement contains financial covenants
related to tangible net worth, as defined. FCStone Merchants was in
compliance with this covenant as of September 30, 2018.
part II
ITEM 8 Financial Statements and Supplementary Data
•• An unsecured syndicated committed borrowing facility under
which $25.0 million is available to the Company’s wholly owned
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, 2018. The facility is guaranteed by the Company.
The Company also has a secured, uncommitted loan facility, under which
INTL FCStone Ltd may borrow up to £20.0 million, collateralized by
commodities warehouse receipts, to facilitate financing of commodities
under repurchase agreement services to its clients, subject to certain
terms and conditions of the credit agreement.
The Company also has a secured, uncommitted loan facility, under
which INTL FCStone Financial may borrow up to $75.0 million,
collateralized by commodities warehouse receipts, to facilitate
U.S. commodity exchange deliveries of its clients, subject to certain
terms and conditions of the credit agreement. There were $0 and
$23.0 million in borrowings outstanding under this credit facility at
September 30, 2018 and 2017, respectively. Borrowings under this
facility bear interest at the Fed Funds Rate, as defined, plus 2.5%.
The Company also has a secured uncommitted loan facility under which
INTL FCStone Financial may borrow for short term funding of firm
and client 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. At September 30, 2018 and 2017, the Company had
$14.0 million and $0, respectively, of borrowings outstanding under
this credit facility. The interest rate associated with the borrowings
outstanding as of September 30, 2018, was 2.88%.
The Company also has secured uncommitted loan facilities under
which INTL FCStone Financial may borrow up to $150.0 million for
short term funding of firm and client securities margin requirements,
subject to certain terms and conditions of the agreements. 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 securities or client owned securities which have
been pledged to the Company. There were $0 and $11.0 million in
borrowings outstanding under these credit facilities at September 30,
2018 and 2017, respectively.
In August 2018, the Company executed a secured uncommitted
loan facility under which FCStone Merchants could borrow up to
$15.0 million to facilitate the financing of inventory of commodities and
other products or goods approved by the lender in its sole discretion,
subject to certain terms and conditions of the loan facility agreement.
The loan facility is collateralized by a first priority security interest in
85
- Form 10-K part II
ITEM 8 Financial Statements and Supplementary Data
goods and inventory of FCStone Merchants that is (a) either located
outside of the U.S. and Canada or in transit to a destination outside
the U.S. or Canada and (b) acquired with any extension of credit
(whether in the form of a loan or by the issuance of a letter of credit)
under the loan facility. Loans under the facility accrue interest at a per
annum rate equal to the applicable Cost of Funds Rate, as defined,
plus 3.00% or at the Base Rate, as defined, plus 2.00%. Letters of
credit under the facility accrue a fee at the per annum rate of 2.75%.
There were $3.8 million in borrowings outstanding under this credit
facility at September 30, 2018. The interest rate associated with
these borrowings was approximately 5.4%. In December 2018, the
Company executed an amendment to increase the availability under
this uncommitted loan facility to $20.0 million.
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 as of September 30, 2018 and 2017:
CREDIT FACILITIES
(in millions)
Borrower
COMMITTED CREDIT FACILITIES
INTL FCStone Inc.
INTL FCStone Financial Inc.
FCStone Merchants Services, LLC Certain commodities assets
INTL FCStone Ltd.
Security
None
Pledged shares of certain subsidiaries
None
UNCOMMITTED CREDIT FACILITIES
INTL FCStone Financial Inc.
Commodities warehouse receipts and
certain pledged securities
Commodities warehouse receipts
Certain commodities assets
INTL FCStone Ltd.
FCStone Merchants Services, LLC
NOTE PAYABLE TO BANK
Monthly installments, due March 2020 and secured by certain equipment
Total Payables to lenders under loans
renewal /
Expiration Date
total
Commitment
September 30,
2018
September 30,
2017
amounts Outstanding
March 18, 2019
April 4, 2019
November 1, 2019
January 31, 2019
$
$
262.0 $
75.0
232.5
25.0
594.5
n/a
n/a
n/a
—
—
—
208.2 $
—
128.0
—
336.2
14.0
—
3.8
1.2
355.2 $
$
150.0
—
44.2
—
194.2
34.0
—
—
2.0
230.2
As reflected above, $362 million of the Company’s committed credit facilities are scheduled to expire during the fiscal year ended September 30,
2019. 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.
86
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
NOTE 11 Commitments and Contingencies
Legal and Regulatory Proceedings
Sentinel Litigation
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 and regulatory 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 or regulatory proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought
or expected to be sought therein.
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.
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 limits of the respective policy. Additionally, the Company
is subject to extensive regulation and supervision by U.S. federal
and international governmental agencies and various self-regulatory
organizations. The Company and its advisors periodically engage
with such regulatory agencies and organizations, in the context of
examinations or otherwise, to respond to inquiries, informational
requests, and investigations. From time to time, such engagements
result in regulatory complaints or other matters, the resolution of
which can include fines and other remediation.
As of September 30, 2018 and 2017, 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:
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 clients 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.
A further $2.0 million was held by the bankruptcy trustee in reserve
in the name of FCStone, LLC.
In August 2008, the bankruptcy trustee of Sentinel filed adversary
proceedings against FCStone, LLC, and a number of other FCMs,
seeking recovery of pre- and post-petition transfers totaling
$15.5 million.
On April 23, 2018, following ten years of legal proceedings and a
final ruling by the United States Court of Appeals for the Seventh
Circuit against the trustee in favor of INTL FCStone Financial, the
United States Supreme Court denied the trustee’s petition for writ of
certiorari. Following this, on May 1, 2018, INTL FCStone Financial
received funds from the reserve account in the amount of $2.0 million.
This amount is presented in ‘Other gains’ in the consolidated income
statement for the year ended September 30, 2018.
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.
Contractual Commitments
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 $12.0 million, $11.3 million and $9.9 million, for fiscal years
ended September 30, 2018, 2017, and 2016, 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.
87
- Form 10-K part II
ITEM 8 Financial Statements and Supplementary Data
Future aggregate minimum lease payments under noncancelable operating leases as of September 30, 2018 are as follows:
(in millions)
Year ending September 30,
2019
2020
2021
2022
2023
Thereafter
$
$
10.1
9.3
8.1
5.8
4.5
5.6
43.4
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, 2018 fair values. The purchase commitments and
other obligations as of September 30, 2018 for less than one year,
one to three years and three to five years were $1,204.7 million,
$1.7 million and $1.8 million, respectively. There were $2.0 million
in purchase commitments and other obligations after five years as of
September 30, 2018. The purchase commitments for less than one year
will be offset by corresponding sales commitments of $1,406 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 client
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, 2018 and 2017,
the Company had $0.8 million accrued for self-insured medical and
dental claims included in ‘accounts payable and other liabilities’ in
the consolidated balance sheets.
