Attached files
| file | filename |
|---|---|
| EX-31.1 - SECTION 302 CEO CERTIFICATION - StoneX Group Inc. | iaacexhibit31103312011.htm |
| EX-32.1 - SECTION 906 CEO CERTIFICATION - StoneX Group Inc. | iaacexhibit32103312011.htm |
| EX-31.2 - SECTION 302 CFO CERTIFICATION - StoneX Group Inc. | iaacexhibit31203312011.htm |
| EX-32.2 - SECTION 906 CFO CERTIFICATION - StoneX Group Inc. | iaacexhibit32203312011.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
____________________
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
o | 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 | 59-2921318 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
New York, NY 10017
(Address of principal executive offices) (Zip Code)
(212) 485-3500
(Registrant’s telephone number, including area code)
____________________
Indicate by check mark 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. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 305 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company.
Large accelerated filer | o | Accelerated filer | x | |
Non-accelerated filer | o | Smaller reporting company | o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 6, 2011, there were 18,181,972 shares of the registrant’s common stock outstanding.
INTL FCStone Inc.
INDEX
Page | ||
Part I. FINANCIAL INFORMATION | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Part II. OTHER INFORMATION | ||
Item 1. | ||
Item 1A. | ||
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTL FCStone Inc.
Condensed Consolidated Balance Sheets
(in millions, except par value and share amounts) | March 31, 2011 | September 30, 2010 | |||||
(Unaudited) | |||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 135.0 | $ | 81.9 | |||
Cash, securities and other assets segregated under federal and other regulations (including $24.8 and $0.8 at fair value at March 31, 2011 and September 30, 2010, respectively) | 64.9 | 15.3 | |||||
Securities purchased under agreements to resell | 77.2 | 342.0 | |||||
Deposits and receivables from: | |||||||
Exchange-clearing organizations (including $996.8 and $906.4 at fair value at March 31, 2011 and September 30, 2010, respectively) | 1,046.5 | 903.4 | |||||
Broker-dealers, clearing organizations and counterparties (including $16.0 and $56.1 at fair value at March 31, 2011 and September 30, 2010, respectively) | 123.2 | 173.9 | |||||
Receivables from customers, net | 158.1 | 78.0 | |||||
Notes receivable, net | 46.0 | 29.2 | |||||
Income taxes receivable | 8.4 | 9.4 | |||||
Financial instruments owned, at fair value | 338.5 | 159.8 | |||||
Physical commodities inventory, at cost | 163.0 | 125.0 | |||||
Deferred income taxes | 20.1 | 21.0 | |||||
Property and equipment, net | 10.2 | 7.3 | |||||
Goodwill and intangible assets, net | 57.2 | 53.4 | |||||
Other assets | 23.6 | 22.1 | |||||
Total assets | $ | 2,271.9 | $ | 2,021.7 | |||
LIABILITIES AND EQUITY | |||||||
Liabilities: | |||||||
Accounts payable and other accrued liabilities (including $30.5 and $32.3 at fair value at March 31, 2011 and September 30, 2010) | $ | 107.1 | $ | 99.4 | |||
Payables to: | |||||||
Customers | 1,285.2 | 1,351.0 | |||||
Broker-dealers, clearing organizations and counterparties | 2.8 | 3.9 | |||||
Lenders under loans and overdrafts | 32.0 | 114.9 | |||||
Income taxes payable | 7.9 | 2.8 | |||||
Financial instruments sold, not yet purchased, at fair value | 554.8 | 189.6 | |||||
1,989.8 | 1,761.6 | ||||||
Subordinated debt | — | 0.5 | |||||
Convertible subordinated notes payable | 10.0 | 16.7 | |||||
Total liabilities | 1,999.8 | 1,778.8 | |||||
Commitments and contingencies (see Notes 12 and 13) | |||||||
Equity: | |||||||
INTL FCStone Inc. stockholders’ equity: | |||||||
Preferred stock, $.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding | — | — | |||||
Common stock, $.01 par value. Authorized 30,000,000 shares; 18,114,565 issued and 18,103,308 outstanding at March 31, 2011 and 17,612,792 issued and 17,601,535 outstanding at September 30, 2010 | 0.2 | 0.2 | |||||
Common stock in treasury, at cost - 11,257 shares at March 31, 2011 and September 30, 2010 | (0.1 | ) | (0.1 | ) | |||
Additional paid-in capital | 193.8 | 184.6 | |||||
Retained earnings | 79.1 | 59.7 | |||||
Accumulated other comprehensive loss | (2.2 | ) | (3.1 | ) | |||
Total INTL FCStone Inc. stockholders’ equity | 270.8 | 241.3 | |||||
Noncontrolling interests | 1.3 | 1.6 | |||||
Total equity | 272.1 | 242.9 | |||||
Total liabilities and equity | $ | 2,271.9 | $ | 2,021.7 | |||
1
INTL FCStone Inc.
Condensed Consolidated Income Statements
(Unaudited)
Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
(in millions, except share and per share amounts) | 2011 | 2010 | 2011 | 2010 | |||||||||||
Revenues: | |||||||||||||||
Sales of physical commodities | $ | 14,506.4 | $ | 8,995.7 | $ | 30,715.2 | $ | 16,945.4 | |||||||
Trading gains | 30.9 | 25.7 | 47.9 | 27.5 | |||||||||||
Commission and clearing fees | 36.9 | 27.0 | 74.5 | 56.9 | |||||||||||
Consulting and management fees | 5.5 | 4.4 | 10.0 | 8.6 | |||||||||||
Interest income | 3.0 | 1.7 | 5.5 | 3.1 | |||||||||||
Other income | 0.3 | 0.1 | 0.7 | 0.1 | |||||||||||
Total revenues | 14,583.0 | 9,054.6 | 30,853.8 | 17,041.6 | |||||||||||
Cost of sales of physical commodities | 14,470.0 | 8,989.3 | 30,644.1 | 16,916.7 | |||||||||||
Operating revenues | 113.0 | 65.3 | 209.7 | 124.9 | |||||||||||
Interest expense | 3.3 | 2.3 | 7.1 | 4.8 | |||||||||||
Net revenues | 109.7 | 63.0 | 202.6 | 120.1 | |||||||||||
Non-interest expenses: | |||||||||||||||
Compensation and benefits | 43.1 | 23.0 | 85.6 | 47.1 | |||||||||||
Clearing and related expenses | 20.2 | 15.3 | 40.4 | 33.8 | |||||||||||
Communication and data services | 3.4 | 2.7 | 6.9 | 5.3 | |||||||||||
Introducing broker commissions | 6.0 | 4.7 | 11.4 | 8.9 | |||||||||||
Occupancy and equipment rental | 2.2 | 1.4 | 4.0 | 3.0 | |||||||||||
