StoneX(SNEX) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the company's unaudited financial statements and management's analysis of financial performance and condition Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, statements of comprehensive income, cash flows, and stockholders' equity, along with detailed notes explaining the basis of presentation, accounting policies, and specific financial instrument disclosures Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific points in time | Metric | March 31, 2022 (in millions) | September 30, 2021 (in millions) | Change (in millions) | % Change | | :----------------------------------- | :----------------------------- | :------------------------------- | :------------------- | :------- | | Total Assets | $21,195.7 | $18,839.6 | $2,356.1 | 12.5% | | Total Liabilities | $20,190.1 | $17,935.6 | $2,254.5 | 12.6% | | Total Equity | $1,005.6 | $904.0 | $101.6 | 11.2% | - Cash and cash equivalents increased from $1,109.6 million at September 30, 2021, to $1,299.7 million at March 31, 2022[9] - Payables to clients increased significantly from $7,835.9 million at September 30, 2021, to $9,497.8 million at March 31, 2022[9] Condensed Consolidated Income Statements This section outlines the company's financial performance over specific periods, including revenues, expenses, and net income Three Months Ended March 31, | Metric | 2022 (in millions) | 2021 (in millions) | Change (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Total Revenues | $16,382.7 | $11,244.8 | $5,137.9 | 45.7% | | Operating Revenues | $544.7 | $471.4 | $73.3 | 15.5% | | Net Operating Revenues | $400.3 | $334.2 | $66.1 | 19.8% | | Net Income | $64.0 | $55.3 | $8.7 | 15.7% | | Basic EPS | $3.18 | $2.81 | $0.37 | 13.2% | | Diluted EPS | $3.11 | $2.73 | $0.38 | 13.9% | Six Months Ended March 31, | Metric | 2022 (in millions) | 2021 (in millions) | Change (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Total Revenues | $30,724.1 | $20,495.3 | $10,228.8 | 49.9% | | Operating Revenues | $995.2 | $851.5 | $143.7 | 16.9% | | Net Operating Revenues | $714.1 | $590.3 | $123.8 | 21.0% | | Net Income | $105.7 | $74.8 | $30.9 | 41.3% | | Basic EPS | $5.27 | $3.81 | $1.46 | 38.3% | | Diluted EPS | $5.15 | $3.71 | $1.44 | 38.8% | Condensed Consolidated Statements of Comprehensive Income This section details the company's comprehensive income, including net income and other comprehensive gains or losses Three Months Ended March 31, | Metric | 2022 (in millions) | 2021 (in millions) | Change (in millions) | | :----------------------------------- | :----------------- | :----------------- | :------------------- | | Net Income | $64.0 | $55.3 | $8.7 | | Other comprehensive (loss)/gain, net of tax | $(16.9) | $(1.6) | $(15.3) | | Comprehensive income | $47.1 | $53.7 | $(6.6) | - Cash flow hedges resulted in a $(18.1) million loss in other comprehensive income for the three months ended March 31, 2022, compared to zero in the prior year[13] Condensed Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities Six Months Ended March 31, | Metric | 2022 (in millions) | 2021 (in millions) | Change (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------------------- | :------- | | Net cash provided by operating activities | $2,102.0 | $665.0 | $1,437.0 | 216.1% | | Net cash used in investing activities | $(24.1) | $(40.4) | $16.3 | (40.3)% | | Net cash provided by financing activities | $222.2 | $46.4 | $175.8 | 378.9% | | Net increase in cash, segregated cash, cash equivalents, and segregated cash equivalents | $2,300.0 | $683.7 | $1,616.3 | 236.4% | | Cash, segregated cash, cash equivalents, and segregated cash equivalents at end of period | $8,809.5 | $5,152.1 | $3,657.4 | 71.0% | - The significant increase in operating cash flow was driven by changes in operating assets and liabilities, notably a $1,661.9 million increase in payables to clients and a $986.3 million increase in financial instruments sold, not yet purchased[17] Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's equity, including net income, other comprehensive income, and share transactions Six Months Ended March 31, | Metric | March 31, 2022 (in millions) | September 30, 2021 (in millions) | Change (in millions) | % Change | | :----------------------------------- | :----------------------------- | :------------------------------- | :------------------- | :------- | | Total Equity | $1,005.6 | $904.0 | $101.6 | 11.2% | | Retained Earnings | $788.2 | $682.5 | $105.7 | 15.5% | | Accumulated other comprehensive loss, net | $(43.4) | $(25.1) | $(18.3) | 72.9% | - Net income contributed $105.7 million to retained earnings for the six months ended March 31, 2022[23] - Accumulated other comprehensive loss increased by $18.3 million for the six months ended March 31, 2022, primarily due to cash flow hedges[23] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1 – Basis of Presentation and Consolidation and Accounting Standards Adopted This note describes the financial statement presentation, consolidation