NOTE 12 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 client
and nonclient 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 (“Rule 15c3-3”), which requires the Company to maintain
separate accounts for the benefit of securities clients and proprietary
accounts of broker dealers (“PABs”). These client protection rules
require the Company to maintain special reserve bank accounts
(“SRBAs”) for the exclusive benefit of securities clients and PABs.
Pursuant to the requirements of the Commodity Exchange Act, funds
deposited by clients 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 clients’ accounts. Pursuant to the requirements of
the CFTC, funds deposited by clients of INTL FCStone Financial
88
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
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 clients trading foreign
futures and foreign options on foreign commodity exchanges or
boards of trade, which are designated as secured clients’ accounts. See
below for additional information regarding INTL FCStone Financial’s
calculation of segregated and secured client funds.
The Company’s subsidiary SA Stone Wealth Management Inc. (formerly
Sterne Agee Financial Services, Inc.) is 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 client money and other
assets which under certain circumstances for certain classes of client
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.
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.
INTL Gainvest S.A. and INTL CIBSA S.A. are regulated by the
Comision Nacional de Valores, and are subject to net capital and
capital adequacy requirements.
All subsidiaries of the Company are in compliance with all of their regulatory requirements as of September 30, 2018, as follows:
as of September 30, 2018
regulatory authority
requirement type
actual
Net capital
Segregated funds
Secured funds
Customer reserve
PAB reserve
Net capital
Net capital
Segregated funds
Net capital
$
$
$
$
$
$
$
$
167.7 $
2,637.0 $
148.9 $
* $
0.3 $
4.6 $
193.1 $
187.3 $
193.0 $
Minimum
requirement
101.4
2,579.7
132.8
6.4
—
0.4
95.9
182.1
95.9
(in millions)
Subsidiary
INTL FCStone Financial Inc.
INTL FCStone Financial Inc.
INTL FCStone Financial Inc.
INTL FCStone Financial Inc.
INTL FCStone Financial Inc.
SA Stone Wealth Management Inc.
INTL FCStone Ltd
INTL FCStone Ltd
INTL Netherlands BV
INTL FCStone DTVM Ltda.
SEC and CFTC
CFTC
CFTC
SEC
SEC
SEC
FCA (United Kingdom)
FCA (United Kingdom)
FCA (United Kingdom)
Brazilian Central Bank and Securities and
Exchange Commission of Brazil
National Securities Commission ("CNV")
CNV
CNV
CNV
INTL Gainvest S.A.
INTL Gainvest S.A.
INTL CIBSA S.A.
INTL CIBSA S.A.
*
2.1
0.1
0.1
0.5
0.3
As of September 30, 2018, the Company had no balance in the customer reserve SRBA. As a result of the reserve requirement determined through the weekly computation, the
Company made a deposit to the customer reserve SRBA of $11.4 million on October 2, 2018, to meet the customer segregation requirements under Rule 15c3-3.
Capital adequacy
Capital adequacy
Net capital
Capital adequacy
Net capital
11.2 $
4.2 $
1.2 $
4.4 $
3.1 $
$
$
$
$
$
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, 2018, these subsidiaries were in compliance with their local capital adequacy requirements.
NOTE 13 Securities and Commodity Financing Transactions
The Company’s outstanding notes receivable in connection with
repurchase agreements for agricultural and energy commodities,
whereby the clients sell to the Company certain commodity inventory
and agree to repurchase the commodity inventory at a future date at
a fixed price were $1.9 million and $0.8 million as of September 30,
2018 and 2017, 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.
89
- Form 10-K part II
ITEM 8 Financial Statements and Supplementary Data
The Company pledges financial instruments owned to collateralize
repurchase agreements. At September 30, 2018 and 2017, financial
instruments owned, at fair value of $123.0 million and $19.4 million,
respectively, 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.
In addition, as of September 30, 2018 and 2017, the Company
pledged financial instruments owned, at fair value of $1,481.1 million
and $1,306.4 million, respectively, and securities received under
reverse repurchase agreements of $369.8 million and $100.2 million,
respectively, to cover collateral requirements for tri-party repurchase
agreements. For these securities, the counterparties do not have the
right to sell or repledge the collateral and, therefore, they have not
been parenthetically disclosed on the consolidated balance sheet.
The Company also has repledged securities borrowed and client
securities held under custodial clearing arrangements to collateralize
securities loaned agreements with a fair value of $267.9 million and
$108.4 million as of September 30, 2018 and 2017, respectively.
Additionally, the Company has also pledged financial instruments
owned of $27.1 million and $12.7 million as of September 30, 2018
and 2017, respectively, to collateralize uncommitted loan facilities
with certain banks as discussed further in Note 10.
At September 30, 2018 and 2017, the Company had 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,
2018 and 2017 was $1,294.8 million and $631.7 million, respectively,
of which $473.9 million and $306.9 million, respectively, 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.
The following tables provide the contractual maturities of gross obligations under repurchase and securities lending agreements as of September 30,
2018 and 2017 (in millions):
Securities sold under agreements to repurchase
Securities loaned
Gross amount of secured financing
Securities sold under agreements to repurchase
Securities loaned
Gross amount of secured financing
September 30, 2018
Overnight and
Open
Less than
30 Days
30-90 Days
total
934.9 $
277.9
1,212.8 $
661.3 $
—
661.3 $
340.5 $
—
340.5 $
1,936.7
277.9
2,214.6
September 30, 2017
Overnight and
Open
Less than
30 Days
30-90 Days
total
640.2 $
111.1
751.3 $
432.9 $
—
432.9 $
320.0 $
—
320.0 $
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, 2018 and 2017 (in millions):
September 30, 2018
$
39.6
461.7
50.0
1,385.4
1,936.7
277.9
277.9
2,214.6
$
$
September 30, 2017
$
$
$
7.0
332.6
36.4
1,017.1
1,393.1
111.1
111.1
1,504.2
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:
Equity securities
Total securities loaned
Gross amount of secured financing
90
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
NOTE 14 Share-Based Compensation
Share-based compensation expense is included in ‘compensation and benefits’ in the consolidated income statements and totaled $6.6 million,
$6.3 million and $5.1 million for the fiscal years ended September 30, 2018, 2017, and 2016, 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, 2018, there were 0.6 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,
2017
2016
2018
30%
—%
1.23%
3.06
31%
—%
0.99%
3.08
28%
—%
0.83%
3.06
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, 2018, 2017, and 2016
was $9.79, $8.67 and $6.40, respectively.