Professional fees | 1.9 | 1.9 | 4.0 | 3.7 | |||||||||||
Depreciation and amortization | 1.1 | 0.2 | 2.1 | 0.4 | |||||||||||
Bad debts and impairments | 2.1 | (0.4 | ) | 4.5 | 0.2 | ||||||||||
Other | 6.4 | 4.5 | 14.5 | 8.5 | |||||||||||
Total non-interest expenses | 86.4 | 53.3 | 173.4 | 110.9 | |||||||||||
Income from continuing operations, before tax | 23.3 | 9.7 | 29.2 | 9.2 | |||||||||||
Income tax expense | 8.0 | 3.5 | 10.1 | 3.3 | |||||||||||
Income from continuing operations | 15.3 | 6.2 | 19.1 | 5.9 | |||||||||||
Income from discontinued operations, net of tax | — | 1.2 | 0.2 | 0.4 | |||||||||||
Income before extraordinary loss | 15.3 | 7.4 | 19.3 | 6.3 | |||||||||||
Extraordinary loss | — | — | — | (3.4 | ) | ||||||||||
Net income | 15.3 | 7.4 | 19.3 | 2.9 | |||||||||||
Add: Net loss attributable to noncontrolling interests | 0.1 | — | 0.1 | 0.3 | |||||||||||
Net income attributable to INTL FCStone Inc. common stockholders | $ | 15.4 | $ | 7.4 | $ | 19.4 | $ | 3.2 | |||||||
Basic earnings per share: | |||||||||||||||
Income from continuing operations attributable to INTL FCStone Inc. common stockholders | $ | 0.87 | $ | 0.36 | $ | 1.09 | $ | 0.35 | |||||||
Income from discontinued operations attributable to INTL FCStone Inc. common stockholders | — | 0.07 | 0.01 | 0.02 | |||||||||||
Extraordinary loss attributable to INTL FCStone Inc. common stockholders | — | — | — | (0.19 | ) | ||||||||||
Net income attributable to INTL FCStone Inc. common stockholders | $ | 0.87 | $ | 0.43 | $ | 1.10 | $ | 0.18 | |||||||
Diluted earnings per share: | |||||||||||||||
Income from continuing operations attributable to INTL FCStone Inc. common stockholders | $ | 0.81 | $ | 0.34 | $ | 1.02 | $ | 0.34 | |||||||
Income from discontinued operations attributable to INTL FCStone Inc. common stockholders | — | 0.07 | 0.01 | 0.02 | |||||||||||
Extraordinary loss attributable to INTL FCStone Inc. common stockholders | — | — | — | (0.19 | ) | ||||||||||
Net income attributable to INTL FCStone Inc. common stockholders | $ | 0.81 | $ | 0.41 | $ | 1.03 | $ | 0.17 | |||||||
Weighted-average number of common shares outstanding: | |||||||||||||||
Basic | 17,830,888 | 17,319,170 | 17,622,306 | 17,271,940 | |||||||||||
Diluted | 19,224,588 | 18,483,752 | 19,181,158 | 17,821,990 | |||||||||||
Amounts attributable to INTL FCStone Inc. common stockholders: | |||||||||||||||
Income from continuing operations, net of tax | $ | 15.4 | $ | 6.2 | $ | 19.2 | $ | 6.2 | |||||||
Income from discontinued operations, net of tax | — | 1.2 | 0.2 | 0.4 | |||||||||||
Extraordinary loss | — | — | — | (3.4 | ) | ||||||||||
Net income | $ | 15.4 | $ | 7.4 | $ | 19.4 | $ | 3.2 | |||||||
See accompanying notes to condensed consolidated financial statements.
2
INTL FCStone Inc.
Condensed Consolidated Cash Flows Statements
(Unaudited)
Six Months Ended March 31, | |||||||
(in millions) | 2011 | 2010 | |||||
Cash flows from operating activities: | |||||||
Net cash provided by operating activities | $ | 152.7 | $ | 88.9 | |||
Cash flows from investing activities: | |||||||
Cash paid for acquisitions, net | (10.4 | ) | (1.2 | ) | |||
Purchase of exchange memberships and common stock | (3.4 | ) | — | ||||
Sale of exchange memberships and common stock | 1.3 | — | |||||
Deconsolidation of affiliates | — | (0.3 | ) | ||||
Purchase of property and equipment | (3.9 | ) | (1.5 | ) | |||
Net cash used in investing activities | (16.4 | ) | (3.0 | ) | |||
Cash flows from financing activities: | |||||||
Net change in payable to lenders under loans and overdrafts | (82.8 | ) | (36.5 | ) | |||
Repayment of subordinated debt | (0.5 | ) | (51.0 | ) | |||
Debt issuance costs | (1.2 | ) | — | ||||
Exercise of stock options | 1.2 | 0.7 | |||||
Income tax benefit on stock options and awards | 0.1 | 0.1 | |||||
Net cash used in financing activities | (83.2 | ) | (86.7 | ) | |||
Effect of exchange rates on cash and cash equivalents | — | 0.1 | |||||
Net increase (decrease) in cash and cash equivalents | 53.1 | (0.7 | ) | ||||
Cash and cash equivalents at beginning of period | 81.9 | 60.5 | |||||
Cash and cash equivalents at end of period | $ | 135.0 | $ | 59.8 | |||
Supplemental disclosure of cash flow information: | |||||||
Cash paid for interest | $ | 4.3 | $ | 4.7 | |||
Income taxes paid, net of cash refunds | $ | 2.2 | $ | (38.7 | ) | ||
Supplemental disclosure of non-cash investing and financing activities: | |||||||
Conversion of subordinated notes to common stock, net | $ | 6.8 | $ | — | |||
See accompanying notes to condensed consolidated financial statements.
3
INTL FCStone Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Unaudited)
(in millions) | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total | ||||||||||||||||||||
Balances as of September 30, 2010 | $ | 0.2 | $ | (0.1 | ) | $ | 184.6 | $ | 59.7 | $ | (3.1 | ) | $ | 1.6 | $ | 242.9 | |||||||||||
Components of comprehensive income: | |||||||||||||||||||||||||||
Net income (loss) | 19.4 | (0.1 | ) | 19.3 | |||||||||||||||||||||||
Change in foreign currency translation | (0.1 | ) | (0.1 | ) | |||||||||||||||||||||||
Change in unrealized loss on derivative instruments | 1.1 | 1.1 | |||||||||||||||||||||||||
Change in unrealized gain or loss on available-for-sale securities | (0.1 | ) | (0.1 | ) | |||||||||||||||||||||||
Total comprehensive income | $ | 20.2 | |||||||||||||||||||||||||
Redemption of fund units | (0.2 | ) | (0.2 | ) | |||||||||||||||||||||||
Exercise of stock options | 1.3 | 1.3 | |||||||||||||||||||||||||
Stock-based compensation | 1.1 | 1.1 | |||||||||||||||||||||||||
Convertible note conversions | 6.8 | 6.8 | |||||||||||||||||||||||||
Balances as of March 31, 2011 | $ | 0.2 | $ | (0.1 | ) | $ | 193.8 | $ | 79.1 | $ | (2.2 | ) | $ | 1.3 | $ | 272.1 | |||||||||||
See accompanying notes to condensed consolidated financial statements.