principles, and recently adopted accounting standards - StoneX Group Inc. operates a global financial services network, serving over 52,000 commercial, institutional, and global payments clients and over 370,000 active retail clients in more than 180 countries[24] - The company adopted ASU 2019-12 (Income Taxes) and ASU 2016-13 (CECL model) on October 1, 2021, and October 1, 2020, respectively. The CECL adoption resulted in a $6.2 million cumulative-effect adjustment to retained earnings[33][36] Note 2 – Earnings per Share This note provides the calculation and reconciliation of basic and diluted earnings per share EPS Reconciliation - Three Months Ended March 31 | Metric | 2022 | 2021 | | :----------------------------------- | :----- | :----- | | Net income allocated to common stockholders (in millions) | $62.2 | $53.6 | | Basic weighted-average common shares outstanding | 19,573,871 | 19,112,216 | | Diluted weighted-average common shares outstanding | 20,012,709 | 19,670,539 | - Options to purchase 468,763 shares (2022) and 212,892 shares (2021) were anti-dilutive and excluded from diluted EPS calculation for the three months ended March 31[43] Note 3 – Assets and Liabilities, at Fair Value This note details assets and liabilities measured at fair value, categorized by valuation input levels - The company had no Level 3 assets as of March 31, 2022, and September 30, 2021[52] - Total assets at fair value were $5,490.7 million as of March 31, 2022, with Level 1 inputs accounting for $12,217.7 million (before netting) and Level 2 for $5,235.5 million (before netting)[67] - Total liabilities at fair value were $2,289.2 million as of March 31, 2022, with Level 1 inputs accounting for $11,777.7 million (before netting) and Level 2 for $2,363.0 million (before netting)[67] Note 4 – Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk This note discusses the company's exposure to off-balance sheet risks and concentrations of credit risk from financial instruments - Total financial instruments sold, not yet purchased, increased from $1,771.2 million (Sept 30, 2021) to $2,781.8 million (March 31, 2022)[74] - The company uses interest rate swaps to hedge against variability in overnight rates, converting floating-rate interest income to fixed-rate. As of March 31, 2022, $1,000.0 million in notional value of interest rate swaps were outstanding[79][172] Net Gains from Derivative Contracts - Three Months Ended March 31 | Derivative Type | 2022 (in millions) | 2021 (in millions) | % Change | | :---------------------- | :----------------- | :----------------- | :------- | | Commodities | $135.2 | $59.0 | 129.2% | | Foreign exchange | $56.7 | $25.5 | 122.4% | | Interest rate, equities, and indices | $27.4 | $30.6 | (10.5)% | | TBA and forward settling securities | $94.1 | $8.6 | 994.2% | | Total Net Gains | $313.4 | $123.7 | 153.4% | Note 5 – Allowance for Doubtful Accounts This note details the activity and balances of the allowance for doubtful accounts related to client receivables Allowance for Doubtful Accounts Activity - Six Months Ended March 31, 2022 | Metric | Amount (in millions) | | :-------------------------- | :------------------- | | Balance as of September 30, 2021 | $39.8 | | Provision for bad debts | $10.6 | | Allowance charge-offs | $(0.4) | | Other | $0.8 | | Balance as of March 31, 2022 | $50.8 | - Allowance for doubtful accounts related to receivables from clients increased from $38.5 million (Sept 30, 2021) to $47.7 million (March 31, 2022)[89] Note 6 – Physical Commodities Inventory This note provides a breakdown and valuation methods for the company's physical commodities inventory Physical Commodities Inventory, Net | Commodity Type | March 31, 2022 (in millions) | September 30, 2021 (in millions) | | :----------------------------------- | :----------------------------- | :------------------------------- | | Physical Ag & Energy | $262.3 | $248.6 | | Precious metals - held by broker-dealer subsidiary | $100.1 | $111.2 | | Precious metals - held by non-broker-dealer subsidiaries | $185.0 | $87.7 | | Total Physical commodities inventory, net | $547.4 | $447.5 | - Physical Ag & Energy and precious metals held by non-broker-dealer subsidiaries are valued at net realizable value or lower of cost or net realizable value, while precious metals held by broker-dealer subsidiaries are at fair value[92] Note 7 – Goodwill This note presents the allocation of goodwill across the company's operating segments Goodwill by Segment | Segment | March 31, 2022 (in millions) | September 30, 2021 (in millions) | | :---------------- | :----------------------------- | :------------------------------- | | Commercial | $32.5 | $32.5 | | Institutional | $9.8 | $9.8 | | Retail | $5.8 | $5.8 | | Global Payments | $10.0 | $10.0 | | Total Goodwill | $58.1 | $58.1 | Note 8 – Intangible Assets This note details the company's intangible assets, including amortization schedules and related expenses Intangible Assets, Net | Intangible Asset Class | March 31, 2022 (in millions) | September 