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EX-31.1 - SECTION 302 CEO CERTIFICATION - INTL FCSTONE INC.intlexhibit31106302014.htm
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EX-32.1 - SECTION 906 CEO CERTIFICATION - INTL FCSTONE INC.intlexhibit32106302014.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - INTL FCSTONE INC.intlexhibit31206302014.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - INTL FCSTONE INC.intlexhibit32206302014.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
For the Quarterly Period Ended June 30, 2014
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.)
708 Third Avenue, Suite 1500
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  x 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 August 4, 2014, there were 18,879,984 shares of the registrant’s common stock outstanding.
 
 
 
 
 



INTL FCStone Inc.
Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30, 2014
Table Of Contents
 
 
Page
Part I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
Part II. OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTL FCStone Inc.
Condensed Consolidated Balance Sheets
(in millions, except par value and share amounts)
June 30,
2014
 
September 30,
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
97.7

 
$
156.1

Cash, securities and other assets segregated under federal and other regulations (including $29.9 and $107.6 at fair value at June 30, 2014 and September 30, 2013, respectively)
420.8

 
449.4

Deposits and receivables from:

 
 
Exchange-clearing organizations (including $1,242.3 and $1,371.7 at fair value at June 30, 2014 and September 30, 2013, respectively)
1,863.7

 
1,576.6

Broker-dealers, clearing organizations and counterparties (including $(8.1) and $(13.1) at fair value at June 30, 2014 and September 30, 2013, respectively)
147.7

 
168.3

Receivables from customers, net
131.3

 
93.3

Notes receivable, net
57.9

 
37.4

Income taxes receivable
13.2

 
15.5

Financial instruments owned, at fair value
258.7

 
158.5

Physical commodities inventory
52.0

 
59.0

Deferred income taxes, net
29.1

 
25.5

Property and equipment, net
17.0

 
17.5

Goodwill and intangible assets, net
58.5

 
59.1

Other assets
36.5

 
31.8

Total assets
$
3,184.1

 
$
2,848.0

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable and other accrued liabilities (including $8.0 and $9.6 at fair value at June 30, 2014 and September 30, 2013, respectively)
$
105.3

 
$
114.0

Payables to:
 
 
 
Customers
2,332.0

 
2,091.8

Broker-dealers, clearing organizations and counterparties
3.0

 
17.0

Lenders under loans
79.0

 
61.0

Senior unsecured notes
45.5

 
45.5

Income taxes payable
6.8

 
3.4

Financial instruments sold, not yet purchased, at fair value
272.5

 
179.9

Deferred income taxes
0.1

 

Total liabilities
2,844.2

 
2,512.6

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; 19,819,720 issued and 18,876,747 outstanding at June 30, 2014 and 19,638,330 issued and 19,209,157 outstanding at September 30, 2013
0.2

 
0.2

Common stock in treasury, at cost - 942,973 shares at June 30, 2014 and 429,173 shares at September 30, 2013, respectively
(17.5
)
 
(7.8
)
Additional paid-in capital
228.6

 
224.0

Retained earnings
138.9

 
125.4

Accumulated other comprehensive loss, net
(10.3
)
 
(6.4
)
Total stockholders' equity
339.9

 
335.4

Total liabilities and stockholders' equity
$
3,184.1

 
$
2,848.0

See accompanying notes to condensed consolidated financial statements.

1


INTL FCStone Inc.
Condensed Consolidated Income Statements
(Unaudited)
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(in millions, except share and per share amounts)
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Sales of physical commodities
$
6,886.6

 
$
9,540.5

 
$
23,017.2

 
$
33,215.7

Trading gains, net
61.6

 
60.2

 
178.0

 
186.5

Commission and clearing fees
44.5

 
46.8

 
134.0

 
130.2

Consulting and management fees
10.1

 
9.4

 
31.6

 
25.4

Interest income
2.1

 
2.1

 
5.4

 
7.7

Other income
0.2

 
0.1

 
0.5

 
0.4

Total revenues
7,005.1

 
9,659.1

 
23,366.7

 
33,565.9

Cost of sales of physical commodities
6,886.9

 
9,536.1

 
23,006.4

 
33,209.6

Operating revenues
118.2

 
123.0

 
360.3

 
356.3

Transaction-based clearing expenses
28.1

 
28.9

 
81.0

 
82.1

Introducing broker commissions
11.6

 
11.0

 
36.0

 
29.0

Interest expense
2.5

 
1.8

 
8.0

 
5.5

Net operating revenues
76.0

 
81.3

 
235.3

 
239.7

Compensation and other expenses:
 
 
 
 
 
 
 
Compensation and benefits
49.2

 
51.6

 
148.2

 
148.6

Communication and data services
6.6

 
5.9

 
19.0

 
16.9

Occupancy and equipment rental
2.9

 
2.9

 
9.1

 
9.0

Professional fees
3.5

 
2.9

 
11.9

 
9.7

Travel and business development
2.6

 
2.6

 
7.4

 
7.6

Depreciation and amortization
1.9

 
2.0

 
5.5

 
6.1

Bad debts and impairments
0.1

 
0.1

 
0.8

 
0.2

Other
5.2

 
6.2

 
15.2

 
18.8

Total compensation and other expenses
72.0

 
74.2

 
217.1

 
216.9

Income from continuing operations, before tax
4.0

 
7.1

 
18.2

 
22.8

Income tax expense
0.3

 
2.0

 
4.4

 
5.9

Net income from continuing operations
3.7

 
5.1

 
13.8

 
16.9

(Loss) income from discontinued operations, net of tax
(0.2
)
 
(1.8
)
 
(0.3
)
 
1.2

Net income
$
3.5

 
$
3.3

 
$
13.5

 
$
18.1

Basic earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.20

 
$
0.26

 
$
0.73

 
$
0.88

(Loss) income from discontinued operations
(0.01
)
 
(0.08
)
 
(0.02
)
 
0.08

Net income per common share
$
0.19

 
$
0.18

 
$
0.71

 
$
0.96

Diluted earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.19

 
$
0.25

 
$
0.71

 
$
0.86

(Loss) income from discontinued operations
(0.01
)
 
(0.08
)
 
(0.02
)
 
0.07

Net income per common share
$
0.18

 
$
0.17

 
$
0.69

 
$
0.93

Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
18,443,256

 
18,480,644

 
18,560,080

 
18,377,965

Diluted
18,933,826

 
18,864,040

 
19,170,138

 
18,862,872

See accompanying notes to condensed consolidated financial statements.