4
INTL FCStone Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Presentation and Consolidation and Recently Issued Accounting Standards
INTL FCStone Inc., a Delaware corporation, together with its consolidated subsidiaries (collectively “INTL” or “the Company”) form a financial services group focused on domestic and select international markets. The Company’s services include comprehensive risk management advisory services for commercial customers; execution of listed futures and options on futures contracts on all major commodity exchanges; structured over-the-counter (OTC) products in a wide range of commodities; physical trading and hedging of precious and base metals and select other commodities; trading of more than 130 foreign currencies; market-making in international equities; debt origination and asset management. During the quarter ended March 31, 2011, the Company changed its name from International Assets Holding Corporation to INTL FCStone Inc., following approval of the name change by the Company's stockholders.
The Company provides these services to a diverse group of approximately 10,000 customers located throughout the world, including producers, processors and end-users of nearly all widely-traded physical commodities to manage their risks and enhance margins; to commercial counterparties who are end-users of the firm’s products and services; to governmental and non-governmental organizations; and to commercial banks, brokers, institutional investors and major investment banks.
Basis of Presentation and Consolidation
The accompanying condensed consolidated balance sheet as of September 30, 2010, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the condensed consolidated financial statements for the interim periods presented have been reflected as required by Rule 10-01 of Regulation S-X.
Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. It is suggested that these interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in the Company’s Form 10-K for the fiscal year ended September 30, 2010 filed with the SEC.
These condensed consolidated financial statements include the accounts of INTL FCStone Inc. and its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. In accordance with the Consolidation Topic of the Accounting Standards Codification (ASC), the Company consolidates any variable interest entities for which it is the primary beneficiary, as defined.
The Company has a majority interest in the Blackthorn Multi-Advisor Fund, LP (the “Blackthorn Fund”). The Blackthorn Fund is a commodity investment pool, which allocates most of its assets to third-party commodity trading advisors and other investment managers. The Blackthorn Fund engages in speculative trading of a wide variety of commodity futures and option contracts, securities and other financial instruments. In addition to the majority interest that was acquired, a subsidiary of the Company is also the general partner of the Blackthorn Fund. Under the provisions of the Consolidations Topic of the ASC, the Company is required to consolidate the Blackthorn Fund as a variable interest entity since it is the general partner and owns a majority interest. The creditors of the Blackthorn Fund have no recourse to the general assets of the Company.
The Blackthorn Fund had net assets of $4.9 million as of March 31, 2011. The net assets of the Blackthorn fund consisted of cash and cash equivalents of $1.2 million, deposits and receivables from broker-dealers, clearing organizations and counterparties of $2.8 million, investments in managed funds of $1.2 million and $0.3 million in accounts payable and other accrued liabilities at March 31, 2011. Accordingly, the noncontrolling interest shown in the balance sheet includes the noncontrolling interest of the Blackthorn Fund of $1.4 million as of March 31, 2011. See Note 6 for discussion of fair value of the financial assets and liabilities.
Our fiscal year end is September 30, and our fiscal quarters end on December 31, March 31, June 30 and September 30. Unless otherwise stated, all dates refer to our fiscal years and fiscal interim periods.
5
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. The most significant of these estimates and assumptions relate to fair value measurements for financial instruments and investments and the provision for potential losses from bad debts. Provisions for estimated bad debts are recorded on a specific identification basis. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
Reclassifications
In the six months ended March 31, 2011, the Company reclassified give-up fee revenue in the amount of $0.9 million within the condensed consolidated income statement to the financial statement line caption 'Commission and clearing fees', from 'Consulting and management fees'. Additionally, reclassifications in the amount of $0.3 million and $0.6 million have been made to the three and six month periods ended March 31, 2010, respectively, to conform to the current year presentation. These reclassifications had no effect on previously reported total or net revenues.
Recently Issued Accounting Standards
In June 2009, new guidance was issued on transfers and servicing of financial assets to eliminate the concept of a qualifying special-purpose entity, change the requirements for off balance sheet accounting for financial assets including limiting the circumstances where off balance sheet treatment for a portion of a financial asset is allowable, and require additional disclosures. The guidance was effective at the beginning of the Company’s 2011 fiscal year. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In June 2009, new guidance was issued to revise the approach to determine when a variable interest entity (VIE) should be consolidated. The new consolidation model for VIEs considers whether the Company has the power to direct the activities that most significantly impact the VIEs economic performance and shares in the significant risks and rewards of the entity. The guidance on VIEs requires companies to continually reassess VIEs to determine if consolidation is appropriate and provide additional disclosures. The guidance was effective for the beginning of the Company’s 2011 fiscal year. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
In January 2010, new guidance was issued to require new disclosures and clarify existing disclosure requirements about fair value measurements as set forth in the Fair Value Measurements and Disclosures Topic in the ASC. The guidance requires that a reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and in the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements. In addition, the guidance clarifies that for purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. This guidance was effective for the Company as of the quarter ended March 31, 2010 except for the detailed level 3 roll forward disclosure, which is effective for fiscal years beginning after December 15, 2010. The adoption of this guidance will not have a material impact on the Company’s disclosures in its consolidated financial statements.
Note 2 – Income Taxes
In determining the quarterly provision for income taxes, management uses an estimated annual effective tax rate which is based on the expected annual income and statutory tax rates in the various jurisdictions in which it operates. The Company’s effective tax rate differs from the U.S. statutory rate primarily due to state and local taxes, and differing statutory tax rates applied to the income of non-U.S. subsidiaries. The Company records the tax effect of certain discrete items, including the effects of changes in tax laws, tax rates and adjustments with respect to valuation allowances or other unusual or nonrecurring tax adjustments, in the interim period in which they occur, as an addition to, or reduction from, the income tax provision, rather than being included in the estimated effective annual income tax rate. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective income tax rate.
The Company is required to assess its deferred tax assets and the need for a valuation allowance at each reporting period. This assessment requires judgment on the part of management with respect to benefits that may be realized. The Company will record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of our deferred tax assets will not be realized.
6
The income tax expense from continuing operations of $8.0 million and $3.5 million for the three months ended March 31, 2011 and 2010, respectively, and income tax expense from continuing operations of $10.1 million and $3.3 million for the six months ended March 31, 2011 and 2010, respectively, reflect estimated federal, foreign and state taxes. For the three months ended March 31, 2011, the Company’s effective tax rate was 34%, compared to 36% for the three months ended March 31, 2010. For the six months ended March 31, 2011, the Company's effective tax rate was 35%, compared to 36% for the six months ended March 31, 2010.
The Company and its subsidiaries file income tax returns with the U.S. federal jurisdiction, various states, and various foreign jurisdictions. The Internal Revenue Service has commenced an examination of the U.S. income tax return of FCStone Group, Inc. ("FCStone") for its fiscal year ended August 31, 2009. FCStone is a wholly-owned subsidiary acquired on September 30, 2009. Additionally, both INTL and FCStone are under separate state examinations for various periods, ranging from August 31, 2006 through September 30, 2009.
Note 3 – Earnings per Share
Basic earnings per share (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.
Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
(in millions, except share amounts) | 2011 | 2010 | 2011 | 2010 | |||||||||||
Numerator: | |||||||||||||||
Income from continuing operations | $ | 15.4 | $ | 6.2 | $ | 19.2 | $ | 6.2 | |||||||
Add: Interest on convertible debt, net of tax | 0.1 | 0.2 | 0.3 | — | |||||||||||
Diluted income from continuing operations | 15.5 | 6.4 | 19.5 | 6.2 | |||||||||||
Add: Income from discontinued operations | — | 1.2 | 0.2 | 0.4 | |||||||||||
Less: Extraordinary loss | — | — | — | (3.4 | ) | ||||||||||
Diluted net income | $ | 15.5 | $ | 7.6 | $ | 19.7 | $ | 3.2 | |||||||
Denominator: | |||||||||||||||
Weighted average number of: | |||||||||||||||
Common shares outstanding | 17,830,888 | 17,319,170 | 17,622,306 | 17,271,940 | |||||||||||
Dilutive potential common shares outstanding: | |||||||||||||||
Share-based awards | 930,929 | 507,646 | 961,692 | 550,050 | |||||||||||
Convertible debt | 462,771 | 656,936 | 597,160 | — | |||||||||||
Diluted weighted-average shares | 19,224,588 | 18,483,752 | 19,181,158 | 17,821,990 | |||||||||||
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 required under the Compensation – Stock Compensation Topic of the ASC. The dilutive effect of convertible debt is reflected in diluted net income per share by application of the if-converted method.
Options to purchase 394,179 and 848,562 shares of common stock for the three months ended March 31, 2011 and 2010, respectively, and 395,485 and 848,562 shares of common stock for the six months ended March 31, 2011 and 2010, respectively, were excluded from the calculation of diluted earnings per share because they would have been anti-dilutive.
The Company has unvested share-based payment awards that are considered participating securities and should be included in the computation of basic EPS using the two-class method. The Company has omitted disclosures related to the two-class method as the impact of the computation does not have a material effect on the condensed consolidated financial statements. Had the required disclosures been made for the three months ended March 31, 2011 and 2010, respectively, the Company’s basic earnings per share would have been reduced by approximately $0.01 per share.
7
Note 4 – Receivables from customers and notes receivable, net
On March 31, 2011, the commodities market experienced an upward limit price movement on a certain commodity, and as a result, certain exchange-traded derivative contracts, which would normally be valued using quoted market prices were priced using a valuation model - see Note 6. This market event caused a significant increase in receivables from customers related to margin balances as of the balance sheet date. The Company has subsequently collected all margin balances from its customers related to this market event.
Receivables from customers, net and notes receivable, net include a provision for bad debts, which reflects our best estimate of probable losses inherent in the receivables from customers and notes receivable. The Company provides for an allowance for doubtful accounts based on a specific-identification basis. The Company continually reviews its provision for bad debts. The allowance for doubtful accounts related to receivables from customers is $9.2 million and $4.9 million at March 31, 2011 and September 30, 2010, respectively.
During the three and six months ended March 31, 2011, the Company recorded charges to bad debt expense of $0.3 million and $4.5 million, respectively, primarily related to a customer to whom the Company had consigned gold, in the C&RM segment and a clearing customer deficit account in the CES segment. During the three and six months ended March 31, 2011, the Company recorded recoveries of $0.1 million and $1.9 million, respectively, of bad debt expense, including $1.3 million following a settlement relating to a disputed trade that was “given-up” to FCStone during the quarter ended June 30, 2010 by another futures commission merchant (FCM) for a customer that held an account with us.
As a result of the acquisition of FCStone, the Company acquired certain notes receivable of $133.7 million at September 30, 2009, consisting of promissory notes from certain customers and an introducing broker which arose from previous customer account deficits, of which the Company estimated collectability to be $16.7 million. During the three months ended March 31, 2011, the Company recovered $11.4 million as partial payment against the promissory notes receivable from these certain customers, and charged off $111.5 million against the allowance for notes receivable related to these certain customer account deficits. Total recoveries from these certain customers and introducing broker through March 31, 2011 is $14.3 million, and at March 31, 2011, remaining notes receivable related to these certain customer account deficits was $2.4 million. The Company expects to collect the remaining amounts from the introducing broker, by withholding commissions due on future revenues collected by the Company, and through credit insurance, although no assurance can be given as to the timing of collection. The allowance for doubtful accounts related to total notes receivable was $2.1 million at March 31, 2011, and $114.3 million at September 30, 2010.
Activity in the allowance for doubtful accounts and notes was as follows:
(in millions) | |||
Balance, September 30, 2010 | $ | 119.2 | |
Provision for bad debts | 4.5 | ||
Transfer in (1) | 2.5 | ||
Deductions: | |||
Charge-offs | (113.0 | ) | |
Recoveries | (1.9 | ) | |
Balance, March 31, 2011 | $ | 11.3 | |
(1) | During the three months ended December 31, 2010, certain open position derivative contracts, which had a $2.5 million credit reserve at September 30, 2010 were closed, and the deficit account balance was reclassified from financial instruments owned to a receivable from customer. Accordingly, the previously established credit reserve amount was transferred into the allowance for doubtful accounts during the three months ended December 31, 2010. |
Additionally, in the normal course of operations the Company accepts notes receivable under sale/repurchase agreements with customers whereby the customers sell certain commodity inventory and agree to repurchase the commodity inventory at a future date at either a fixed or floating rate. These transactions are short-term in nature, and are treated as secured borrowings rather than commodity inventory, purchases and sales in the Company’s condensed consolidated financial statements. At March 31, 2011 and September 30, 2010, the Company had outstanding notes receivable of $42.9 million and $13.6 million, respectively, related to this program.
8
Note 5 – Exchange Memberships and Stock
The Company holds certain commodity exchange membership seats and commodity exchange firm common stock, which are pledged for clearing purposes, providing the Company the right to process trades directly with the various exchanges. The Company acquired additional exchange firm common stock during the six months ended March 31, 2011 at a cost of $3.3 million. Exchange memberships and common stocks pledged for clearing purposes are recorded at cost. The cost basis for exchange memberships and common stock pledged for clearing purposes was $14.0 million and $11.9 million at March 31, 2011 and September 30, 2010, respectively, and is included within ‘Other assets’ on the condensed consolidated balance sheets. The fair value of the exchange memberships and common stock pledged for clearing purposes was $14.0 million and $9.8 million at March 31, 2011 and September 30, 2010, respectively. In January 2011, excess shares of exchange firm common stock, with a cost basis of $1.2 million, were sold, resulting in a nominal gain. The fair value of exchange 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 membership seats and common stock on a quarterly basis, and considers the current unrealized loss to be a temporary impairment.
Note 6 – Assets and Liabilities, at Fair Value
The Company’s financial and nonfinancial assets and liabilities reported at fair value are included within the following captions on the condensed consolidated balance sheets:
• | Cash and cash equivalents |
• | Securities segregated under federal and other regulations |
• | Securities purchased under agreements to resell |
• | Deposits and receivables from exchange-clearing organizations |
• | Deposits and receivables from broker-dealers, clearing organizations and counterparties |
• | Financial instruments owned |
• | Accounts payable and other accrued liabilities |
• | Payables to customers |
• | Financial instruments sold, not yet purchased |
The table below sets forth an analysis of the carrying value of financial instruments owned and financial instruments sold, not yet purchased. This is followed by tables that provide the information required by the Fair Value Measurements and Disclosures Topic of the ASC for all financial assets and liabilities that are carried at fair value.