30, 2021 (in millions) | | :----------------------------------- | :----------------------------- | :------------------------------- | | Total intangible assets subject to amortization | $29.6 | $36.9 | | Total intangible assets not subject to amortization | $5.8 | $5.8 | | Total intangible assets | $35.4 | $42.7 | - Amortization expense for intangible assets was $3.7 million for the three months ended March 31, 2022, and $7.4 million for the six months ended March 31, 2022[94] Estimated Future Amortization Expense | Fiscal Year | Amount (in millions) | | :-------------------------- | :------------------- | | 2022 (remaining six months) | $7.1 | | 2023 | $12.7 | | 2024 | $5.2 | | 2025 | $1.9 | | 2026 and thereafter | $2.7 | | Total | $29.6 | Note 9 – Credit Facilities This note outlines the company's committed credit facilities, outstanding borrowings, and covenant compliance - As of March 31, 2022, the company had four committed credit facilities totaling $851.5 million, with $515.3 million outstanding[105] - The company amended its senior secured syndicated loan facility on April 21, 2022, expanding revolving credit to $475.0 million and extending it through April 2025[109][343] - Total outstanding borrowings from all credit facilities and notes were $974.8 million as of March 31, 2022, up from $755.6 million as of September 30, 2021[105] - The company was in compliance with all financial covenants under its credit facilities as of March 31, 2022[110] Note 10 – Securities and Commodity Financing Transactions This note describes the company's securities and commodity financing activities, including repurchase agreements and collateral - Financial instruments owned of $1,448.7 million (March 31, 2022) and $843.3 million (Sept 30, 2021) were pledged as collateral under repurchase agreements[112] - The fair value of accepted collateral that the company is permitted to sell or repledge was $4,606.6 million as of March 31, 2022[115] Gross Obligations under Repurchase and Securities Lending Agreements - March 31, 2022 | Maturity | Securities sold under agreements to repurchase (in millions) | Securities loaned (in millions) | | :---------------- | :------------------------------------------------- | :---------------------------- | | Overnight and Open | $2,563.4 | $2,103.7 | | Less than 30 Days | $725.6 | — | | 30-90 Days | $512.3 | — | | Over 90 Days | $6.6 | — | | Total | $3,807.9 | $2,103.7 | Note 11 – Commitments and Contingencies This note discloses the company's various commitments and potential liabilities, including legal and operational contingencies - The company recorded a $3.0 million allowance for a potential shortfall related to 2.8 million bushels of soybeans held in a third-party facility that filed for Chapter 11 bankruptcy. Receivables from clients, net, includes $31.6 million related to this matter[121][328] - Net Client Accounts Receivable from OptionSellers.com Inc. related to natural gas market fluctuations was $28.1 million as of March 31, 2022, with an allowance of $8.0 million. The company prevailed in the first arbitration case related to this[124][126][330] - Loss contingency accruals are not material, individually or in aggregate, to the company's financial position or liquidity[130] Note 12 – Accumulated Other Comprehensive Loss, Net This note details the components and changes in accumulated other comprehensive loss, net of tax Changes in Accumulated Other Comprehensive Loss, Net - Six Months Ended March 31, 2022 | Metric | Foreign Currency Translation Adjustment (in millions) | Pension Benefits Adjustment (in millions) | Cash Flow Hedge (in millions) | Accumulated Other Comprehensive Loss, net (in millions) | | :----------------------------------- | :------------------------------------------ | :---------------------------------------- | :---------------------------- | :------------------------------------------------------ | | Balances as of September 30, 2021 | $(22.7) | $(2.4) | $— | $(25.1) | | Other comprehensive loss, net of tax (Dec 31, 2021) | $(1.3) | $— | $(0.1) | $(1.4) | | Balances as of December 31, 2021 | $(24.0) | $(2.4) | $(0.1) | $(26.5) | | Other comprehensive income/(loss), net of tax (March 31, 2022) | $1.2 | $— | $(18.1) | $(16.9) | | Balances as of March 31, 2022 | $(22.8) | $(2.4) | $(18.2) | $(43.4) | - Cash flow hedges contributed $(18.2) million to accumulated other comprehensive loss for the six months ended March 31, 2022[135] Note 13 – Revenue from Contracts with Clients This note provides a breakdown of revenues from contracts with clients by geographic region and revenue recognition details - Revenues from contracts with clients subject to Topic 606 represented approximately 5.9% of total revenues for the three months ended March 31, 2022, and 6.2% for the six months ended March 31, 2022[139] Total Revenues by Primary Geographic Region - Three Months Ended March 31 | Region | 2022 (in millions) | 2021 (in millions) | % Change | | :------------------ | :----------------- | :----------------- | :------- | | United