2


INTL FCStone Inc.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(in millions)
2014
 
2013
 
2014
 
2013
Net income
$
3.5

 
$
3.3

 
$
13.5

 
$
18.1

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(0.1
)
 
(0.5
)
 
(4.0
)
 
(1.1
)
Pension liabilities adjustment

 

 
0.2

 
0.4

Net unrealized gain or loss on available-for-sale securities
(0.1
)
 
0.5

 
(0.1
)
 
0.7

Reclassification of adjustment for gains included in net income:


 


 


 


Foreign currency translation adjustment (included in other income)

 

 

 
(0.1
)
Realized gain on available-for-sale securities (included in trading gains, net)

 

 

 
(8.3
)
Income tax expense from reclassification adjustments (included in income tax expense)

 

 

 
2.0

Reclassification adjustment for gains included in net income:

 

 

 
(6.4
)
Other comprehensive loss
(0.2
)
 

 
(3.9
)
 
(6.4
)
Comprehensive income
$
3.3

 
$
3.3

 
$
9.6

 
$
11.7

 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.

3


INTL FCStone Inc.
Condensed Consolidated Cash Flows Statements
(Unaudited)
 
Nine Months Ended June 30,
(in millions)
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
13.5

 
$
18.1

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
5.4

 
6.1

Provision for bad debts and impairments
0.8

 
0.2

Deferred income taxes
(3.6
)
 
(0.4
)
Amortization of debt issuance costs and debt discount
0.8

 
0.9

Amortization of share-based compensation
3.2

 
5.3

Loss on sale of property and equipment
0.3

 

Gain on sale of exchange memberships and common stock

 
(9.1
)
Changes in operating assets and liabilities, net:
 
 
 
Cash, securities and other assets segregated under federal and other regulations
29.5

 
62.1

Deposits and receivables from exchange-clearing organizations
(287.7
)
 
(36.8
)
Deposits and receivables from broker-dealers, clearing organizations, and counterparties
11.0

 
(32.2
)
Receivable from customers, net
(38.6
)
 
(101.1
)
Notes receivable, net
(20.6
)
 
70.3

Income taxes receivable
1.8

 
(3.1
)
Financial instruments owned, at fair value
(104.0
)
 
(10.2
)
Physical commodities inventory
7.0

 
73.1

Other assets
(5.5
)
 
(0.5
)
Accounts payable and other accrued liabilities
(6.5
)
 
1.1

Payable to customers
249.8

 
27.6

Payable to broker-dealers, clearing organizations and counterparties
(14.0
)
 
(17.6
)
Income taxes payable
4.4

 
2.0

Financial instruments sold, not yet purchased, at fair value
92.5

 
7.6

Net cash (used in) provided by operating activities
(60.5
)
 
63.4

Cash flows from investing activities:
 
 
 
Sale of exchange memberships and common stock

 
10.2

Purchase of property and equipment
(4.1
)
 
(3.9
)
Net cash (used in) provided by investing activities
(4.1
)
 
6.3

Cash flows from financing activities:
 
 
 
Net change in payable to lenders under loans
18.0

 
(72.6
)
Payments related to earn-outs on acquisitions
(1.5
)
 
(3.4
)
Debt issuance costs
(0.3
)
 
(0.4
)
Exercise of stock options
1.4

 
0.7

Share repurchases
(9.7
)
 
(2.2
)
Income tax expense on stock options and awards

 
(0.3
)
Net cash provided by (used in) financing activities
7.9

 
(78.2
)
Effect of exchange rates on cash and cash equivalents
(1.7
)
 
(0.3
)
Net decrease in cash and cash equivalents
(58.4
)
 
(8.8
)
Cash and cash equivalents at beginning of period
156.1

 
228.1

Cash and cash equivalents at end of period
$
97.7

 
$
219.3

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
7.4

 
$
7.2

Income taxes paid, net of cash refunds
$
1.0

 
$
8.3

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Identified intangible assets and goodwill on acquisitions
$
0.5

 
$
3.1

Additional consideration payable related to acquisitions, net
$
0.6

 
$
4.7

See accompanying notes to condensed consolidated financial statements.

4


INTL FCStone Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(in millions)
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Balances as of September 30, 2013
$
0.2

 
$
(7.8
)
 
$
224.0

 
$
125.4

 
$
(6.4
)
 
$
335.4

Net income
 
 
 
 
 
 
13.5

 
 
 
13.5

Other comprehensive loss
 
 
 
 
 
 
 
 
(3.9
)
 
(3.9
)
Exercise of stock options
 
 
 
 
1.4

 
 
 
 
 
1.4

Share-based compensation
 
 
 
 
3.2

 
 
 
 
 
3.2

Repurchase of stock
 
 
(9.7
)
 
 
 
 
 
 
 
(9.7
)
Balances as of June 30, 2014
$
0.2

 
$
(17.5
)
 
$
228.6

 
$
138.9

 
$
(10.3
)
 
$
339.9

See accompanying notes to condensed consolidated financial statements.