March 31, 2011 | September 30, 2010 | ||||||||||||||
(in millions) | Owned | Sold, not yet purchased | Owned | Sold, not yet purchased | |||||||||||
Common stock and ADR’s | $ | 22.1 | $ | 22.9 | $ | 17.4 | $ | 8.5 | |||||||
Exchangeable foreign ordinary equities and ADR’s | 19.5 | 13.0 | 6.6 | 7.5 | |||||||||||
Corporate and municipal bonds | 10.3 | — | 13.1 | — | |||||||||||
U.S. and foreign government obligations | 15.0 | 1.0 | 8.7 | 0.2 | |||||||||||
Derivatives | 83.0 | 186.8 | 40.2 | 87.6 | |||||||||||
Commodities leases and unpriced positions | 185.9 | 331.1 | 69.2 | 85.8 | |||||||||||
Mutual funds and other | 0.7 | — | 2.1 | — | |||||||||||
Investment in managed funds | 2.0 | — | 2.5 | — | |||||||||||
$ | 338.5 | $ | 554.8 | $ | 159.8 | $ | 189.6 | ||||||||
Fair Value Hierarchy
The majority of financial assets and liabilities on the condensed consolidated balance sheets are reported at fair value. Cash and cash equivalents are reported at the balance held at financial institutions. Deposits with and receivables from exchange-clearing organizations and broker-dealers and FCMs and payables to customers and exchange-clearing organizations include the value of cash collateral as well as the value of money market funds and other pledged investments, primarily U.S. Treasury bills and securities issued by government sponsored entities. These balances also include the fair value of futures and options on futures determined by prices on the applicable exchange. Financial instruments owned and sold, not yet purchased include the value of U.S. and foreign government obligations, corporate debt securities, derivative financial instruments, commodities, mutual funds and investments in managed funds. The fair value of exchange common stock is determined by quoted market prices, and the fair value of exchange memberships is determined by recent sale transactions. Notes payable and subordinated debt carry variable rates of interest and thus approximate fair value.
9
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 March 31, 2011 and September 30, 2010 by level within the fair value hierarchy. There were no assets or liabilities that were measured at fair value on a nonrecurring basis as of March 31, 2011. As required by the Fair Value Measurements and Disclosures Topic of the ASC, financial and nonfinancial assets and liabilities measured on recurring and nonrecurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy under the Fair Value Measurements and Disclosures Topic of the ASC are:
Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
March 31, 2011 | |||||||||||||||||||
(in millions) | Level 1 | Level 2 | Level 3 | Netting and Collateral (1) | Total | ||||||||||||||
Assets: | |||||||||||||||||||
Unrestricted cash equivalents - money market funds | $ | 1.6 | $ | — | $ | — | $ | — | $ | 1.6 | |||||||||
Commodities warehouse receipts | 22.5 | — | — | — | 22.5 | ||||||||||||||
U.S. and foreign government obligations | — | 2.3 | — | — | 2.3 | ||||||||||||||
Securities and other assets segregated under federal and other regulations | 22.5 | 2.3 | — | — | 24.8 | ||||||||||||||
Securities purchased under agreements to resell | 77.2 | — | — | — | 77.2 | ||||||||||||||
Money market funds | 388.0 | — | — | — | 388.0 | ||||||||||||||
U.S. and foreign government obligations | — | 1,212.2 | — | — | 1,212.2 | ||||||||||||||
Mortgage-backed securities | — | 9.4 | — | — | 9.4 | ||||||||||||||
Derivatives | 7,722.3 | 317.5 | — | (8,652.6 | ) | (612.8 | ) | ||||||||||||
Deposits and receivables from exchange-clearing organizations | 8,110.3 | 1,539.1 | — | (8,652.6 | ) | 996.8 | |||||||||||||
Deposits and receivables from broker-dealers, clearing organizations and counterparties - U.S. and foreign government obligations | — | 0.5 | — | — | 0.5 | ||||||||||||||
Common stock and ADR’s | 39.2 | 1.2 | 1.2 | — | 41.6 | ||||||||||||||
Corporate and municipal bonds | — | 5.0 | 5.3 | — | 10.3 | ||||||||||||||
U.S. and foreign government obligations | 8.9 | 6.1 | — | — | 15.0 | ||||||||||||||
Derivatives (2) | 409.5 | 994.0 | — | (1,320.5 | ) | 83.0 | |||||||||||||
Commodities leases and unpriced positions | — | 300.8 | — | (114.9 | ) | 185.9 | |||||||||||||
Mutual funds and other | 0.3 | — | 0.4 | — | 0.7 | ||||||||||||||
Investment in managed funds | — | 1.2 | 0.8 | — | 2.0 | ||||||||||||||
Financial instruments owned | 457.9 | 1,308.3 | 7.7 | (1,435.4 | ) | 338.5 | |||||||||||||
Total assets at fair value | $ | 8,669.5 | $ | 2,850.2 | $ | 7.7 | $ | (10,088.0 | ) | $ | 1,439.4 | ||||||||
Liabilities: | |||||||||||||||||||
Accounts payable and other accrued liabilities - contingent liabilities | $ | — | $ | — | $ | 30.5 | $ | — | $ | 30.5 | |||||||||
Payables to customers - derivatives | 8,075.0 | 1,079.6 | — | (9,154.6 | ) | — | |||||||||||||
Common stock and ADR’s | 35.0 | 0.9 | — | — | 35.9 | ||||||||||||||
U.S. and foreign government obligations | — | 1.0 | — | — | 1.0 | ||||||||||||||
Derivatives (2) | 422.6 | 924.1 | — | (1,159.9 | ) | 186.8 | |||||||||||||
Commodities leases and unpriced positions | — | 433.2 | — | (102.1 | ) | 331.1 | |||||||||||||
Financial instruments sold, not yet purchased | 457.6 | 1,359.2 | — | (1,262.0 | ) | 554.8 | |||||||||||||
Total liabilities at fair value | $ | 8,532.6 | $ | 2,438.8 | $ | 30.5 | $ | (10,416.6 | ) | $ | 585.3 | ||||||||
(1) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level are included in that level. |
(2) | The derivatives include net unrealized gains (losses) that are reclassified to deposits and receivables from broker-dealers, clearing organizations and counterparties and receivables from customers of $15.5 million as of March 31, 2011, as a result of netting and collateral. |
10
September 30, 2010 | |||||||||||||||||||
(in millions) | Level 1 | Level 2 | Level 3 | Netting and Collateral (1) | Total | ||||||||||||||
Assets: | |||||||||||||||||||
Unrestricted cash equivalents - money market funds | $ | 0.3 | $ | — | $ | — | $ | — | $ | 0.3 | |||||||||
U.S. and foreign government obligations | — | 0.8 | — | — | 0.8 | ||||||||||||||
Securities segregated under federal and other regulations | — | 0.8 | — | — | 0.8 | ||||||||||||||