States | $1,204.6 | $853.6 | 41.1% | | Europe | $933.6 | $490.1 | 90.5% | | South America | $23.6 | $14.5 | 62.8% | | Middle East and Asia | $14,218.5 | $9,885.1 | 43.8% | | Other | $2.4 | $1.5 | 60.0% | | Total revenues | $16,382.7 | $11,244.8 | 45.7% | Operating Revenues by Primary Geographic Region - Three Months Ended March 31 | Region | 2022 (in millions) | 2021 (in millions) | % Change | | :------------------ | :----------------- | :----------------- | :------- | | United States | $364.5 | $349.7 | 4.2% | | Europe | $131.3 | $87.1 | 50.7% | | South America | $23.6 | $14.5 | 62.8% | | Middle East and Asia | $23.0 | $18.6 | 23.7% | | Other | $2.3 | $1.5 | 53.3% | | Total operating revenues | $544.7 | $471.4 | 15.5% | Note 14 – Other Expenses This note itemizes and compares various other operating expenses for the reported periods Other Expenses - Three Months Ended March 31 | Expense Type | 2022 (in millions) | 2021 (in millions) | % Change | | :-------------------------- | :----------------- | :----------------- | :------- | | Non-income taxes | $5.5 | $3.5 | 57.1% | | Insurance | $3.0 | $1.9 | 57.9% | | Employee related expenses | $1.8 | $1.4 | 28.6% | | Other direct business expenses | $2.9 | $1.7 | 70.6% | | Membership fees | $1.1 | $0.8 | 37.5% | | Director and public company expenses | $0.6 | $0.5 | 20.0% | | Office expenses | $0.4 | $0.4 | 0.0% | | Other expenses | $1.6 | $1.9 | (15.8)% | | Total other expenses | $16.9 | $12.1 | 39.7% | Note 15 – Income Taxes This note details the company's income tax expense, effective tax rates, and factors influencing tax variations - Income tax expense was $23.4 million for the three months ended March 31, 2022 (up from $21.0 million in 2021), and $34.2 million for the six months ended March 31, 2022 (up from $28.4 million in 2021)[151] - The effective tax rate was 27% for the three months ended March 31, 2022 (down from 28% in 2021), and 24% for the six months ended March 31, 2022 (down from 28% in 2021)[152][233] - The effective tax rate was higher than the U.S. federal statutory rate of 21% due to state and local taxes, global intangible low taxed income ("GILTI"), and foreign earnings taxed at higher rates[152][234] Note 16 – Regulatory Capital Requirements This note outlines the regulatory capital requirements for the company's subsidiaries and their compliance status - All of the company's subsidiaries were in compliance with their local regulatory requirements as of March 31, 2022[154] Regulatory Capital for Key Subsidiaries - March 31, 2022 | Subsidiary | Regulatory Authority | Actual (in millions) | Minimum Requirement (in millions) | | :---------------------- | :------------------- | :------------------- | :-------------------------------- | | StoneX Financial Inc. | SEC and CFTC | $357.6 | $256.9 | | StoneX Financial Ltd. | FCA | $403.4 | $358.0 | | Gain Capital Group, LLC | CFTC and NFA | $54.3 | $29.4 | | StoneX Markets LLC | CFTC and NFA | $176.8 | $119.4 | | StoneX Financial Pte Ltd | MAS | $53.6 | $11.2 | Note 17 – Segment Analysis This note provides financial performance data and key metrics for each of the company's operating segments - The company manages its business across four operating segments: Commercial, Institutional, Retail, and Global Payments, serving clients in over 180 countries with approximately 3,300 employees[155][169] - Key performance measures include total revenues, operating revenues, net operating revenues, net contribution, and segment income[160][161][162][239][240][241] Total Revenues by Segment - Three Months Ended March 31 | Segment | 2022 (in millions) | 2021 (in millions) | % Change | | :---------------- | :----------------- | :----------------- | :------- | | Commercial | $15,792.5 | $10,516.4 | 50.2% | | Institutional | $202.8 | $191.6 | 5.8% | | Retail | $349.6 | $503.5 | (30.6)% | | Global Payments | $41.0 | $33.5 | 22.4% | | Corporate Unallocated | $1.9 | $4.2 | (54.8)% | | Eliminations | $(5.1) | $(4.4) | 15.9% | | Total | $16,382.7 | $11,244.8 | 45.7% | Segment Income - Three Months Ended March 31 | Segment | 2022 (in millions) | 2021 (in millions) | % Change | | :---------------- | :----------------- | :----------------- | :------- | | Commercial | $70.1 | $55.6 | 26.1% | | Institutional | $50.0 | $52.0 | (3.8)% | | Retail | $45.5 | $32.0 | 42.2% | | Global Payments | $23.9 | $19.4 | 23.2% | | Total Segment Income | $189.5 | $159.0 | 19.2% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for the periods presented, highlighting key drivers of revenue and expense changes, segment-specific results, and an assessment of liquidity and capital resources Overview This section provides a high-level introduction to the company's business operations and segment structure - StoneX operates a global financial services network with approximately 3,300 employees as of March 31, 2022, serving clients in over 180 countries[169] - The company's business is segmented into Commercial, Institutional, Retail, and Global Payments, based on client type[170] Executive Summary This section