5


INTL FCStone Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1Basis of Presentation and Consolidation and Recently Issued Accounting Standards
INTL FCStone Inc., a Delaware corporation, and its consolidated subsidiaries (collectively “INTL” or “the Company”), form a diversified, global financial services organization providing financial products and advisory and execution services to help clients access market liquidity, maximize profits and manage risk. 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; the sale of structured over-the-counter (“OTC”) products in a wide range of commodities; physical trading and hedging of precious metals and select other commodities; trading of more than 150 foreign currencies; market-making in international equities; debt origination and asset management.
The Company provides these services to a diverse group of more than 20,000 accounts, representing approximately 11,000 consolidated clients 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, 2013, 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, 2013 filed with the SEC.
These condensed consolidated financial statements include the accounts of INTL FCStone Inc. and all other entities in which the Company has a controlling financial interest. All material intercompany transactions and balances have been eliminated in consolidation.
The Company’s fiscal year end is September 30, and the fiscal quarters end on December 31, March 31, June 30 and September 30. Unless otherwise stated, all dates refer to fiscal years and fiscal interim periods.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant of these estimates and assumptions relate to fair value measurements for financial instruments and investments, revenue recognition, the provision for potential losses from bad debts, valuation of inventories, valuation of goodwill and intangible assets, self-insurance liabilities, incomes taxes and contingencies. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
Immaterial Correction of an Error in Previously Reported Condensed Consolidated Financial Statements
In connection with the preparation of the consolidated financial statements for the fiscal year ended September 30, 2013, the Company identified errors in the reconciliation of the Company’s subsidiary INTL FCStone Markets, LLC’s accounting records to its back office system. The Company has made an immaterial correction relating to the reconciliation errors for the three and nine months ended June 30, 2013 resulting in an increase in total and operating revenues of $0.7 million, a decrease in compensation and other expenses of $0.1 million, and an aggregate increase in net income of $0.5 million.

6


The prior period condensed consolidated income statements have also been revised to reflect the immaterial correction of certain intercompany physical sales which were not correctly eliminated from the condensed consolidated income statements, resulting in a gross-up of sales of physical commodities and cost of sales of physical commodities. The impact of the correction of this error, before reclassifications for discontinued operations, was a decrease in total revenues of $1,043.6 million from $11,039.5 million to $9,995.9 million and a decrease in cost of sales of physical commodities of $1,043.6 million from $10,917.4 million to $9,873.8 million for the three months ended June 30, 2013 and a decrease in total revenues of $2,134.9 million from $36,872.1 million to $34,737.2 million and a decrease in cost of sales of physical commodities of $2,134.9 million from $36,507.0 million to $34,372.1 million for the nine months ended June 30, 2013. These immaterial corrections did not impact operating revenues or net income.
See discussion of total revenues and cost of sales of physical commodities from discontinued operations in Note 18Discontinued Operations.
Reclassifications
Certain amounts previously reported in the condensed consolidated income statements have been reclassified to conform to the current period presentation. The reclassifications were made to change the income statement presentation to provide the users of the financial statements additional information related to the operating results of the Company. These reclassifications include presenting transaction-based clearing expenses and introducing broker commissions separately from compensation and other expenses, and as components along with interest expense in arriving at net operating revenues. Additionally, travel and business development expenses were previously included in ‘other’ expense. The reclassifications had no effect on consolidated operating revenues or net income.
For all periods and amounts presented, reclassifications have been made for discontinued operations. See Note 18Discontinued Operations.
Beginning with the Company’s report on Form 10-Q for the three months ended March 31, 2014 filed with the SEC, the Company reorganized its reportable segments. All segment information has been revised to reflect the business reorganization for all periods and amounts presented. See Note 19Segment Analysis.
Recent Accounting Pronouncements
On December 16, 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance on the disclosures about offsetting assets and liabilities. The amended guidance limits the scope of balance sheet offsetting to derivatives, repurchase agreements and securities lending transactions to the extent that they are offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. While the FASB retained the existing offsetting models under U.S. GAAP, the new standard requires disclosures to allow investors to better compare and understand significant quantitative differences in financial statements prepared under U.S. GAAP. The new standard is effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective application is required. This guidance is effective for the Company’s fiscal year beginning October 1, 2013. The Company adopted this guidance starting with the first quarter ended December 31, 2013. The adoption of this guidance did not have a material impact on the Company’s disclosures within the notes to its condensed consolidated financial statements. Refer to Note 4 and Note 10 of the notes to the condensed consolidated financial statements for disclosure of assets and liabilities regarding the Company's derivative instruments and repurchase agreements.
In February 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income requiring new disclosures regarding reclassification adjustments from accumulated other comprehensive income (“AOCI”). ASU No. 2013-02 requires disclosure of amounts reclassified out of AOCI by component. In addition, the entity is required to present, either on the face of the statement where net income is presented or the notes, significant amounts reclassified out of AOCI by the respective line items of net income. The Company adopted this guidance starting with the first quarter ended December 31, 2013. The adoption of this guidance did not have a material impact on the presentation of the Company’s condensed consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, which addresses the accounting for the cumulative translation adjustment when a parent either sells part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. For public entities, the ASU is effective prospectively for fiscal years, and interim periods, within those years, beginning after December 15, 2013. Early adoption is permitted. The Company expects to adopt this guidance starting with the first quarter of fiscal year 2015. The adoption of this guidance is not expected to have a material impact on the Company’s condensed consolidated financial statements.

7


In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. For public entities, the ASU is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company expects to adopt this guidance starting with the first quarter of fiscal year 2015. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s condensed consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements: Reporting Discontinued Operations, which updated guidance on reporting discontinued operations and disclosures of disposals of components of an entity. Under the amendment only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations in the financial statements. Next, the elimination of the component's operations, cash flows and significant continuing involvement conditions have been removed. Lastly, an equity method investment could be reported as discontinued operations. The updated guidance is effective prospectively for all disposals or classifications as held for sale that occur within annual periods beginning after December 15, 2014. The Company expects to adopt this guidance starting with the first quarter of fiscal year 2016. The Company does not expect the adoption of this guidance to have a material impact on the condensed consolidated financial statements.
On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. For public entities, the ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early application is not permitted. The Company expects to adopt this guidance starting with the first quarter of fiscal year 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its condensed consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, which changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. Additionally, for repurchase financing arrangements, the amendments of this ASU require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which will result in secured borrowing accounting for the repurchase agreement. For public entities, the ASU is effective for the first interim or annual period beginning after December 15, 2014. Earlier application is not permitted. The Company expects to adopt this guidance starting with the second quarter of fiscal year 2015. The Company does not expect the adoption of this guidance to have a material impact on the condensed consolidated financial statements.
Note 2Earnings per Share
The Company presents basic and diluted earnings per share (“EPS”) using the two-class method which requires all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends and therefore participate in undistributed earnings with common stockholders be included in computing earnings per share. Under the two-class method, net earnings are reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed earnings are then allocated to common stock and participating securities, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees and directors and shares held in trust for the Provident Group acquisition contain non-forfeitable rights to dividends at the same rate as common stock, and are considered participating securities.