Securities purchased under agreements to resell | 342.0 | — | — | — | 342.0 | ||||||||||||||
Money market funds | 428.2 | — | — | — | 428.2 | ||||||||||||||
U.S. and foreign government obligations | — | 988.1 | — | — | 988.1 | ||||||||||||||
Mortgage-backed securities | — | 10.0 | — | — | 10.0 | ||||||||||||||
Derivatives | 4,228.1 | — | — | (4,748.0 | ) | (519.9 | ) | ||||||||||||
Deposits and receivables from exchange-clearing organizations | 4,656.3 | 998.1 | — | (4,748.0 | ) | 906.4 | |||||||||||||
Common stock and ADR’s | 22.1 | 0.7 | 1.2 | — | 24.0 | ||||||||||||||
Corporate and municipal bonds | — | 5.1 | 8.0 | — | 13.1 | ||||||||||||||
U.S. and foreign government obligations | 2.8 | 5.9 | — | — | 8.7 | ||||||||||||||
Derivatives (2) | 186.0 | 897.9 | — | (1,043.7 | ) | 40.2 | |||||||||||||
Commodities leases and unpriced positions | — | 201.9 | — | (132.7 | ) | 69.2 | |||||||||||||
Mutual funds and other | 1.7 | — | 0.4 | — | 2.1 | ||||||||||||||
Investment in managed funds | — | 1.9 | 0.6 | — | 2.5 | ||||||||||||||
Financial instruments owned | 212.6 | 1,113.4 | 10.2 | (1,176.4 | ) | 159.8 | |||||||||||||
Total assets at fair value | $ | 5,211.2 | $ | 2,112.3 | $ | 10.2 | $ | (5,924.4 | ) | $ | 1,409.3 | ||||||||
Liabilities: | |||||||||||||||||||
Accounts payable and other accrued liabilities - contingent liabilities | $ | — | $ | 32.3 | $ | — | $ | 32.3 | |||||||||||
Payables to customers - derivatives | 5,451.0 | — | — | (5,451.0 | ) | — | |||||||||||||
Common stock and ADR’s | 15.5 | 0.5 | — | — | 16.0 | ||||||||||||||
U.S. and foreign government obligations | — | 0.2 | — | — | 0.2 | ||||||||||||||
Derivatives (2) | 189.3 | 859.5 | — | (961.2 | ) | 87.6 | |||||||||||||
Commodities leases and unpriced positions | — | 127.2 | — | (41.4 | ) | 85.8 | |||||||||||||
Financial instruments sold, not yet purchased | 204.8 | 987.4 | — | (1,002.6 | ) | 189.6 | |||||||||||||
Total liabilities at fair value | $ | 5,655.8 | $ | 987.4 | $ | 32.3 | $ | (6,453.6 | ) | $ | 221.9 | ||||||||
(1) | Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level are included in that level. |
(2) | The derivatives include net unrealized gains (losses) that are reclassified to deposits and receivables from broker-dealers, clearing organizations and counterparties and receivables from customers of $56.1 million as of September 30, 2010, as a result of netting and collateral. |
Realized and unrealized gains and losses are included within ‘Trading gains’ in the condensed consolidated income statement.
Information on Level 3 Financial Assets and Liabilities
The Company’s financial assets at fair value classified within level 3 of the fair value hierarchy are summarized below:
(in millions) | As of March 31, 2011 | As of September 30, 2010 | |||||
Total level 3 assets | $ | 7.7 | $ | 10.2 | |||
Level 3 assets for which the Company bears economic exposure | $ | 7.7 | $ | 10.2 | |||
Total assets | $ | 2,271.9 | $ | 2,021.7 | |||
Total financial assets at fair value | $ | 1,439.4 | $ | 1,409.3 | |||
Total level 3 assets as a percentage of total assets | 0.3 | % | 0.5 | % | |||
Level 3 assets for which the Company bears economic exposure as a percentage of total assets | 0.3 | % | 0.5 | % | |||
Total level 3 assets as a percentage of total financial assets at fair value | 0.5 | % | 0.7 | % | |||
11
The following tables set forth a summary of changes in the fair value of the Company’s level 3 financial assets and liabilities during the three and six months ended March 31, 2011 including a summary of unrealized gains (losses) during the three and six months on the Company’s level 3 financial assets and liabilities still held at March 31, 2011.
Level 3 Financial Assets and Financial Liabilities For the Three Months Ended March 31, 2011 | |||||||||||||||||||||||
(in millions) | Balances at beginning of period | Realized gains (losses) during period | Unrealized gains (losses) during period | Purchases, issuances, settlements | Transfers in or (out) of Level 3 | Balances at end of period | |||||||||||||||||
Assets: | |||||||||||||||||||||||
Common stock and ADR’s | $ | 1.2 | $ | — | $ | — | $ | — | $ | — | $ | 1.2 | |||||||||||
Corporate and municipal bonds | 8.1 | — | (2.8 | ) | — | — | 5.3 | ||||||||||||||||
Mutual funds and other | 0.4 | — | — | — | — | 0.4 | |||||||||||||||||
Investment in managed funds | 0.6 | — | 0.2 | — | — | 0.8 | |||||||||||||||||
$ | 10.3 | $ | — | $ | (2.6 | ) | $ | — | $ | — | $ | 7.7 | |||||||||||
Liabilities - | |||||||||||||||||||||||
Contingent liabilities | $ | 30.0 | $ | — | $ | 0.5 | $ | — | $ | — | $ | 30.5 | |||||||||||
Level 3 Financial Assets and Financial Liabilities For the Six Months Ended March 31, 2011 | |||||||||||||||||||||||
(in millions) | Balances at beginning of period | Realized gains (losses) during period | Unrealized gains (losses) during period | Purchases, issuances, settlements | Transfers in or (out) of Level 3 | Balances at end of period | |||||||||||||||||
Assets: | |||||||||||||||||||||||
Common stock and ADR’s | $ | 1.2 | $ | — | $ | — | $ | — | $ | — | $ | 1.2 | |||||||||||
Corporate and municipal bonds | 8.0 | — | (2.7 | ) | — | — | 5.3 | ||||||||||||||||
Mutual funds and other | 0.4 | — | — | — | — | 0.4 | |||||||||||||||||
Investment in managed funds | 0.6 | — | 0.2 | — | — | 0.8 | |||||||||||||||||
$ | 10.2 | $ | — | $ | (2.5 | ) | $ | — | $ | — | $ | 7.7 | |||||||||||
Liabilities - | |||||||||||||||||||||||
Contingent liabilities | $ | 32.3 | $ | — | $ | 1.9 | $ | (3.7 | ) | $ | — | $ | 30.5 | ||||||||||
In August 2008, INTL Asia Pte, Ltd., a subsidiary of the Company, arranged a 550 million Thai Baht ("THB"), an $18 million U.S. dollar ("USD") equivalent, issue of debentures for the single asset owning company of Suriwongse Hotel located in Chiang Mai, Thailand. The debentures have a 9.5% coupon and were scheduled to mature in August 2011. The Company arranged for the sale of 375.5 million THB ($12.6 USD) of the debentures to two investors and the Company retained debentures in the amount of 174.5 million THB ($5.4 USD). The debentures are secured by a mortgage on the land and hotel buildings, the personal guarantee of the owner, and conditional assignments of accounts and agreements.