highlights key financial performance indicators and significant market events for the reporting period - Q2 fiscal 2022 was marked by increased inflationary concerns, rising interest rates and commodity prices, and widespread volatility, especially following the Russian invasion of Ukraine, leading to significant increases in client volumes and wider spreads[171] - Operating revenues increased $73.3 million (16%) to $544.7 million for the three months ended March 31, 2022, with record operating revenues in Commercial, Institutional, and Retail segments[173] - Net income increased $8.7 million to $64.0 million, and diluted EPS was $3.11 for the three months ended March 31, 2022[179] - Bad debt expense increased by $11.4 million for the three months ended March 31, 2022, due to heightened market volatility impacting certain clients[171] Selected Summary Financial Information This section presents key financial metrics, including operating revenues by product and various volume data Operating Revenues by Product - Three Months Ended March 31 | Product | 2022 (in millions) | 2021 (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------- | | Listed derivatives | $123.0 | $101.1 | 21.7% | | Over-the-counter ("OTC") derivatives | $62.4 | $35.1 | 77.8% | | Securities | $151.3 | $157.8 | (4.1)% | | FX / Contract For Difference ("CFD") contracts | $98.9 | $74.7 | 32.4% | | Global payments | $40.1 | $32.8 | 22.3% | | Physical contracts | $40.7 | $49.5 | (17.8)% | | Interest / fees earned on client balances | $10.4 | $5.8 | 79.3% | | Other | $21.1 | $14.8 | 42.6% | | Corporate Unallocated | $1.9 | $4.2 | (54.8)% | | Eliminations | $(5.1) | $(4.4) | 15.9% | | Total Operating Revenues | $544.7 | $471.4 | 15.5% | Volumes and Other Select Data - Three Months Ended March 31 | Metric | 2022 | 2021 | % Change | | :----------------------------------- | :------- | :------- | :------- | | Listed derivatives (contracts, 000's) | 42,033 | 37,119 | 13% | | Listed derivatives, average rate per contract | $2.77 | $2.59 | 7% | | Average client equity - listed derivatives (millions) | $5,267 | $3,813 | 38% | | OTC derivatives (contracts, 000's) | 738 | 623 | 18% | | OTC derivatives, average rate per contract | $84.98 | $56.05 | 52% | | Securities average daily volume ("ADV") (millions) | $3,492 | $3,003 | 16% | | Securities rate per million ("RPM") | $567 | $714 | (21)% | | Average money market / FDIC sweep client balances (millions) | $1,751 | $1,356 | 29% | | FX / CFD contracts ADV (millions) | $14,937 | $11,143 | 34% | | FX / CFD contracts RPM | $104 | $106 | (2)% | | Global Payments ADV (millions) | $56 | $52 | 8% | | Global Payments RPM | $11,668 | $10,420 | 12% | Operating Revenues This section analyzes the drivers and changes in operating revenues across different product lines - Listed derivatives operating revenues increased 22% (3-month) and 14% (6-month) due to increased contract volumes and average rates, driven by market volatility[188][197] - OTC derivatives operating revenues surged 78% (3-month) and 84% (6-month), driven by strong growth in contract volumes and average rates due to heightened volatility in global commodity and interest rate markets[189][198] - Securities operating revenue declined 4% (3-month and 6-month) due to a decrease in RPM, as prior year benefited from wider spreads during COVID-19[190][199] - Interest and fee income on client balances increased 79% (3-month) and 68% (6-month), driven by a 38% (3-month) and 37% (6-month) increase in average client equity and a modest increase in short-term interest rates[194][203] Interest and Transactional Expenses This section details the company's interest and transaction-based expenses, including clearing and commissions Total Interest Expense - Three Months Ended March 31 | Category | 2022 (in millions) | 2021 (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------- | | Trading activities | $14.1 | $11.1 | 27% | | Corporate funding | $10.6 | $10.5 | 1% | | Total interest expense | $24.7 | $21.6 | 14% | - Transaction-based clearing expenses increased 2% (3-month) and 5% (6-month) due to higher OTC and listed derivative contract volumes and increased costs in Retail Forex[205][208] - Introducing broker commissions increased 6% (3-month) and 3% (6-month) due to increased activity in Independent Wealth Management, Financial Ag & Energy, and Exchange-Traded Futures and Options businesses[206][209] Net Operating Revenues This section analyzes the company's net operating revenues by product, reflecting revenue after direct expenses Net Operating Revenues by Product - Three Months Ended March 31 | Product | 2022 (in millions) | 2021 (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------- | | Listed derivatives | $62.8 | $45.9 | 37% | | OTC derivatives | $62.5 | $35.0 | 79% | | Securities | $104.1 | $109.0 | (4)% | | FX / CFD contracts | $85.8 | $62.7 | 37% | | Global Payments | $38.0 | $31.0 | 23% | | Physical contracts | $35.8 | $44.9 | (20)% | | Interest, net / fees earned on client balances | $9.1 | $4.9 | 