8


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.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(in millions, except share amounts)
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
3.7

 
$
5.1

 
$
13.8

 
$
16.9

Less: Allocation to participating securities
(0.1
)
 
(0.2
)
 
(0.4
)
 
(0.7
)
Income from continuing operations allocated to common stockholders
$
3.6

 
$
4.9

 
$
13.4

 
$
16.2

(Loss) income from discontinued operations
$
(0.2
)
 
$
(1.8
)
 
$
(0.3
)
 
$
1.2

Less: Allocation to participating securities

 
0.1

 

 

(Loss) income from discontinued operations allocated to common stockholders
$
(0.2
)
 
$
(1.7
)
 
$
(0.3
)
 
$
1.2

Diluted net income
$
3.5

 
$
3.3

 
$
13.5

 
$
18.1

Less: Allocation to participating securities
(0.1
)
 
(0.1
)
 
(0.4
)
 
(0.7
)
Diluted net income allocated to common stockholders
$
3.4

 
$
3.2

 
$
13.1

 
$
17.4

Denominator:
 
 
 
 
 
 
 
Weighted average number of:
 
 
 
 
 
 
 
Common shares outstanding
18,443,256


18,480,644

 
18,560,080

 
18,377,965

Dilutive potential common shares outstanding:
 
 
 
 

 

Share-based awards
490,570

 
383,396

 
610,058

 
484,907

Diluted weighted-average shares
18,933,826

 
18,864,040

 
19,170,138

 
18,862,872

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 Accounting Standards Codification (“ASC”).
Options to purchase 1,127,133 and 1,488,235 shares of common stock for the three months ended June 30, 2014 and 2013, respectively, and options to purchase 1,125,467 and 1,488,121 shares of common stock for the nine months ended June 30, 2014 and 2013, respectively, were excluded from the calculation of diluted earnings per share because they would have been anti-dilutive.
Note 3Assets and Liabilities, at Fair Value
The Company’s financial and nonfinancial assets and liabilities reported at fair value are included in the following captions on the condensed consolidated balance sheets:
Cash and cash equivalents
Cash, securities and other assets segregated under federal and other regulations
Deposits and receivables from exchange-clearing organizations, broker-dealers, clearing organizations and counterparties
Financial instruments owned
Accounts payable and other accrued liabilities
Payables to customers
Payables to broker-dealers, clearing organizations and counterparties
Financial instruments sold, not yet purchased






9


Fair Value Hierarchy
The majority of financial assets and liabilities on the consolidated balance sheets are reported at fair value. Cash is reported at the balance held at financial institutions. Cash equivalents includes money market funds, which are valued at period-end at the net asset value provided by the fund’s administrator, and certificates of deposit, which are stated at cost plus accrued interest, which approximates fair value. Cash, securities and other assets segregated under federal and other regulations include the value of cash collateral as well as the value of other pledged investments, primarily U.S. Treasury bills and obligations issued by government sponsored entities and commodities warehouse receipts. Deposits with and receivables from exchange-clearing organizations and broker-dealers, clearing organizations and counterparties and payable to customers and broker-dealers, clearing organizations and counterparties include the value of cash collateral as well as the value of money market funds and other pledged investments, primarily U.S. Treasury bills and obligations issued by government sponsored entities and mortgage-backed securities. These balances also include the fair value of exchange-traded futures and options-on-futures and exchange-cleared swaps and options determined by prices on the applicable exchange. Financial instruments owned and sold, not yet purchased include the value of U.S. and foreign government obligations, corporate debt securities, derivative financial instruments, commodities and mutual 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. The carrying value of receivables from customers, net and notes receivable, net approximates fair value, given their short duration. Payables to lenders under loans carry variable rates of interest and thus approximate fair value. The fair value of the Company’s senior unsecured notes is estimated to be $47.1 million (carrying value of $45.5 million) as of June 30, 2014, based on the transaction prices at public exchanges for the same or similar issues.
The fair value estimates presented in the condensed consolidated financial statements are based on pertinent information available to management as of June 30, 2014 and September 30, 2013. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these condensed consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented in the condensed consolidated financial statements.
Cash equivalents, securities, commodities warehouse receipts, derivative financial instruments, commodities leases, exchange common stock and contingent liabilities are carried at fair value, on a recurring basis, and are classified and disclosed into three levels in the fair value hierarchy. The Company did not have any fair value adjustments for assets or liabilities measured at fair value on a non-recurring basis during the nine months ended June 30, 2014. 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 for identical or similar assets or liabilities in markets that are less active, that is, markets in which there are few transactions for the asset or liability that are observable for substantially the full term; and
Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

10


The following tables set forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis, as of June 30, 2014 and September 30, 2013 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 June 30, 2014 and September 30, 2013.
 