The following is a summary of stock option activity for the year ended September 30, 2018:
Balances at September 30, 2017
Granted
Exercised
Forfeited
Expired
Balances at September 30, 2018
Exercisable at September 30, 2018
Shares
available
for Grant
Number of
Options
Outstanding
652,494
(79,800)
13,324
2,002
588,020
881,403
79,800
(110,423)
(13,324)
(2,002)
835,454
314,366
Weighted
average
Exercise price
27.31
$
44.17
$
23.79
$
33.19
$
32.60
$
29.27
$
27.16
$
Weighted average
Grant Date
Fair Value
Weighted average
remaining term
(in years)
aggregate
Intrinsic Value
($ millions)
$
$
$
$
$
$
$
11.55
9.79
7.98
7.14
6.78
11.93
11.68
3.57 $
9.8
3.01 $
2.81 $
15.9
6.7
The total compensation cost not yet recognized for non-vested awards of $3.0 million as of September 30, 2018 has a weighted-average period
of 3.13 years over which the compensation expense is expected to be recognized. The total intrinsic value of options exercised during fiscal
years 2018, 2017 and 2016 was $2.1 million, $2.6 million and $1.9 million, respectively.
The options outstanding as of September 30, 2018 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
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
$
$
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)
—
—
—
—
28,668 $
580,000 $
49,656 $
100,330 $
74,800 $
—
2,000 $
835,454 $
n/a
n/a
n/a
n/a
20.54
25.91
31.37
38.77
43.88
n/a
55.28
29.27
n/a
n/a
n/a
n/a
0.27
3.37
1.28
2.27
3.30
n/a
3.89
3.01
91
- 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,
2018, 1.4 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, 2018:
Balances at September 30, 2017
Granted
Vested
Forfeited
Balances at September 30, 2018
Shares
available
for Grant
1,459,976
(85,404)
2,706
1,377,278
Number
of Shares
Outstanding
354,474
85,404
(162,544)
(2,706)
274,628
Weighted average
Grant Date
Fair Value
Weighted average
remaining term
(in years)
aggregate
Intrinsic Value
($ millions)
$
$
$
$
$
33.34
44.86
31.14
36.24
38.20
1.26
$
13.6
1.15
$
13.3
The total compensation cost not yet recognized of $6.8 million as of September 30, 2018 has a weighted-average period of 1.15 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 15 Retirement Plans
Defined Benefit Retirement Plans
The Company has a frozen qualified defined benefit pension plan
(the “Qualified Plan”) and a nonqualified defined benefit pension
plan (the “Nonqualified Plan”), and recognizes their funded status,
measured as the difference between the fair value of the plan assets
and the projected benefit obligation, in “other assets” or “accounts
payable and other accrued liabilities” in the consolidated balance
sheets, depending on the funded status of each plan.
The Qualified 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
$35.6 million and $36.3 million as of September 30, 2018 and 2017,
respectively. All Qualified Plan assets fall within Level 2 of the fair
value hierarchy. The benefit obligation associated with the Qualified
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 Qualified Plan
was frozen in 2006. The benefit obligation was $32.5 million and
$34.7 million and the discount rate assumption used in the measurement
of this obligation was 4.20% and 3.75% as of September 30, 2018
and 2017, respectively. Related to the Qualified Plan, the Company’s
net liability for retirement costs had a funded status of $3.1 million
and $1.6 million as of September 30, 2018 and 2017, respectively.
The Nonqualified Plan assets had a total fair value of less than
$0.1 million as of September 30, 2018 and 2017. The benefit obligation
associated with the Nonqualified 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. There are no active participants
in the Nonqualified plan. The benefit obligation was $1.6 million
and $1.8 million as of September 30, 2018 and 2017, respectively.
Related to the Nonqualified Plan, the Company’s unfunded pension
obligation was $1.6 million and $1.7 million as of September 30,
2018 and 2017, respectively.
92
The Company recognized a net periodic benefit $0.2 million and
$0.3 million for the year ended September 30, 2018 and 2017,
respectively. The net periodic benefit cost associated with the plans
was $0.2 million for the year ended September 30, 2016. The expected
long-term return on plan assets assumption is 4.50% for 2018. The
Company made contributions of $1.0 million and $2.0 million to the
plans in the years ended September 30, 2018 and 2017, respectively. The
Company complies with minimum funding requirements. The estimated
undiscounted future benefit payments are expected to be $2.1 million
in 2019, $2.0 million in 2020, $2.0 million in 2021, $2.0 million in
2022, $2.0 million in 2023 and $9.7 million in 2024 through 2028.
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 full-time non-temporary employees who have
reached 21 years of age. 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, 2018, 2017, and 2016, the
Company’s contribution to these defined contribution plans were
$6.8 million, $6.1 million and $5.3 million, respectively.
- Form 10-K
NOTE 16 Other Expenses
Other expenses for the years ended September 30, 2018, 2017, and 2016 are comprised of the following:
part II
ITEM 8 Financial Statements and Supplementary Data
Year Ended September 30,
2017
2018
$
(in millions)
Contingent consideration, net(1)
Insurance
Advertising, meetings and conferences
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
— $
2.6
6.2
1.7
2.5
4.9
8.4
26.3
0.1
2.7
4.0
2.1
2.6
4.6
9.8
25.9
0.4
2.1
5.1
1.2
1.3
4.3
7.9
22.3
$
$
$
$
2016
Combinations Topic of the ASC (see Note 3).
NOTE 17 Bad Debt on Physical Coal
During the first quarter of fiscal 2018 and the fourth quarter of fiscal
2017, the Company recorded charges to earnings of $1.0 million and
$47.0 million, respectively, 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 clients; reimbursement
of demurrage claims, dead freight and other charges paid by INTL
Asia Pte. Ltd. to its clients; reimbursement due for deficiencies in
the quality of coal delivered to clients; and losses incurred related to
the cancellation of open sales contracts.
During fiscal 2017, 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 clients’ vessels. The Company took title of the coal when
it was loaded onto barges and maintained title until it was offloaded
onto clients’ vessels. The logistics related to the delivery of coal to the
clients’ vessels was out-sourced to the Company’s coal supplier, and the
Company determined that certain purchased coal was not delivered
to the clients’ vessels during the fourth quarter ended September 30,
2017. Furthermore, the Company determined that the supplier was
NOTE 18 Income Taxes
unable to deliver such purchased coal to its clients. Demurrage claims,
dead freight, and other penalty charges paid and payable by INTL
Asia Pte. Ltd. to its clients were due to be reimbursed by the supplier
based on transaction agreements with the supplier. The Company
determined the supplier was unable to make this reimbursement.
The Company received an acknowledgment of debt and a note from
the supplier, 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 Company continues to pursue
all legal avenues available to it regarding this matter. The bad debt
on physical coal is presented separately as a component of income
before tax in the consolidated income statements. The Company
has completed its exit of the physical coal business, which was part
of our Physical Commodities segment and was conducted solely in
INTL Asia Pte. Ltd.
On November 22, 2018, the Company reached a settlement with a
client, paying $5.1 million related to demurrage, dead freight, and
other penalty charges regarding coal supplied during fiscal 2017.