The proceeds of this issue were to be used to refinance the previous loan to the hotel owner, finance the hotel's renovation and fund interest up to 50.0 million THB. Renovations were initially planned to be completed by April 2011 and the outstanding debentures were to be refinanced following the completion of renovations. The renovations have been delayed and are currently expected to be completed by February 2012.
In addition, the political and economic conditions in Thailand over the past two years have impacted the performance of the hotel. Following the interest capitalization period, the hotel owner was able to meet four quarterly interest payments on the debentures, however the hotel owner defaulted on the interest payment that was due in March 2011. The Company and other debenture holders are currently in restructuring discussions with the hotel owner as a result of the renovation delays.
In accordance with the Fair Value Measurements and Disclosures Topic of the ASC, the Company has estimated the fair value of the debentures on a recurring basis each period. The Company has classified its investment in the hotel within level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which include projected cash flows. These cash flows are discounted employing present value techniques. At March 31, 2011, due to the issues discussed previously, the Company estimated the fair value of its investment in these debentures by using a management-developed forecast, which is based on the income approach. This valuation model assigned a fair value for the debentures held by the Company of $3.7 million at March 31, 2011, and accordingly the Company has recorded a loss of $1.7 million, representing an other than temporary impairment, for the three and six months ended March 31, 2011.
12
The Company is required to make additional future cash payments based on certain financial performance measures of its acquired businesses. The Company is required to remeasure the fair value of the cash earnout arrangements on a recurring basis in accordance with the guidance in the Business Combinations Topic of the ASC. The Company has classified its net liabilities for the contingent earnout arrangements within level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which include projected cash flows. The estimated fair value of the contingent purchase consideration is based upon management-developed forecasts, a level 3 input in the fair value hierarchy. These cash flows are discounted employing present value techniques in arriving at the acquisition-date fair value. The discount rate was developed using market participant company data, a level 2 input in the fair value hierarchy. From the dates of acquisition to March 31, 2011, there have been no significant changes in the estimates of undiscounted cash flows. During the three and six months ended March 31, 2011, $0.5 million and $1.9 million, respectively, was accreted to the fair value of the contingent consideration for the passage of time, with the corresponding expense classified as other operating expense in the accompanying condensed consolidated income statement.
Level 3 Financial Assets and Financial Liabilities For the Three Months Ended March 31, 2010 | |||||||||||||||||||||||
(in millions) | Balances at beginning of period | Realized gains (losses) during period | Unrealized gains (losses) during period | Purchases, issuances, settlements | Transfers in or (out) of Level 3 | Balances at end of period | |||||||||||||||||
Assets: | |||||||||||||||||||||||
Common stock and ADR’s | $ | 1.2 | $ | — | $ | — | $ | — | $ | — | $ | 1.2 | |||||||||||
Corporate and municipal bonds | 4.7 | — | 0.1 | — | — | 4.8 | |||||||||||||||||
U.S. and foreign government obligations | — | — | — | — | — | — | |||||||||||||||||
Mutual funds and other | 0.4 | — | 0.1 | — | — | 0.5 | |||||||||||||||||
Investment in managed funds | 2.7 | — | (0.1 | ) | (0.6 | ) | — | 2.0 | |||||||||||||||
$ | 9.0 | $ | — | $ | 0.1 | $ | (0.6 | ) | $ | — | $ | 8.5 | |||||||||||
Level 3 Financial Assets and Financial Liabilities For the Six Months Ended March 31, 2010 | |||||||||||||||||||||||
(in millions) | Balances at beginning of period | Realized gains (losses) during period | Unrealized gains (losses) during period | Purchases, issuances, settlements | Transfers in or (out) of Level 3 | Balances at end of period | |||||||||||||||||
Assets: | |||||||||||||||||||||||
Common stock and ADR’s | $ | 1.2 | $ | — | $ | — | $ | — | $ | — | $ | 1.2 | |||||||||||
Corporate and municipal bonds | 4.3 | — | 0.1 | 0.4 | — | 4.8 | |||||||||||||||||
U.S. and foreign government obligations | 0.7 | — | — | — | (0.7 | ) | — | ||||||||||||||||
Mutual funds and other | 0.4 | — | 0.1 | — | — | 0.5 | |||||||||||||||||
Investment in managed funds | 2.7 | — | (0.1 | ) | (0.6 | ) | — | 2.0 | |||||||||||||||
$ | 9.3 | $ | — | $ | 0.1 | $ | (0.2 | ) | $ | (0.7 | ) | $ | 8.5 | ||||||||||
The Company reports transfers in and out of levels 1, 2 and 3, as applicable, using the fair value of the securities as of the beginning of the reporting period in which the transfer occurred.
The 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 market value as determined in good faith pursuant to procedures adopted by management of the Company.
On March 31, 2011, the commodities market experienced an upward limit price movement on a certain commodity. As a result, certain exchange-traded derivative contracts, which would normally be valued using quoted market prices and classified as level 1 within the fair value hierarchy, were priced using a valuation model using observable inputs. Due to the change in valuation techniques because of the limit move, derivative assets of $317.5 million and derivative liabilities of $1,079.6 million were transferred from level 1 and were classified as level 2 at March 31, 2011.
The Company did not have any additional significant transfers between level 1 and level 2 fair value measurements for the three months and six months ended March 31, 2011.
13
The Company transferred $0.7 million of U.S. and foreign obligations from level 3 to level 2 during the six months ended March 31, 2010. The Company re-evaluated the observability of the inputs for the fair value of the securities that were transferred into level 2 from level 3 and determined that there was improvement in the market for these securities and that resulted in the Company being able to utilize inputs that were observable.