June 30, 2014
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Unrestricted cash equivalents - certificate of deposits
$
1.8

 
$

 
$

 
$

 
$
1.8

Commodities warehouse receipts
19.4

 

 

 

 
19.4

U.S. government obligations

 
10.5

 

 

 
10.5

Securities and other assets segregated under federal and other regulations
19.4

 
10.5

 

 

 
29.9

Money market funds
526.9

 

 

 

 
526.9

U.S. government obligations

 
812.1

 

 

 
812.1

Mortgage-backed securities

 
3.1

 

 

 
3.1

Derivatives
2,517.3

 

 

 
(2,617.1
)
 
(99.8
)
Deposits and receivables from exchange-clearing organizations
3,044.2

 
815.2

 

 
(2,617.1
)
 
1,242.3

Deposits and receivables from broker-dealers, clearing organizations and counterparties - derivatives
0.4

 
0.6

 

 
(9.1
)
 
(8.1
)
Common and preferred stock and American Depositary Receipts (“ADRs”)
91.2

 
4.3

 
0.7

 

 
96.2

Exchangeable foreign ordinary equities and ADRs
24.0

 

 

 

 
24.0

Corporate and municipal bonds
2.8

 
3.9

 
3.4

 

 
10.1

U.S. government obligations

 
0.3

 

 

 
0.3

Foreign government obligations
2.5

 

 

 

 
2.5

Derivatives
232.6

 
553.0

 

 
(765.4
)
 
20.2

Commodities leases

 
111.9

 

 
(54.2
)
 
57.7

Commodities warehouse receipts
38.3

 

 

 

 
38.3

Exchange firm common stock
4.3

 

 

 

 
4.3

Mutual funds and other
3.8

 

 

 

 
3.8

Mortgage-backed securities

 
1.3

 

 

 
1.3

Financial instruments owned
399.5

 
674.7

 
4.1

 
(819.6
)
 
258.7

Total assets at fair value
$
3,465.3

 
$
1,501.0

 
$
4.1

 
$
(3,445.8
)
 
$
1,524.6

Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and other accrued liabilities - contingent liabilities
$

 
$

 
$
8.0

 
$

 
$
8.0

Payable to customers - derivatives
2,405.5

 
8.8

 

 
(2,414.3
)
 

Common and preferred stock and ADRs
124.1

 
3.6

 

 

 
127.7

Exchangeable foreign ordinary equities and ADRs
9.8

 

 

 

 
9.8

Corporate and municipal bonds

 

 

 

 

Derivatives
238.9

 
539.3

 

 
(720.7
)
 
57.5

Commodities leases

 
133.6

 

 
(56.1
)
 
77.5

Financial instruments sold, not yet purchased
372.8

 
676.5

 

 
(776.8
)
 
272.5

Total liabilities at fair value
$
2,778.3

 
$
685.3

 
$
8.0

 
$
(3,191.1
)
 
$
280.5

 
(1)
Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.

11


 
September 30, 2013
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Money market funds
$
0.1

 
$

 
$

 
$

 
$
0.1

Certificate of deposits
2.9

 

 

 

 
2.9

Unrestricted cash equivalents
3.0

 

 

 

 
3.0

Money market funds
75.0

 

 

 

 
75.0

Commodities warehouse receipts
13.1

 

 

 

 
13.1

U.S. government obligations

 
19.5

 

 

 
19.5

Securities and other assets segregated under federal and other regulations
88.1

 
19.5

 

 

 
107.6

Money market funds
841.4

 

 

 

 
841.4

U.S. government obligations

 
594.8

 

 

 
594.8

Mortgage-backed securities

 
5.3

 

 

 
5.3

Derivatives
2,263.2

 

 

 
(2,333.0
)
 
(69.8
)
Deposits and receivables from exchange-clearing organizations
3,104.6

 
600.1

 

 
(2,333.0
)
 
1,371.7

Deposits and receivables from broker-dealers, clearing organizations and counterparties - derivatives
1.8

 
0.2

 

 
(15.1
)
 
(13.1
)
Common and preferred stock and American Depositary Receipts (“ADRs”)
49.3

 
19.8

 
0.7

 

 
69.8

Exchangeable foreign ordinary equities and ADRs
36.7

 

 

 

 
36.7

Corporate and municipal bonds
0.1

 

 
3.5

 

 
3.6

U.S. government obligations

 
0.3

 

 

 
0.3

Foreign government obligations
7.7

 

 

 

 
7.7

Derivatives
173.6

 
440.6

 

 
(592.3
)
 
21.9

Commodities leases

 
56.1

 

 
(50.0
)
 
6.1

Commodities warehouse receipts
4.0

 

 

 

 
4.0

Exchange firm common stock
4.4

 

 

 

 
4.4

Mutual funds and other
4.0

 

 

 

 
4.0

Financial instruments owned
279.8

 
516.8

 
4.2

 
(642.3
)
 
158.5

Total assets at fair value
$
3,477.3

 
$
1,136.6

 
$
4.2

 
$
(2,990.4
)
 
$
1,627.7

Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and other accrued liabilities - contingent liabilities
$

 
$

 
$
9.6

 
$

 
$
9.6

Payable to customers - derivatives
2,328.2

 

 

 
(2,328.2
)
 

Common and preferred stock and ADRs
82.9

 
16.6

 

 

 
99.5

Exchangeable foreign ordinary equities and ADRs
8.7

 

 

 

 
8.7

Derivatives
174.0

 
473.2

 

 
(616.5
)
 
30.7

Commodities leases

 
85.5

 

 
(44.5
)
 
41.0

Financial instruments sold, not yet purchased
265.6

 
575.3

 

 
(661.0
)
 
179.9

Total liabilities at fair value
$
2,593.8

 
$
575.3

 
$
9.6

 
$
(2,989.2
)
 
$
189.5

(1)
Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.
Realized and unrealized gains and losses are included in ‘trading gains, net’ in the condensed consolidated income statements.