The settlement amount paid was less than the accrued liability for
the transactions recorded during fiscal 2017, and accordingly the
Company will record a recovery on the bad debt on physical coal of
$1.7 million in the three months ending December 31, 2018.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the President of the United States (“U.S.”)
signed and enacted into law H.R. 1, the Tax Cuts and Jobs Act (the
“Tax Reform”). Among the significant changes to the U.S. Internal
Revenue Code, the Tax Reform lowers the U.S. federal corporate
income tax rate from 35% to 21%, effective January 1, 2018. The
Company computed income tax expense for the year ended September
30, 2018 using a U.S. statutory tax rate of 24.5%. The 21% U.S.
statutory tax rate will apply to fiscal years ending September 30, 2019
and thereafter. The Tax Reform also imposes a one-time mandatory
repatriation transition tax on previously untaxed accumulated and
current earnings and profits (“E&P”) of certain foreign subsidiaries.
The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”),
which provides guidance on accounting for the tax effects of the Tax
Reform. SAB 118 provides a measurement period that should not
extend beyond one year from the Tax Reform enactment date for
companies to complete the accounting under Accounting Standards
Codification (“ASC”) 740 - Income Taxes (“ASC 740”). In accordance
93
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
with SAB 118, a company must reflect the income tax effects of
those aspects of the Tax Reform for which the accounting under
ASC 740 is complete. To the extent that a company’s accounting
for certain income tax effects of the Tax Reform is incomplete but
it can determine a reasonable estimate, it must record a provisional
estimate in the financial statements. If a company cannot determine
a provisional estimate to be included in the financial statements, it
should continue to apply ASC 740 based on the tax laws that were in
effect immediately before the enactment of the Tax Reform.
The accounting for certain elements of the Tax Reform is incomplete.
However, as of September 30, 2018, the accounting for the
remeasurement of the deferred tax assets and liabilities is complete.
The remeasurement of the deferred tax assets and liabilities resulted
in $8.6 million of income tax expense, which increased the effective
tax rate by 8.5% during the year ended September 30, 2018.
To determine the amount of the mandatory repatriation transition
tax, the Company must determine, in addition to other factors, the
amount of post 1986 E&P of the relevant subsidiaries, as well as the
amount of non-U.S. income taxes paid on such earnings. The Company
made a reasonable estimate of the mandatory repatriation transition tax
and recorded a provisional transition tax obligation of $11.2 million,
which increased the effective tax rate by 11% during the year ended
September 30, 2018. While the Company can make reasonable estimates
for the deemed repatriation transition tax, the final tax impact may
differ from these estimates, due to, among other things, changes in
our interpretations and assumptions, additional guidance that may
be issued by taxing authorities, and actions the Company may take.
The Tax Reform also establishes new tax laws that will affect the fiscal year
ending September 30, 2019, including, but not limited to, (1) elimination
of the corporate alternative minimum tax, (2) a new provision designed
to tax global intangible low-taxed income (GILTI), (3) limitations on
the utilization of net operating losses incurred in tax years beginning
after September 30, 2018 to 80% of taxable income per tax year, (4) the
creation of the base erosion anti-abuse tax (BEAT), (5) a general elimination
of U.S. federal income taxes on dividends from foreign subsidiaries,
and (6) limitations on the deductibility of interest expense and certain
executive compensation. The Company has not yet determined the
potential tax impact of provisions that are not yet effective, such as
GILTI, BEAT, and the elimination of U.S. tax on dividends of future
foreign earnings. The Company expects to make the policy election to
treat GILTI as a period expense in the first quarter of fiscal year 2019.
Income tax expense (benefit) for the years ended September 30, 2018, 2017, and 2016 was allocated as follows:
2018
Year Ended September 30,
2017
2016
(in millions)
Income tax expense attributable to income from operations
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
$
$
$
46.0
0.1
—
$
46.1
8.8
1.0
0.1
9.9
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,
2018
2017
$
$
0.8
0.5
22.4
23.7
22.3
—
46.0
$
$
0.7
1.2
16.7
18.6
(9.8)
—
8.8
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,
2018
2017
$
$
9.9
91.6
101.5
$
$
(13.9)
29.1
15.2
94
$
$
$
$
$
$
18.0
0.2
(0.8)
17.4
1.3
0.8
16.8
18.9
(0.8)
(0.1)
18.0
4.8
67.9
72.7
2016
2016
- 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
Remeasurement of deferred tax
Repatriation Transition tax
Other reconciling items
Effective rate
Year Ended September 30,
2018
2017
2016
24.5%
0.8%
(0.8)%
(0.8)%
—%
(0.2)%
2.1%
—%
8.5%
11.0%
0.2%
45.3%
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%
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
Foreign 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
Pension liability
Deferred income tax liabilities
Deferred income taxes, net
September 30, 2018
September 30, 2017
$
$
2.8
$
—
1.4
4.2
8.7
—
1.8
1.5
—
6.5
3.4
0.9
31.2
(3.5)
27.7
2.6
1.8
3.1
0.4
7.9
19.8
$
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
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, 2018 and 2017, the Company has net operating
loss carryforwards for U.S. federal, state, local, and foreign income tax
purposes of $9.4 million and $30.1 million, net of valuation allowances,
respectively, which are available to offset future taxable income in
these jurisdictions. The Company utilized the $21.9 million U.S.
federal net operating loss in the current year against the mandatory
repatriation transition tax. The state and local net operating loss
carryforwards of $5.7 million, net of valuation allowance, begin to
expire after September 2020. INTL Asia Pte. Ltd. has a net operating
loss carryforward of $2.9 million. This Singapore net operating loss has
an indefinite carryforward and, in the judgment of management, is
more likely than not to be realized. As a result of Tax Reform, the AMT
credit carryforward deferred tax asset has been reclassified to income
taxes receivable. The Company can continue to utilize AMT credits
to offset regular income tax liability in fiscal years 2019 through 2021.
Any remaining amount is fully refundable by fiscal year 2022. In the
current year, the Company generated $6.5 million in foreign tax credit
carryforwards as part of the mandatory repatriation transition tax. These
credits expire in fiscal year 2028. In the judgment of management,
the Company believes that sufficient taxable income will be earned to
utilize the foreign tax credit carryforwards within 10 years.
The valuation allowance for deferred tax assets as of September 30,
2018 was $3.5 million. The net change in the total valuation allowance
for the year ended September 30, 2018 was a decrease of $0.5 million.
95
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
The valuation allowances as of September 30, 2018 and 2017 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.