86% | | Other | $16.2 | $11.0 | 47% | | Corporate Unallocated | $(14.0) | $(10.2) | 37% | | Total Net Operating Revenues | $400.3 | $334.2 | 20% | - Net operating revenues increased 20% (3-month) and 21% (6-month), driven by strong performance in listed and OTC derivatives, FX/CFD contracts, and global payments[213] Compensation and Other Expenses This section details the company's compensation, benefits, and other operating expenses, including bad debt Total Compensation and Other Expenses - Three Months Ended March 31 | Expense Category | 2022 (in millions) | 2021 (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------- | | Compensation and benefits | $207.1 | $185.0 | 12% | | Trading systems and market information | $16.9 | $14.8 | 14% | | Professional fees | $13.8 | $9.0 | 53% | | Non-trading technology and support | $12.8 | $10.6 | 21% | | Occupancy and equipment rental | $8.8 | $7.5 | 17% | | Selling and marketing | $14.3 | $6.5 | 120% | | Travel and business development | $3.0 | $0.5 | 500% | | Communications | $2.1 | $2.4 | (13)% | | Depreciation and amortization | $11.3 | $8.6 | 31% | | Bad debt expense, net | $12.3 | $0.9 | n/m | | Other | $16.9 | $12.1 | 40% | | Total compensation and other expenses | $319.3 | $257.9 | 24% | - Bad debt expense, net, increased significantly by $11.4 million (3-month) and $9.7 million (6-month) over the prior year, primarily due to client trading account deficits in Commercial and Institutional segments[222][230] - Selling and marketing costs increased 120% (3-month) and 65% (6-month) due to increased retail forex campaigns and global sales meetings[220][228] - A nonrecurring gain of $6.4 million from a foreign exchange antitrust class action settlement was recognized in March 2022[223][232] Variable vs. Fixed Expenses This section categorizes the company's non-interest expenses into variable and fixed components Variable vs. Non-Variable Expenses - Three Months Ended March 31 | Expense Type | 2022 (in millions) | % of Total | 2021 (in millions) | % of Total | | :----------------------------------- | :----------------- | :--------- | :----------------- | :--------- | | Variable compensation and benefits | $124.1 | 28% | $106.0 | 28% | | Transaction-based clearing expenses | $76.5 | 17% | $74.8 | 21% | | Introducing broker commissions | $43.2 | 10% | $40.8 | 11% | | Total variable expenses | $243.8 | 55% | $221.6 | 60% | | Fixed compensation and benefits | $83.0 | 19% | $79.0 | 21% | | Other fixed expenses | $99.9 | 23% | $72.0 | 19% | | Bad debts, net of recoveries | $12.3 | 3% | $0.9 | 0% | | Total non-variable expenses | $195.2 | 45% | $151.9 | 40% | | Total non-interest expenses | $439.0 | 100% | $373.5 | 100% | - Variable expenses were 55% of total non-interest expenses for the three months ended March 31, 2022, down from 60% in the prior year, reflecting the company's focus on a variable cost model[178][236] Segment Information (Summary) This section provides a summary of net contribution and segment income across all operating segments - Net contribution for all segments increased 23% to $304.7 million (3-month) and 22% to $544.7 million (6-month)[243][244] - Segment income for all segments increased 19% to $189.5 million (3-month) and 22% to $334.8 million (6-month)[243][244] Commercial Segment Analysis This section analyzes the financial performance of the Commercial segment, including revenue and income drivers Commercial Segment Operating Revenues - Three Months Ended March 31 | Product | 2022 (in millions) | 2021 (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------- | | Listed derivatives | $73.0 | $57.5 | 27% | | OTC derivatives | $62.4 | $35.1 | 78% | | Physical contracts | $37.2 | $43.1 | (14)% | | Interest / fees earned on client balances | $6.3 | $3.0 | 110% | | Other | $5.2 | $5.6 | (7)% | | Total Operating Revenues | $184.1 | $144.3 | 28% | - Commercial segment operating revenues increased 28% (3-month) and 35% (6-month), driven by strong performance in OTC derivatives (78% 3-month increase) and interest/fees on client balances (110% 3-month increase)[248][250][253][256][258][260] - Segment income increased 26% (3-month) and 55% (6-month), partially offset by a significant increase in bad debt expense ($8.9 million 3-month increase)[255][262] Institutional Segment Analysis This section analyzes the financial performance of the Institutional segment, including revenue and income drivers Institutional Segment Operating Revenues - Three Months Ended March 31 | Product | 2022 (in millions) | 2021 (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------- | | Listed derivatives | $50.0 | $43.6 | 15% | | Securities | $125.3 | $133.1 | (6)% | | FX contracts | $8.9 | $3.5 | 154% | | Interest / fees earned on client balances | $4.0 | $2.5 | 60% | | Other | $14.6 | $8.9 | 64% | | Total Operating Revenues | $202.8 | $191.6 | 6% | - Institutional segment operating revenues increased 6% (3-month) and 2% (6-month), driven by listed derivatives and FX contracts, but securities revenue declined due to lower