12


Information on Level 3 Financial Assets and Liabilities
The Company’s financial assets at fair value classified in level 3 of the fair value hierarchy as of June 30, 2014 and September 30, 2013 are summarized below:
(in millions)
June 30, 2014
 
September 30, 2013
Total level 3 assets
$
4.1

 
$
4.2

Level 3 assets for which the Company bears economic exposure
$
4.1

 
$
4.2

Total assets
$
3,184.1

 
$
2,848.0

Total financial assets at fair value
$
1,524.6

 
$
1,627.7

Total level 3 assets as a percentage of total assets
0.1
%
 
0.1
%
Level 3 assets for which the Company bears economic exposure as a percentage of total assets
0.1
%
 
0.1
%
Total level 3 assets as a percentage of total financial assets at fair value
0.3
%
 
0.3
%
The following tables set forth a summary of changes in the fair value of the Company’s level 3 financial assets and liabilities during the three and nine months ended June 30, 2014 and 2013, including a summary of unrealized gains (losses) during the respective periods on the Company’s level 3 financial assets and liabilities still held as of June 30, 2014.
 
Level 3 Financial Assets and Financial Liabilities
For the Three Months Ended June 30, 2014
 
 
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Purchases/issuances
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
0.7

 
$

 
$

 
$

 
$

 
$

 
$
0.7

Corporate and municipal bonds
3.4

 

 

 

 

 

 
3.4

 
$
4.1

 
$

 
$

 
$

 
$

 
$

 
$
4.1

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
9.2

 
$

 
$
(0.2
)
 
$
0.5

 
$
(1.5
)
 
$

 
$
8.0

 
Level 3 Financial Assets and Financial Liabilities
For the Nine Months Ended June 30, 2014
 
 
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Purchases/issuances
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
0.7

 
$

 
$

 
$

 
$

 
$

 
$
0.7

Corporate and municipal bonds
3.5

 

 
(0.1
)
 

 

 

 
3.4

 
$
4.2

 
$

 
$
(0.1
)
 
$

 
$

 
$

 
$
4.1

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
9.6

 
$

 
$
0.1

 
$
0.5

 
$
(2.2
)
 
$

 
$
8.0

 
Level 3 Financial Assets and Financial Liabilities
For the Three Months Ended June 30, 2013
 
 
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Purchases/issuances
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
0.9

 
$

 
$
(0.1
)
 
$

 
$

 
$

 
$
0.8

Corporate and municipal bonds
3.8

 

 
(0.2
)
 

 

 

 
3.6

 
$
4.7

 
$

 
$
(0.3
)
 
$

 
$

 
$

 
$
4.4

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
18.4

 
$

 
$
0.8

 
$

 
$
(3.1
)
 
$

 
$
16.1


13


 
Level 3 Financial Assets and Financial Liabilities
For the Nine Months Ended June 30, 2013
 
 
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Purchases/issuances
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
0.9

 
$

 
$
(0.1
)
 
$

 
$

 
$

 
$
0.8

Corporate and municipal bonds
3.6

 

 

 

 

 

 
3.6

 
$
4.5

 
$

 
$
(0.1
)
 
$

 
$

 
$

 
$
4.4

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
14.8

 
$

 
$
1.6

 
$
3.1

 
$
(3.4
)
 
$

 
$
16.1

In accordance with the Fair Value Measurements Topic of the ASC, the Company has estimated on a recurring basis each period the fair value of debentures issued by a single asset owning company of Suriwongse Hotel located in Chiang Mai, Thailand. As of June 30, 2014, the Company’s investment in the hotel is $3.4 million, and included within the corporate and municipal bonds classification in the level 3 financial assets and financial liabilities tables. 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. The Company estimates the fair value of its investment in these debentures by using a management-developed forecast, which is based on the income approach. The Company continues to monitor the hotel renovation process and evaluate the fair value of the debentures. There has been no significant change in the fair value of the debentures, and no additional loss has been recognized during the three and nine months ended June 30, 2014 and 2013.
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 liabilities for the contingent earnout arrangements within level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which include projected cash flows. The estimated fair value of the contingent purchase consideration is based upon management-developed forecasts, a level 3 input in the fair value hierarchy. These cash flows are discounted employing present value techniques in arriving at fair value. The discount rate was developed using market participant company data and there have been no significant changes in the discount rate environment. From the dates of acquisition to June 30, 2014, certain acquisitions have had changes in the estimates of undiscounted cash flows, based on actual performances fluctuating from estimates. The fair value of the contingent consideration decreased $0.2 million and increased $0.8 million during the three months ended June 30, 2014 and 2013, respectively, and increased $0.1 million and $1.6 million during the nine months ended June 30, 2014 and 2013, respectively, with the corresponding amount classified as ‘other expense’ in the condensed consolidated income statements.
The Company reports transfers in and out of levels 1, 2 and 3, as applicable, using the fair value of the securities as of the beginning of the reporting period in which the transfer occurred. The Company did not have any transfers between level 1 and level 2 fair value measurements during the three and nine months ended June 30, 2014.
The Company has also classified equity investments in exchange firms’ common stock not pledged for clearing purposes as available-for-sale. The investments are recorded at fair value, with unrealized gains and losses recorded, net of taxes, as a component of other comprehensive income (“OCI”) until realized. As of June 30, 2014, the cost and fair value of all the equity investments in exchange firms was $3.7 million and $4.3 million, respectively. As of September 30, 2013, the cost and fair value of the equity investments in exchange firms was $3.7 million and $4.4 million, respectively.
In June 2012, the board of LME Holdings Limited (“LME Holdings”), the parent company of The London Metal Exchange (“LME”), entered into a framework agreement regarding the terms of a recommended cash offer for the entire issued and outstanding ordinary share capital of LME Holdings. In July 2012, the shareholders of LME Holdings approved the sale of LME Holdings to the Hong Kong Exchanges & Clearing Limited. In December 2012, the Company received proceeds of $8.6 million from the sale of its shares in the LME. The shares of the LME were previously held by the Company as available-for-sale and the unrealized gain for those shares was reflected in OCI. For the nine months ended June 30, 2013, the Company reclassified the unrealized gain remaining in AOCI of approximately $6.3 million, net of income tax expense of $2.0 million, into earnings.