The Company incurred U.S. federal, state, and local taxable losses for
the years ended September 30, 2018 (excluding the taxable income
associated with the mandatory repatriation transition tax), 2017,
and 2016 of $(3.7) million, $(20.5) million, and $(9.7) million,
respectively. The differences between actual levels of past taxable
losses and pre-tax book income (losses) are primarily attributable to
temporary differences in these jurisdictions, such as tax deductible
amortization and bonus depreciation. When evaluating if U.S. federal,
state, and local deferred taxes are realizable, the Company considered
deferred tax liabilities of $5.0 million that are scheduled to reverse from
2019 to 2021 and $2.5 million of deferred tax liabilities associated
with unrealized gains in securities which the Company could sell,
if necessary. Furthermore, the Company considered its ability to
implement business and tax planning strategies that would allow
the remaining U.S. federal, state, and local deferred tax assets, net
of valuation allowances, to be realized in less than 5 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 $354.7 million
as of September 30, 2018. The Company recognized the mandatory
repatriation tax related to these undistributed earnings as part of Tax
Reform and, as a result, repatriation of these amounts would not be
subject to additional U.S. federal income tax but may be subject
to applicable withholding taxes in the relevant jurisdictions. The
Company’s intent is to permanently reinvest these funds outside
of the United States, with the exception of $13.0 million that will
be distributed in fiscal year 2019. Foreign withholding tax is not
applicable to this distribution.
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 prior years
Balance, end of year
2018
Year Ended September 30,
2017
2016
$
$
0.1
$
—
$
0.1
0.1
$
—
$
0.1
—
0.1
0.1
The Company has a minimal balance of unrecognized tax benefits as
of September 30, 2018, 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, 2018 and 2017.
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, 2018, 2017, and 2016.
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, 2018 with U.S. federal
and state and local taxing authorities. In the U.K., the Company has
open tax years ending September 30, 2017 to September 30, 2018. In
Brazil, the Company has open tax years ranging from December 31,
2013 through December 31, 2017. In Argentina, the Company has
open tax years ranging from September 30, 2011 to September 30,
2018. In Singapore, the Company has open tax years ranging from
September 30, 2014 to September 30, 2018.
NOTE 19 Acquisitions
The Company’s consolidated financial statements include the operating
results of the acquired businesses from the dates of acquisition.
Acquisitions in Fiscal 2018
PayCommerce Financial Solutions, LLC
On September 5, 2018, the Company acquired all of the outstanding
membership interests of PayCommerce Financial Solutions, LLC
(“PCFS”). Subsequent to the acquisition, the Company renamed PCFS
to INTL Technology Services, LLC (“ITS”). ITS is a fully accredited
SWIFT Service Bureau provider. This acquisition enables the Company
to act as a SWIFT Service Bureau for its 300-plus correspondent banking
network, thus providing another important service for delivering
96
local currency, cross-border payments to the developing world. The
purchase price was approximately $3.8 million of cash consideration.
The purchase price allocation resulted in $0.7 million in receivables,
$0.8 million in property, plant, and equipment, $0.5 million in equity
investments, and $2.2 million in liabilities assumed. Additionally, the
Company acquired identifiable, definite lived client relationship and
client list assets that have been assigned a fair value of $1.3 million and
a useful life of 5 years. The fair value of the consideration transferred
exceeded the fair value of identifiable assets acquired and liabilities
assumed. The excess of the purchase consideration over the fair
value of net tangible and identifiable intangible assets acquired of
$2.6 million was recorded as goodwill. Management believes that
the goodwill represents the synergies expected from the incremental
revenue that can be realized from combining the technologies acquired
with the Company’s pre-existing correspondent banking network.
- Form 10-K
The estimated fair value assigned to the tangible assets, identifiable
intangible assets, and assumed liabilities were based on management’s
estimates and assumptions.
This business has been included within the Company’s Global
Payments Segment. The Company’s consolidated income statement
for the year ended September 30, 2018 includes the post-acquisition
results of ITS, which was immaterial in relation to the Company’s
consolidated results.
Carl Kliem S.A.
On June 12, 2018, the Company executed a sale and purchase agreement
to acquire the entire issued and outstanding share capital of Carl
Kliem S.A. Carl Kliem S.A. is an independent interdealer broker based
in Luxembourg, a leading European financial hub, which provides
foreign exchange, interest rate and fixed income products to a diverse,
institutional client base across the European Union. Carl Kliem S.A.
employs approximately 40 people and has over 400 active institutional
clients. This acquisition is expected to provide the Company with a
strong European client base and a European Union based footprint
following the completion of Brexit. The closing of the agreement
was conditional upon approval of the Luxembourg financial sector
supervisory authority, the Commission de Surveillance du Secteur
Financier (“CSSF”). In November 2018, the Company received
regulatory approval from the CSSF to complete the acquisition and
the acquisition closed effective November 30, 2018. The purchase
price is equal to the net tangible book value on the closing date minus
restructuring costs and is not material to the Company. The initial
accounting for the purchase price allocation is not yet complete.
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 clients
throughout Europe, the Middle East and Africa. The terms of the
agreement included cash consideration of $6.0 million paid directly to
ICAP as well as incentive amounts payable to employees acquired based
upon their continued employment. The cash consideration paid to
ICAP was dependent upon the number of brokers who accepted 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 client 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.
part II
ITEM 8 Financial Statements and Supplementary Data
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
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 ‘Other gains’ 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.
NOTE 20 Accumulated Other Comprehensive (Loss) 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 (loss) income includes net actuarial gains from defined benefit pension plans and losses on foreign
currency translations.
97
- Form 10-K part II
ITEM 8 Financial Statements and Supplementary Data
The following table summarizes the changes in accumulated other comprehensive (loss) income for the year ended September 30, 2018.
(in millions)
Balances as of September 30, 2017
Other comprehensive (loss) income, net of tax before reclassifications
Amounts reclassified from AOCI, net of tax
Other comprehensive (loss) income, net of tax
Balances as of September 30, 2018
NOTE 21 Segment and Geographic Information
Foreign
Currency
translation
adjustment
pension
Benefits
adjustment
accumulated Other
Comprehensive
Loss
$
$
(21.5) $
(9.0)
—
(9.0)
(30.5) $
(3.0)
0.3
0.1
0.4
(2.6)
$
$
(24.5)
(8.7)
0.1
(8.6)
(33.1)
The Company reports its operating segments based on services provided
to clients. 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 Capital Markets (formerly
referred to as Equity Market-Making), Debt Capital Markets
(which now includes both our Debt Trading and Investment Banking
businesses discussed in prior fiscal years) 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 clients 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 clients. 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 client objectives. Clients
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 clients who are seeking
cost-effective hedging strategies. Generally, clients direct their own
trading activity and the Company’s risk management consultants do
not have discretionary authority to transact trades on behalf of clients.
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 170 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 clients 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
client 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 clients 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.
Securities
The Company provides value-added solutions that facilitate
cross-border trading and believes its clients 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 clients include
U.S.-based regional and national broker-dealers and institutions
investing or executing client 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
98
- Form 10-K
Company makes markets in over 5,000 ADRs, GDRs and foreign
ordinary shares, of which over 3,600 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 client 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.
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
part II
ITEM 8 Financial Statements and Supplementary Data
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 major foreign currency pairs and swap transactions.