RPM[267][268][269][270][274][275][276][277] - Segment income decreased 4% (3-month) and 15% (6-month), primarily due to increased interest expense, variable compensation, and non-variable direct expenses, including bad debt expense[177][273][280] Retail Segment Analysis This section analyzes the financial performance of the Retail segment, including revenue and income drivers Retail Segment Operating Revenues - Three Months Ended March 31 | Product | 2022 (in millions) | 2021 (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------- | | Securities | $26.0 | $24.7 | 5% | | FX / CFD contracts | $90.0 | $71.2 | 26% | | Physical contracts | $3.5 | $6.4 | (45)% | | Interest / fees earned on client balances | $0.1 | $0.3 | (67)% | | Other | $0.4 | $(0.4) | (200)% | | Total Operating Revenues | $120.0 | $102.2 | 17% | - Retail segment operating revenues increased 17% (3-month) and 18% (6-month), largely driven by FX/CFD contracts (26% 3-month increase) due to heightened volatility and increased customer trading activity[284][285][290][291] - Segment income increased 42% (3-month) and 38% (6-month), benefiting from a $6.4 million nonrecurring foreign exchange antitrust class action settlement[175][289][294] Global Payments Segment Analysis This section analyzes the financial performance of the Global Payments segment, including revenue and income drivers Global Payments Segment Operating Revenues - Three Months Ended March 31 | Product | 2022 (in millions) | 2021 (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------- | | Payments | $40.1 | $32.8 | 22% | | Other | $0.9 | $0.7 | 29% | | Total Operating Revenues | $41.0 | $33.5 | 22% | - Global Payments operating revenues increased 22% (3-month) and 23% (6-month), driven by an 8% (3-month) and 13% (6-month) increase in average daily notional payment volume and a 12% (3-month) and 9% (6-month) increase in RPM[176][299][301][302] - Segment income increased 23% (3-month) and 22% (6-month), primarily due to increased net operating revenues[300][303] Unallocated Costs and Expenses This section details the company's unallocated corporate costs and other general expenses Total Unallocated Costs and Other Expenses - Three Months Ended March 31 | Expense Category | 2022 (in millions) | 2021 (in millions) | % Change | | :----------------------------------- | :----------------- | :----------------- | :------- | | Compensation and benefits | $44.8 | $39.0 | 15% | | Occupancy and equipment rental | $8.7 | $7.4 | 18% | | Non-trading technology and support | $9.5 | $7.6 | 25% | | Professional fees | $7.3 | $5.2 | 40% | | Depreciation and amortization | $5.6 | $4.1 | 37% | | Communications | $1.4 | $1.6 | (13)% | | Selling and marketing | $2.2 | $0.2 | n/m | | Trading systems and market information | $1.3 | $0.9 | 44% | | Travel and business development | $0.6 | $0.1 | 500% | | Other | $6.7 | $6.4 | 5% | | Total unallocated costs and other expenses | $88.1 | $72.5 | 22% | - Unallocated costs increased 22% (3-month) and 16% (6-month), driven by higher variable compensation due to improved performance and increased headcount in IT, compliance, and HR[306][308][309] Liquidity, Financial Condition and Capital Resources This section assesses the company's liquidity, financial position, capital structure, and regulatory compliance - The company's liquidity is supported by funds from operations, debt and equity issuance, and committed credit facilities, with 98% of assets being liquid as of March 31, 2022[310][318] - Total equity was $1,005.6 million as of March 31, 2022, with outstanding loans of $471.3 million, a senior secured term loan of $165.3 million, and senior secured notes of $338.2 million[317] - The company's subsidiaries are subject to significant governmental and regulatory capital requirements (e.g., SEC, CFTC, FINRA, FCA) and were in compliance as of March 31, 2022[311][312][313][314][345] - Cash, segregated cash, cash equivalents, and segregated cash equivalents increased by $2,300.0 million to $8,809.5 million as of March 31, 2022[352] - Net cash provided by operating activities was $2,102.0 million for the six months ended March 31, 2022[352] Off Balance Sheet Arrangements This section describes the company's off-balance sheet exposures, particularly from derivative financial instruments - The company is exposed to off-balance sheet market risk from derivative financial instruments, which are managed through diversification, position limits, capital allocation, and daily monitoring[362][376] - Total financial instruments sold, not yet purchased, were $2,781.8 million as of March 31, 2022, representing obligations to purchase financial instruments at a future date[367] - The company mitigates credit risk by requiring margin deposits, monitoring collateral levels daily, and establishing credit limits for clients and counterparties[363][368] Effects of Inflation This section discusses the potential impact of inflation on the company's expenses and financial performance - Inflation may increase expenses (compensation, clearing, rental) which