14


In December 2012, the Company sold its exchange membership seats in the Board of Trade of Kansas City, Missouri, Inc. (“KCBT”), in connection with the acquisition of the KCBT by Chicago Mercantile Exchange (“CME”). The Company was required to hold these exchange membership seats for clearing purposes and, as a result, the associated KCBT shares were being held at cost on the condensed consolidated balance sheet. The Company received proceeds of $1.5 million and recognized a gain of $0.9 million before taxes, during the nine months ended June 30, 2013, in connection with the sale of these seats.
The Company recorded unrealized gains of $0.5 million, net of income tax expense of $0.3 million as of June 30, 2014, and unrealized gains of $0.5 million, net of income tax expense of $0.3 million as of September 30, 2013, in OCI related to U.S. government obligations, mortgage-backed securities and the remaining equity investments in exchange firms classified as available-for-sale securities.
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 as of June 30, 2014 and September 30, 2013:
June 30, 2014
Amounts included in deposits with and receivables from exchange-clearing organizations and financial instruments owned:
 
Amortized
Cost
 
Unrealized Holding
 
Estimated
Fair Value
(in millions)
Gains
 
(Losses)
 
U.S. government obligations
$
793.1

 
$
0.1

 
$

 
$
793.2

Mortgage-backed securities
4.3

 
0.1

 

 
4.4

 
$
797.4

 
$
0.2

 
$

 
$
797.6

 
September 30, 2013
Amounts included in deposits with and receivables from exchange-clearing organizations:
 
Amortized
Cost
 
Unrealized Holding(1)
 
Estimated
Fair Value
(in millions)
Gains
 
(Losses)
 
U.S. government obligations
$
568.5

 
$

 
$

 
$
568.5

Mortgage-backed securities
5.2

 
0.1

 

 
5.3

 
$
573.7

 
$
0.1

 
$

 
$
573.8

(1) Unrealized gain/loss on U.S. government obligations as of September 30, 2013, was less than $0.1 million.
As of June 30, 2014 and September 30, 2013, investments in debt securities classified as available-for-sale (“AFS”) mature as follows:
June 30, 2014
 
Due in
 
Estimated
Fair Value
(in millions)
Less than 1 year
 
1 year or more
 
U.S. government obligations
$
593.2

 
$
200.0

 
$
793.2

Mortgage-backed securities

 
4.4

 
4.4

 
$
593.2

 
$
204.4

 
$
797.6

September 30, 2013
 
Due in
 
Estimated
Fair Value
(in millions)
Less than 1 year
 
1 year or more
 
U.S. government obligations
$
568.5

 
$

 
$
568.5

Mortgage-backed securities

 
5.3

 
5.3

 
$
568.5

 
$
5.3

 
$
573.8

Except as discussed previously, there were no other sales of AFS securities during the three months ended June 30, 2014 and 2013, and as a result, no realized gains or losses were recorded for the three months ended June 30, 2014 and 2013.
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.

15



Note 4Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk
The Company is party to certain financial instruments with off-balance sheet risk in the normal course of its business. The Company has sold financial instruments that it does not currently own and will therefore be obliged to purchase such financial instruments at a future date. The Company has recorded these obligations in the condensed consolidated financial statements as of June 30, 2014 at the fair values of the related financial instruments. The Company will incur losses if the fair value of the underlying financial instruments increases subsequent to June 30, 2014. The total of $272.5 million as of June 30, 2014 includes $57.5 million for derivative contracts, which represents a liability to the Company based on their fair values as of June 30, 2014.
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 in the consolidated balance sheets in ‘financial instruments owned, at fair value’, ‘deposits and receivables from exchange-clearing organizations’ and ‘financial instruments sold, not yet purchased, at fair value’.
Listed below are the fair values of the Company’s derivative assets and liabilities as of June 30, 2014 and September 30, 2013. Assets represent net unrealized gains and liabilities represent net unrealized losses.
 
June 30, 2014
 
September 30, 2013
(in millions)
Assets (1)
 
Liabilities (1)
 
Assets (1)
 
Liabilities (1)
Derivative contracts not accounted for as hedges:
 
 
 
 
 
 
 
Exchange-traded commodity derivatives
$
2,380.3

 
$
2,220.7

 
$
2,036.6

 
$
2,046.3

OTC commodity derivatives
546.2

 
553.8

 
481.4

 
484.9

Exchange-traded foreign exchange derivatives
70.7

 
84.0

 
89.3

 
104.2

OTC foreign exchange derivatives
239.6

 
233.2

 
132.3

 
162.3

Exchange-traded interest rate derivatives
6.0

 
9.6

 
4.3

 
36.0

Equity index derivatives
61.1

 
91.2

 
135.5

 
141.7

Gross fair value of derivative contracts
3,303.9

 
3,192.5

 
2,879.4

 
2,975.4

Impact of netting and collateral
(3,391.6
)
 
(3,135.0
)
 
(2,940.4
)
 
(2,944.7
)
Total fair value included in ‘Deposits and receivables from exchange-clearing organizations’
$
(99.8
)
 
 
 
$
(69.8
)
 
 
Total fair value included in ‘Deposits and receivables from broker-dealers, clearing organizations and counterparties’
$
(8.1
)
 
 
 
$
(13.1
)
 
 
Total fair value included in ‘Financial instruments owned, at fair value’
$
20.2

 
 
 
$
21.9

 
 
Fair value included in ‘Financial instruments sold, not yet purchased, at fair value’
 
 
$
57.5

 
 
 
$
30.7

(1)
As of June 30, 2014 and September 30, 2013, the Company’s derivative contract volume for open positions were approximately 4.2 million and 4.1 million contracts, respectively.
The Company’s derivative contracts are principally held in its Commercial Hedging segment. The Company assists its Commercial Hedging segment customers in protecting the value of their future production by entering into option or forward agreements with them on an OTC basis. The Company also provides its Commercial Hedging segment customers with sophisticated option products, including combinations of buying and selling puts and calls. The Company mitigates its risk by offsetting the customer’s transaction simultaneously with one of the Company’s trading counterparties or with a similar but not identical 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.