Through its platform, client orders are accepted and directed to the
appropriate exchange for execution. The Company then facilitates
the clearing of clients’ transactions. Clearing involves the matching of
clients’ trades with the exchange, the collection and management of
client margin deposits to support the transactions, and the accounting
and reporting of the transactions to clients.
As of September 30, 2018, the Company held $2.6 billion in required
client segregated assets, which it believes makes it the third largest
independent futures commission merchant (“FCM”) in the U.S. not
affiliated with a major financial institution or commodity intermediary,
end-user or producer, as measured by required client segregated assets.
The Company seeks to leverage its capabilities and capacity by offering
facilities management or outsourcing solutions to other FCM’s.
The Company 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 client experience through the clearing and settlement process.
The Company’s independent wealth management business, which
offers a comprehensive product suite to retail clients nationwide, clears
through this platform. The Company believes it is one of the leading
mid-market clearer’s in the securities industry, with approximately 60
correspondent clearing relationships with over $15 billion in assets
under management or administration as of September 30, 2018.
Within this segment, the Company also maintains what it believes
is one of the largest non-bank prime brokers and swap dealers in
the world. Through this offering, the Company provides prime
brokerage foreign exchange (“FX”) services to financial institutions
and professional traders. The Company provides its clients 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 operate a proprietary
foreign exchange desk that arbitrages the exchange-traded foreign
exchange markets with the cash markets.
99
- Form 10-K part II
ITEM 8 Financial Statements and Supplementary Data
Through its London-based Europe, Middle East and Africa (“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 clients
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
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
100
2018
Year Ended September 30,
2017
2016
286.7
99.2
196.2
26,703.8
332.4
4.4
27,622.7
286.7
99.2
196.2
56.9
332.4
4.4
975.8
226.4
93.5
94.6
44.8
122.6
(0.3)
581.6
164.7
75.0
69.1
31.8
91.8
432.4
$
$
$
$
$
$
$
$
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
141.8
64.4
75.6
27.2
78.0
387.0
$
$
$
$
$
$
$
$
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
134.4
52.2
97.5
23.4
39.5
347.0
$
$
$
$
$
$
$
$
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
2018
Year Ended September 30,
2017
2016
$
$
$
96.4
59.8
40.8
16.6
48.3
261.9
261.9
162.4
2.0
101.5
$
$
$
72.8
50.6
46.6
(31.4)
30.4
169.0
169.0
153.8
—
15.2
68.7
39.8
69.4
13.3
14.8
206.0
206.0
139.5
6.2
72.7
(in millions)
Segment income (loss):
(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 before tax:
Segment income
$
$
$
Costs not allocated to operating segments(2)
Other gains
Income before tax
(1) During the first quarter of fiscal 2018 and the fourth quarter of fiscal 2017, the Company recorded charges to earnings of $1.0 million and $47.0 million, respectively, 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 17.
$
$
$
(2) The costs not allocated to operating segments 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)
Total assets:
Commercial Hedging
Global Payments
Securities
Physical Commodities
Clearing and Execution Services
Corporate unallocated
Total
as of September 30, 2018
as of September 30, 2017
as of September 30, 2016
$
$
1,935.7
206.6
3,058.2
413.7
2,109.9
100.6
7,824.7
$
$
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
Information regarding revenues and operating revenues for the years ended September 30, 2018, 2017, and 2016, and information regarding
long-lived assets (defined as property, equipment, leasehold improvements and software) as of September 30, 2018, 2017, and 2016 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
(in millions)
Long-lived assets, as defined:
United States
Europe
South America
Asia
Total
2018
Year Ended September 30,
2017
2016
$
$
$
$
1,587.6
189.6
59.5
25,781.4
4.6
27,622.7
695.3
189.0
58.0
28.9
4.6
975.8
$
$
$
$
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
as of September 30, 2018
as of September 30, 2017
as of September 30, 2016
$
$
33.0
6.8
1.4
1.2
42.4
$
$
29.7
7.3
1.5
0.2
38.7
$
$
23.3
4.8
1.2
0.1
29.4
101
- Form 10-K
part II
ITEM 8 Financial Statements and Supplementary Data
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:
September 30(1)
$
6,078.8
5,835.6
$
243.2
43.1
32.4
25.3
142.4
85.4
1.2
—
35.3
121.9
—
20.5
4.8
15.7
0.83
0.81
$
$
$
$
$
$
For the 2018 Fiscal Quarter Ended
June 30
March 31
December 31
7,118.3
6,858.5
259.8
49.0
34.1
22.1
154.6
86.9
1.6
—
35.2
123.7
2.0
32.9
8.9
24.0
1.27
1.25
$
$
$
$
6,507.0
6,246.8
260.2
50.7
36.2
19.0
154.3
88.2
0.2
—
36.4
124.8
—
29.5
6.8
22.7
1.20
1.18
$
$
$
$
7,918.6
7,706.0
212.6
36.9
31.1
14.3
130.3
77.2
0.1
1.0
33.4
111.7
—
18.6
25.5
(6.9)
(0.37)
(0.37)
September 30
June 30
March 31
December 31
For the 2017 Fiscal Quarter Ended
$
$
$
$
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 income
Net basic (loss) earnings per share
Net diluted (loss) earnings per share
(1) During the first quarter of fiscal 2018 and the fourth quarter of fiscal 2017, the Company recorded charges to earnings of $1.0 million and $47.0 million, respectively, 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 17.
$
$
$
$
$
$
$
$
$
$
$
$
(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(1)
Other expenses
Total compensation and other expenses
Other gain
Income before tax
Income tax expense
Net income (loss)
Net basic earnings (loss) per share
Net diluted earnings (loss) per share
(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(1)
Other expenses
Total compensation and other expenses
Income before tax
Income tax expense
102
- Form 10-K
NOTE 23 Subsequent Events
During the week ended November 16, 2018, balances in approximately
300 accounts of the FCM division of the Company’s wholly owned
subsidiary, INTL FCStone Financial, declined below required
maintenance margin levels, primarily as a result of significant price
fluctuations in the natural gas markets. All positions in these accounts,
which were managed by OptionSellers.com Inc. (“OptionSellers”), an
independent Commodity Trading Advisor (“CTA”), were liquidated in
accordance with the INTL FCStone Financial’s customer agreements
and obligations under market regulation standards.
A CTA is by definition registered with the CFTC and a member of,
and subject to audit by, the NFA. OptionSellers is registered under
a CFTC Rule 4.7 exemption for “qualified eligible persons”, which
requires the account holders authorizing OptionSellers to act as their
CTA to meet or exceed certain minimum financial requirements.
OptionSellers, in its role as a CTA, had been granted by each of
its customers full discretionary authority to manage the trading in
the customer accounts, while INTL FCStone Financial acted solely
as the clearing firm in its role as the FCM, at all times meeting its
obligations as the FCM to these accounts.