The following tables summarize the amortized cost basis, the aggregate fair value and gross unrealized holding gains and losses of the Company’s investment securities classified as available-for-sale at March 31, 2011 and September 30, 2010:
March 31, 2011 | |||||||||||||||
Amounts included in financial instruments owned: | |||||||||||||||
Amortized Cost | Unrealized Holding (1) | Estimated Fair Value | |||||||||||||
(in millions) | Gains | (Losses) | |||||||||||||
U.S. government securities and federal agency obligations | $ | 5.0 | $ | — | $ | — | $ | 5.0 | |||||||
Corporate bonds | 5.0 | — | — | 5.0 | |||||||||||
$ | 10.0 | $ | — | $ | — | $ | 10.0 | ||||||||
(1) | Unrealized gain/loss on financial instruments owned as of March 31, 2011, is less than $0.1 million. |
Amounts included in deposits with and receivables from exchange-clearing organizations: | |||||||||||||||
Amortized Cost | Unrealized Holding | Estimated Fair Value | |||||||||||||
(in millions) | Gains | (Losses) | |||||||||||||
U.S. government securities and federal agency obligations | $ | 1,185.7 | $ | 0.3 | $ | — | $ | 1,186.0 | |||||||
Mortgage-backed securities | 9.2 | 0.1 | — | 9.3 | |||||||||||
$ | 1,194.9 | $ | 0.4 | $ | — | $ | 1,195.3 | ||||||||
September 30, 2010 | |||||||||||||||
Amounts included in financial instruments owned: | |||||||||||||||
Amortized Cost | Unrealized Holding (1) | Estimated Fair Value | |||||||||||||
(in millions) | Gains | (Losses) | |||||||||||||
U.S. government securities and federal agency obligations | $ | 5.0 | $ | — | $ | — | $ | 5.0 | |||||||
Corporate bonds | 5.1 | — | — | 5.1 | |||||||||||
$ | 10.1 | $ | — | $ | — | $ | 10.1 | ||||||||
(1) | Unrealized gains/losses on financial instruments as of September 30, 2010, is less than $0.1 million. |
Amounts included in deposits with and receivables from exchange-clearing organizations: | |||||||||||||||
Amortized Cost | Unrealized Holding | Estimated Fair Value | |||||||||||||
(in millions) | Gains | (Losses) | |||||||||||||
U.S. government securities and federal agency obligations | $ | 936.0 | $ | 0.4 | $ | — | $ | 936.4 | |||||||
Mortgage-backed securities | 10.1 | — | (0.1 | ) | 10.0 | ||||||||||
$ | 946.1 | $ | 0.4 | $ | (0.1 | ) | $ | 946.4 | |||||||
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At March 31, 2011 and September 30, 2010, investments in debt securities classified as available-for-sale (AFS) mature as follows:
March 31, 2011 | |||||||||||
Due in | Estimated Fair Value | ||||||||||
(in millions) | Less than 1 year | 1 year or more | |||||||||
U.S. government securities and federal agency obligations | $ | 1,186.0 | $ | 5.0 | $ | 1,191.0 | |||||
Corporate bonds | 5.0 | — | 5.0 | ||||||||
Mortgage-backed securities | — | 9.3 | 9.3 | ||||||||
$ | 1,191.0 | $ | 14.3 | $ | 1,205.3 | ||||||
September 30, 2010 | |||||||||||
Due in | Estimated Fair Value | ||||||||||
(in millions) | Less than 1 year | 1 year or more | |||||||||
U.S. government securities and federal agency obligations | $ | 876.0 | $ | 65.4 | $ | 941.4 | |||||
Corporate bonds | — | 5.1 | 5.1 | ||||||||
Mortgage-backed securities | — | 10.0 | 10.0 | ||||||||
$ | 876.0 | $ | 80.5 | $ | 956.5 | ||||||
There were no sales of AFS Securities during three and six months ended March 31, 2011 and 2010, and as a result, no realized gains or losses were recorded for the three and six months ended March 31, 2011 and 2010.
For the purposes of the maturity schedule, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the expected maturity of the underlying collateral. Mortgage-backed securities may mature earlier than their stated contractual maturities because of accelerated principal repayments of the underlying loans.
Note 7 – Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk
The Company is party to certain financial instruments with off-balance sheet risk in the normal course of its business. The Company has sold financial instruments that it does not currently own and will therefore be obliged to purchase such financial instruments at a future date. The Company has recorded these obligations in the condensed consolidated financial statements at March 31, 2011 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 March 31, 2011. The total of $554.8 million at March 31, 2011 includes $186.8 million for derivative contracts, which represent a liability to the Company based on their fair values as of March 31, 2011.
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 majority of the Company’s derivative positions are included within the balance sheets under the caption ‘financial instruments owned, at fair value’, ‘deposits and receivables from exchange-clearing organizations’ and ‘financial instruments sold, not yet purchased, at fair value’.
The Company utilizes an interest rate risk management strategy, using derivative financial instruments in the form of interest rate swaps, to manage a portion of the aggregate interest rate position. The Company’s objective is to invest the majority of customer segregated deposits in high quality, short-term investments and swap the resulting variable interest earnings into the medium-term interest stream, by using a strip of interest rate swaps that mature every quarter, in order to achieve the two year moving average of the two year swap rate. The risk mitigation of these interest rate swaps is not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC and as a result they are recorded at fair value, with changes in the mark-to-market valuation of the financial instruments recorded in earnings on a quarterly basis.
15
Listed below are the fair values of the Company's derivative assets and liabilities as of March 31, 2011 and September 30, 2010. Assets represent net unrealized gains and liabilities represent net unrealized losses.
March 31, 2011 | September 30, 2010 | ||||||||||||||
(In millions) | Assets (1) | Liabilities (1) | Assets (1) | Liabilities (1) | |||||||||||
Derivative contracts not accounted for as hedges: | |||||||||||||||
Exchange-traded commodity derivatives | $ | 7,951.6 | $ | 9,031.4 | $ | 4,126.2 | $ | 5,332.6 | |||||||
OTC commodity derivatives | 1,059.6 | 1,070.5 | 563.3 | 562.9 | |||||||||||
Exchange-traded foreign exchange derivatives | 30.5 | 53.6 | 84.6 | 98.7 | |||||||||||
OTC Foreign exchange derivatives (2) | 341.3 | 274.8 | 512.6 | 478.3 | |||||||||||
Interest rate derivatives | 7.0 | 7.2 | 22.5 | 18.6 | |||||||||||
Equity index derivatives | 53.3 | 63.8 | 2.8 | 7.6 | |||||||||||
Derivative contracts accounted for as hedges: | |||||||||||||||
Interest rate derivatives | — | — | — | 1.1 | |||||||||||
Gross fair value of derivative contracts | 9,443.3 | 10,501.3 | 5,312.0 | 6,499.8 | |||||||||||
Counterparty netting | |||||||||||||||
Impact of netting and collateral | (9,973.1 | ) | (10,314.5 | ) | (5,791.7 | ) | (6,412.2 | ) | |||||||
Total fair value included in ‘Deposits and receivables from exchange-clearing organizations’ | $ | (612.8 | ) | $ | (519.9 | ) | |||||||||
Total fair value included in ‘Financial instruments owned, at fair value’ | $ | 83.0 | $ | 40.2 | |||||||||||
Fair value included in ‘Financial instruments sold, not yet purchased, at fair value’ | $ | 186.8 | $ | 87.6 | |||||||||||
(1) | As of March 31, 2011 and September 30, 2010, the Company’s derivative contract volume for open positions was approximately 5.0 million and 3.5 million contracts, respectively. |
(2) | In accordance with agreements with counterparties, the Company is allowed to periodically take advances against its open trade fair value. These amounts exclude advances against open trade fair value of $50.9 million and $27.0 million outstanding at March 31, 2011 and September 30, 2010, respectively. |
The Company’s derivative contracts are principally held in its Commodities and Risk Management Services (C&RM) segment. The Company assists its C&RM segment customers in protecting the value of their future production by entering into option or forward agreements with them on an OTC basis. The Company also provides its C&RM segment customers with sophisticated option products, including combinations of buying and selling puts and calls. The Company mitigates its risk by effecting offsetting trades with market counterparties. 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.