16


The following table sets forth the Company’s gains (losses) related to derivative financial instruments for the three and nine months ended June 30, 2014 and 2013, in accordance with the Derivatives and Hedging Topic of the ASC. The gains (losses) set forth below are included in ‘trading gains, net’ and ‘income (loss) from discontinued operations, net of tax’ in the condensed consolidated income statements.
 
Three Months Ended June 30,
 
Nine Months Ended June 30,
(in millions)
2014
 
2013
 
2014
 
2013
Commodities
$
15.8

 
$
18.9

 
$
46.4

 
$
60.3

Foreign exchange
1.3

 
4.0

 
6.1

 
9.7

Interest rate

 

 

 
0.1

Net gains (losses) from derivative contracts
$
17.1

 
$
22.9

 
$
52.5

 
$
70.1

Credit Risk
In the normal course of business, the Company purchases and sells financial instruments, commodities and foreign currencies as either principal or agent on behalf of its customers. If either the customer or counterparty fails to perform, the Company may be required to discharge the obligations of the nonperforming party. In such circumstances, the Company may sustain a loss if the fair value of the financial instrument or foreign currency is different from the contract value of the transaction.
The majority of the Company’s transactions and, consequently, the concentration of its credit exposure are with commodity exchanges, customers, broker-dealers and other financial institutions. These activities primarily involve collateralized and uncollateralized arrangements and may result in credit exposure in the event that a counterparty fails to meet its contractual obligations. The Company’s exposure to credit risk can be directly impacted by volatile financial markets, which may impair the ability of counterparties to satisfy their contractual obligations. The Company seeks to control its credit risk through a variety of reporting and control procedures, including establishing credit limits based upon a review of the counterparties’ financial condition and credit ratings. The Company monitors collateral levels on a daily basis for compliance with regulatory and internal guidelines and requests changes in collateral levels as appropriate.
The Company is a party to financial instruments in the normal course of its business through customer and proprietary trading accounts in exchange-traded and OTC derivative instruments. These instruments are primarily the execution of orders for commodity futures, options on futures and forward foreign currency contracts on behalf of its customers, substantially all of which are transacted on a margin basis. Such transactions may expose the Company to significant credit risk in the event margin requirements are not sufficient to fully cover losses which customers may incur. The Company controls the risks associated with these transactions by requiring customers to maintain margin deposits in compliance with individual exchange regulations and internal guidelines. The Company monitors required margin levels daily and, therefore, may require customers to deposit additional collateral or reduce positions when necessary. The Company also establishes credit limits for customers, which are monitored daily. The Company evaluates each customer’s creditworthiness on a case by case basis. Clearing, financing, and settlement activities may require the Company to maintain funds with or pledge securities as collateral with other financial institutions. Generally, these exposures to both customers and exchanges are subject to master netting, or customer agreements, which reduce the exposure to the Company by permitting receivables and payables with such customers to be offset in the event of a customer default. Management believes that the margin deposits held as of June 30, 2014 and September 30, 2013 were adequate to minimize the risk of material loss that could be created by positions held at that time. Additionally, the Company monitors collateral fair value on a daily basis and adjusts collateral levels in the event of excess market exposure. Generally, these exposures to both customers and counterparties are subject to master netting or customer agreements which reduce the exposure to the Company.
Derivative financial instruments involve varying degrees of off-balance sheet market risk whereby changes in the fair values of underlying financial instruments may result in changes in the fair value of the financial instruments in excess of the amounts reflected in the condensed consolidated balance sheets. Exposure to market risk is influenced by a number of factors, including the relationships between the financial instruments and the Company’s positions, as well as the volatility and liquidity in the markets in which the financial instruments are traded. The principal risk components of financial instruments include, among other things, interest rate volatility, the duration of the underlying instruments and changes in foreign exchange rates. The Company attempts to manage its exposure to market risk through various techniques. Aggregate market limits have been established and market risk measures are routinely monitored against these limits.

17


Note 5Receivables From Customers, Net and Notes Receivable, Net
Receivables from customers, net and notes receivable, net include an allowance for bad debts, which reflects the Company’s 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 allowance for bad debts. The allowance for doubtful accounts related to receivables from customers was $1.1 million as of June 30, 2014 and September 30, 2013. The allowance for doubtful accounts related to notes receivable was $0.1 million as of June 30, 2014 and September 30, 2013.
During the three months ended June 30, 2014, the Company recorded bad debt expense of $0.1 million, including direct write-offs of $0.2 million partially offset by recoveries of $0.1 million. During the three months ended June 30, 2013, the Company recorded bad debt expense of $0.1 million. During the nine months ended June 30, 2014, the Company recorded bad debt expense of $0.8 million, including provision increases of $0.4 million and direct write-offs of $0.5 million partially offset by recoveries of $0.1 million. During the nine months ended June 30, 2013, the Company recorded bad debt expense of $0.2 million, representing provision decreases.
The Company originates short-term notes receivable from customers with the outstanding balances being insured 90% to 98% by a third party, including accrued interest. The total balance outstanding under insured notes receivable was $33.4 million and $21.1 million as of June 30, 2014 and September 30, 2013, respectively. The Company has sold $25.0 million and $18.7 million of the insured portion of the notes through non-recourse participation agreements with other third parties as of June 30, 2014 and September 30, 2013, respectively.
See discussion of notes receivable related to commodity repurchase agreements in Note 10.
Note 6Physical Commodities Inventory
Physical commodities inventories are stated at the lower of cost or market (“LCM”) using the weighted-average price and first-in first-out cost method. Cost includes finished commodity or raw material and processing costs related to the purchase and processing of inventories. Commodities in process include commodities in the process of being recycled.
The carrying values of the Company’s inventory as of June 30, 2014 and September 30, 2013 are shown below.
(in millions)
June 30,
2014
 
September 30, 2013
Commodities in process
$
0.9

 
$

Finished commodities
51.1

 
59.0

Physical commodities inventory
$
52.0