INTL FCStone Financial’s customer agreements conform to NFA
guidance, disclose the risks to which account-holders are exposed,
hold account-holders liable for all losses in their accounts, and
part II
ITEM 8 Financial Statements and Supplementary Data
obligate the account holders to reimburse INTL FCStone Financial
for any account deficits in their accounts. INTL FCStone Financial
continues to pursue collection of these receivables in the ordinary
course of business. INTL FCStone Financial intends both to enforce
and to defend its rights aggressively, and to claim interest and costs
of collection where applicable. INTL FCStone Financial’s standard
customer agreements provide for arbitration of disputes between parties.
As of December 10, 2018, the aggregate receivable from these customer
accounts, net of collections and other allowable deductions thus far,
is $31.3 million, with no individual account receivable exceeding
$1.4 million. The exposure to losses from these customer accounts is
not yet determinable, as collection efforts are in early stages, given the
timing of events that lead to the receivable balances disclosed above.
Depending on future collections and an assessment to be made under
U.S. GAAP, any provisions for bad debts and actual losses ultimately
may or may not be material to the Company’s financial results. The
Company believes that these accounts receivable balances, along with
possible exposure to losses from these customer accounts, will not
impact the Company’s ability to comply with its ongoing liquidity,
capital, and regulatory requirements.
103
- 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
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 clients
Payable to lenders under loans
Payable to subsidiaries, net
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; 21,030,497 issued and 18,908,540
outstanding at September 30, 2018 and 20,855,243 issued and 18,733,286 outstanding at
September 30, 2017
Common stock in treasury, at cost - 2,121,957 shares at September 30, 2018 and 2017
Additional paid-in capital
Retained earnings(1)
September 30, 2018
September 30, 2017
$
$
$
$
$
$
1.8
23.3
1.8
14.9
318.0
4.4
8.8
25.9
7.6
406.5
23.0
1.7
209.4
—
59.3
293.4
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
—
—
0.2
(46.3)
267.5
(108.3)
113.1
406.5
0.2
(46.3)
259.0
(71.1)
141.8
390.4
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 $425.3 million as of September 30, 2018, respectively, and $332.6 million, as of September 30, 2017,
respectively.
$
$
104
- Form 10-K
part II
SCHEDULE I INTL FCStone Inc. Condensed Statements of Operations
SCHEDULE I
INTL FCStone Inc. Condensed
Statements of Operations
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
Trade systems and market information(3)
Occupancy and equipment rental
Professional fees
Travel and business development
Non-trading technology and support(3)
Depreciation and amortization
Communications(3)
Bad debts
Management services fees to affiliates
Other(3)
Total non-interest expenses
Gain on acquisition
Loss from operations, before tax
Income tax benefit
2018
Year Ended September 30,
2017
2016
$
40.4
$
—
—
2.3
41.9
84.6
15.7
68.9
$
39.1
(1.0)
—
1.2
52.7
92.0
14.4
77.6
30.1
0.7
2.2
1.8
31.0
65.8
13.4
52.4
73.0
1.1
—
5.8
2.6
6.7
2.6
9.1
4.8
0.9
—
—
6.9
113.5
—
(44.6)
7.4
(37.2)
60.3
1.2
—
6.4
2.5
3.7
2.7
7.4
3.3
0.9
—
—
5.6
94.0
—
(16.4)
26.8
10.4
52.8
1.7
0.6
5.6
2.8
4.8
1.7
4.7
2.5
1.1
0.2
1.2
7.0
86.7
6.2
(28.1)
24.7
(3.4)
Net (loss) income
(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
$92.7 million and $58.1 million for the years ended September 30, 2018 and 2016, respectively.
$
$
$
(3) During the year ended September 30, 2018, the Company separately classified non-trading technology and support costs that were previously included within ‘Other’ on
the Condensed Statements of Operations of INTL FCStone Inc. - Parent Company Only. Additionally, during the year ended September 30, 2018, the Company separately
classified communications related expenses separately from trading systems and market information related costs. In performing these reclassifications, the Company has made
immaterial, retrospective adjustments to conform to the current period presentation. For the years ended September 30, 2017 and 2016, ‘Other’ expenses included $7.4 million
and $4.7 million, respectively, of expenses that are now included within ‘Non-trading technology and support’ on the Condensed Statements of Operations of INTL FCStone Inc.
- Parent Company Only. For the years ended September 30, 2017 and 2016, ‘Trading systems and market information’ included $0.9 million and $1.1 million, respectively, of
expenses that are now included within ‘Communications’ on the Condensed Statements of Operations of INTL FCStone Inc. - Parent Company Only.
105
- 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 (loss) income
Adjustments to reconcile net (loss) income 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 clients
Financial instruments sold, not yet purchased, at fair value
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Capital contribution in affiliates
Purchase of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Net change in lenders under loans
Payments of notes payable
Repayment of senior unsecured notes
Deferred payments on acquisitions
Share repurchase
Debt issuance costs
Exercise of stock options
Withholding taxes on stock option exercises
Income tax benefit on stock options and awards
Net cash provided by (used in) financing activities
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 (received) paid, net of cash refunds
Supplemental disclosure of non-cash investing and financing activities:
Additional consideration payable related to acquisitions
2018
Year Ended September 30,
2017
2016
$
(37.2)
$
10.4
$
(3.4)
4.8
—
18.0
0.7
6.1
—
—
(0.8)
(68.6)
2.9
(6.6)
(4.4)
(0.7)
8.6
(0.3)
34.0
(43.5)
(4.5)
(5.9)
(10.4)
58.2
(0.8)
—
(5.5)
—
—
2.6
(0.8)
—
53.7
(0.2)
2.0
1.8
15.0
(18.4)
$
$
$
— $
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)
$
$
$
$
106
- Form 10-K
part II
ITEM 9A Controls and Procedures
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, 2018. 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 effective as of September 30, 2018.
(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. generally accepted accounting principles
(“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, 2018, based on the
framework in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations (COSO) of
the Treadway Commission.
Management’s assessment of the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2018 excluded
PayCommerce Financial Solutions, LLC, acquired with effect from
September 5, 2018.
Based on its assessment, management has concluded that our internal
control over financial reporting was effective as of September 30, 2018.
KPMG LLP, an independent registered public accounting firm, was
engaged to audit the effectiveness of our internal control over financial
reporting as of September 30, 2018 and has issued an audit report
regarding their assessment of the effectiveness of internal control
over financial reporting which is included on page 65 in this Annual
Report on Form 10-K.
107
- Form 10-K part II
ITEM 9B Other Information
(c)
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2018 that
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B Other Information
None.
108
- Form 10-K PART III
Item 11 executive Compensation
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 2019 Annual Meeting of Stockholders to be
held on February 13, 2019. We will file the proxy within 120 days
of the end of our fiscal year ended September 30, 2018 (the “2019
Proxy Statement”). The 2019 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 2019 Proxy Statement and is incorporated herein by reference.