may not be recoverable, and while rising interest rates are generally favorable, other adverse effects of inflation on financial markets could negatively impact the company[370] Critical Accounting Policies This section confirms no material changes to the company's critical accounting policies - No material changes to critical accounting policies since the filing of the most recent Annual Report on Form 10-K[371] Other Accounting Policies This section details other significant accounting policies, including the use of interest rate swaps for hedging - The company began executing interest rate swaps as hedging instruments in Q1 fiscal 2022, with changes in fair value recorded in other comprehensive income, and settlements reclassified to earnings[372] Accounting Development Updates This section confirms no recently issued accounting pronouncements impacting the company - No recently issued accounting pronouncements[373] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section provides quantitative and qualitative information about the company's exposure to market risks, including credit risk, general market risk, interest rate risk, and foreign currency risk, and outlines the strategies employed to manage these exposures Credit Risk This section refers to detailed disclosures on credit risk from financial instruments - Credit risk information is detailed in Note 4, covering financial instruments with off-balance sheet risk and concentrations of credit risk[374] Market Risk This section describes the company's exposure to market risks from trading activities and mitigation strategies - The company's capital is exposed to significant market risks from market-making and trading activities, including price movements, volatility, and liquidity changes[375] - Mitigation techniques include diversification, position limits, capital allocation based on risk, and daily monitoring of positions and profitability[376] - The company does not initiate market positions for its own account in anticipation of future price movements[377] Interest Rate Risk This section quantifies the company's exposure to interest rate fluctuations and hedging strategies - An immediate 25 basis point decrease in short-term interest rates would result in approximately $5.9 million less in annual net income, assuming a 27.5% effective tax rate[382] - The company uses interest rate swaps to convert floating-rate interest income from client deposits into fixed-rate income, mitigating uncertainty[383][384] - As of March 31, 2022, $636.7 million of outstanding principal debt was variable-rate, and $348.4 million was fixed-rate long-term debt (fair value $364.8 million)[385] Foreign Currency Risk This section discusses the company's exposure to foreign currency fluctuations and their potential impact - The company is exposed to foreign currency risk from assets and liabilities denominated in currencies other than the functional currency of its entities, which can impact earnings and assets[386] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2022, concluding they were effective to provide reasonable assurance. No material changes to internal controls over financial reporting were reported - Disclosure controls and procedures were effective as of March 31, 2022, providing reasonable assurance that objectives were met[387] - No material changes in internal controls over financial reporting occurred during the quarter ended March 31, 2022[389] PART II. OTHER INFORMATION This part includes disclosures on legal proceedings, risk factors, equity sales, exhibits, and signatures Item 1. Legal Proceedings This section refers to Note 11 for detailed information regarding legal proceedings, indicating no material changes since the last annual report beyond what is disclosed there - Information on legal proceedings is provided in Note 11, "Commitments and Contingencies"[390] Item 1A. Risk Factors This section refers to the risk factors discussed in the Annual Report on Form 10-K, stating that there have been no material changes to these risk factors since its filing - No material changes to risk factors since the filing of the Form 10-K[391] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the common stock repurchase program authorized by the Board of Directors, noting that no shares were repurchased during the three months ended March 31, 2022 - The Board authorized a repurchase of up to 1.0 million shares of common stock from October 1, 2021, to September 30, 2022[392] - No shares were repurchased under the program during the three months ended March 31, 2022[393] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including various certifications and XBRL documents - The exhibits include CEO and CFO certifications (Rule 13a-14(a) and 18 U.S.C. Section 1350) and Inline XBRL documents[397] Signatures This section contains the signatures of the Chief Executive Officer and Chief Financial Officer, certifying the report - The report is signed by Sean M. O'Connor (CEO) and William J. Dunaway (CFO) on May 4, 2022[397]