109
- Form 10-K
PART III
Item 12 Security Ownership of Certain Beneficial Owners and management and Related Stockholder matters
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 2019 Proxy
Statement and is incorporated herein by reference.
The following table provides information generally as of September 30,
2018, the last day of fiscal 2018, 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 2018.
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
835,454 $
—
835,454 $
29.27
—
29.27
588,020
—
588,020
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 2019 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 2019 Proxy Statement and is incorporated herein by reference.
110
- 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).
111
- 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).
10.20
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. (incorporated by
reference from the Company’s Report on Form 10-K filed with the SEC on December 14, 2017).
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. (incorporated by
reference from the Company’s Report on Form 10-K filed with the SEC on December 14, 2017).
Sixth Amendment to Credit Agreement entered into as of October 22, 2018 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 October 22, 2018).
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).
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. (incorporated by reference from the Company’s Report on
Form 10-K filed with the SEC on December 14, 2017).
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. (incorporated by reference from the Company’s Report on
Form 10-K filed with the SEC on December 14, 2017).
10.25
10.23
10.21
10.22
10.24
10.26 Thirteenth Amendment to Amended and Restated Credit Agreement entered into as of January 25, 2018 with Bank of Montreal, as
10.27
10.28
10.29
10.30
10.31
Administrative Agent, and BMO Harris Financing, Inc., as a lender party thereto. *
Fourteenth Amendment to Amended and Restated Credit Agreement entered into as of April 5, 2018 with Bank of Montreal, as
Administrative Agent, and BMO Harris Financing, Inc., as a lender party thereto. *
Fifteenth Amendment to Amended and Restated Credit Agreement entered into as of October 24, 2018 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 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 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 Report
on Form 10-K filed with the SEC on December 14, 2016).
10.32 Third Amendment to Amended and Restated Credit Agreement, entered into as of May 19, 2017, 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 Report on Form
10-K filed with the SEC on December 14, 2017).
112
- Form 10-K PART IV
Item 15 exhibits
10.33
10.34
10.35
10.36
Fourth Amendment to Amended and Restated Credit Agreement, entered into as of May 1, 2018, by and among FCStone Merchant Services,
LLC, as Borrower, INTL FCStone Inc., as Guarantor, the financial institutions executing this Amendment as Lenders, and Bank of Montreal,
a Canadian chartered bank acting through its Chicago Branch, as Administrative Agent for the Lenders. (incorporated by reference from the
Company’s Report on Form 10-Q filed with the SEC on May 8, 2018).
Fifth Amendment to Amended and Restated Credit Agreement, entered into as of October 22, 2018, by and among FCStone Merchant
Services, LLC, as Borrower, INTL FCStone Inc., as Guarantor, the financial institutions executing this Amendment as Lenders, and Bank of
Montreal, a Canadian chartered bank acting through its Chicago Branch, as Administrative Agent for the Lenders. *
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).
10.39
10.40
10.38
10.37 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 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 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. (incorporated by
reference from the Company’s Report on Form 10-K filed with the SEC on December 14, 2017).
Sixth Amendment to Credit Agreement, made as of November 7, 2018, 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.*
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.
21
23.1
31.1
31.2
32.1
32.2
14
*
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.
113
- Form 10-K PART IV
Item 15 Signatures
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.
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 11, 2018
Title
Date
Director and Chairman of the Board
December 11, 2018
Director, President and Chief Executive Officer
(Principal Executive Officer)
Director
Director
Director
Director
Director
Director
Director
Director
Director
Chief Financial Officer
(Principal Financial and Accounting Officer)
December 11, 2018
December 11, 2018
December 11, 2018
December 11, 2018
December 11, 2018
December 11, 2018
December 11, 2018
December 11, 2018
December 11, 2018
December 11, 2018
December 11, 2018
Signature
/s/ JOHN RADZIWILL
John Radziwill
/s/ SEAN M. O’CONNOR
Sean M. O’Connor
/s/ PAUL G. ANDERSON
Paul G. Anderson
/s/ SCOTT J. BRANCH
Scott J. Branch
/s/ DIANE L. COOPER
Diane L. Cooper
/s/ JOHN M. FOWLER
John M. Fowler
/s/ EDWARD J. GRZYBOWSKI
Edward J. Grzybowski
/s/ DARYL HENZE
Daryl Henze
/s/ STEVEN KASS
Steven Kass
/s/ BRUCE KREHBIEL
Bruce Krehbiel
/s/ ERIC PARTHEMORE
Eric Parthemore
/s/ WILLIAM J. DUNAWAY
William J. Dunaway
114
- Form 10-K eXHIBIt 21 Subsidiaries of the Registrant
Name
Carl Kliem S.A.
FCC Futures, Inc.
FCStone Commodity Services (Europe) Ltd
FCStone do Brasil Ltda.
FCStone Group, Inc.
FCStone Merchant Services, LLC
FCStone Paraguay S.R.L.
Gainvest Asset Management Ltd.
Gainvest Uruguay Asset Management S.A.
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 Financial (Canada) 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 Pagos S.A.U.
INTL Participacoes Ltda.
INTL Technology Services LLC
SA Stone Investment Advisors Inc.
SA Stone Wealth Management Inc.
Westown Commodities, LLC
Place of Incorporation
Luxembourg
Iowa, U.S.
Ireland
Brazil
Delaware, U.S.
Delaware, U.S.
Paraguay
British Virgin Islands
Uruguay
Singapore
Argentina
Argentina
Delaware, U.S.
Florida, U.S.
Brazil
British Virgin Islands
Brazil
Dubai, United Arab Emirates
Mexico
Brazil
Florida, U.S.
British Columbia, Canada
Hong Kong
United Kingdom
Iowa, U.S.
The Netherlands
Nigeria
Singapore
Australia
Argentina
China
Argentina
The Netherlands
Argentina
Brazil
Delaware, U.S.
Delaware, U.S.
Delaware, U.S.
Iowa, U.S.
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 11, 2018,
with respect to the consolidated balance sheets of INTL FCStone
Inc. and subsidiaries as of September 30, 2018 and 2017, and the
related consolidated income statements, consolidated statements of
comprehensive income, consolidated statements of cash flows, and
consolidated statements of stockholders’ equity, for each of the years
in the three-year period ended September 30, 2018, and the related
notes and financial statement schedule (collectively, the consolidated
financial statements), and the effectiveness of internal control over
financial reporting as of September 30, 2018, which reports appear
in the September 30, 2018 Annual Report on Form 10-K of INTL
FCStone Inc.
/s/ KPMG LLP
Kansas City, Missouri
December 11, 2018
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 11, 2018
/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 11, 2018
/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, 2018
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 11, 2018
/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, 2018
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 11, 2018
/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.
This page intentionally left blank
e-6
- Form 10-K This page intentionally left blank
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