INTL FCStone 2011 Annual Report Download - page 46

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INTL FCSTONE INC.Form10K32
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
prime brokerage and foreign exchange arbitrage desk businesses
as compared to the prior year period.
Operating revenues in the Securities segment in 2011 bene ted
from an increase in demand from retail customers of our
institutional clients in our international equities market-making
product line as the overall equities markets recovered. In addition,
operating revenues in this segment were driven by increased
activity in the debt capital markets following the acquisition of
the Provident Group late in scal2010. Operating revenues in
the CES segment in 2011 rose slightly over the prior year period
as market volatility resulted in higher exchange-traded volumes.
However, operating revenues in this segment continue to be
constrained by low short-term interest rates. See 2011 vs. 2010
Segment Analysis below for additional information on activity
in each of the segments.
In 2011, operating revenues include realized gains of $4.2million
and unrealized losses of $0.2million on interest rate swap derivative
contracts used to manage a portion of our aggregate interest
rate position. In 2010, operating revenues included realized and
unrealized gains of $1.0million and $2.5million, respectively, on
interest rate swap derivative contracts. ese interest rate swaps
are not designated for hedge accounting treatment, and changes
in the marked-to-market valuations of these interest rate swaps,
which are volatile and can fl uctuate from period to period, are
recorded in earnings on a quarterly basis. As of September30,2011,
$1.1billion in notional principal of interest rate swaps were
outstanding with a weighted-average life of 14months.
e Company’s adjusted operating revenues were $414.8million
in 2011, compared with $275.0million in 2010, an increase of
$139.8million, or 51%. e only diff erence between operating
revenues and adjusted operating revenues, a non-GAAP measure,
is the gross marked-to-market adjustment of $(8.4)million and
$6.0million for 2011 and 2010, respectively. e gross marked-
to-market adjustment only aff ects the adjusted operating revenues
in the C&RM segment. Adjusted operating revenues are identical
to operating revenues in all other segments.
2010 Operating Revenues vs. 2009
Operating Revenues
e acquisition of FCStone was completed on September30,2009,
therefore the results of FCStone are reflected in the
results of operations for the Company for the year ended
September30,2010, but are not refl ected in the year ended
September30,2009.
e Company’s operating revenues under U.S GAAP for 2010
and 2009 were $269.0million and $90.6million, respectively.
is 197% increase in operating revenue is primarily a result of
the FCStone acquisition. e operations of FCStone contributed
$187.6million in operating revenues for 2010. For the year
ended August31,2009, FCStone reported total revenues of
$248.9million. ere were increases in operating revenues of
576% in the C&RM segment and 57% in the Foreign Exchange
segment, partially off set by a decrease of 47% in the Securities
segment. e CES segment, which consists primarily of revenues
from FCStone, contributed $61.8million in operating revenues
in 2010, while the Other segment contributed $8.9million in
operating revenues compared to $3.4million in 2009.
Operating revenues increased in the C&RM segment in 2010 with
both exchange-traded and OTC contract volumes increasing in the
soft commodities product line. Additionally, our precious metals
product line was aff ected by elevated prices, which constrained
volumes and customer activity, and our base metals product line
was positively aff ected by increased customer demand and wider
spreads which augmented trading profi ts. Operating revenues
in the Foreign Exchange segment in 2010 were aff ected by
narrower spreads, despite an increase in customer trade volumes,
primarily with fi nancial institutions. Operating revenues in the
Securities segment in 2010 were aff ected by low levels of volume
and volatility in the international equities markets, which had
reached unprecedented levels in 2009. Operating revenues in
the CES segment in 2010 were constrained by continued low
short-term interest rates, despite an increase in customer deposits,
and adversely aff ected by a trading loss on positions acquired
from an under-margined clearing customer. While the lack
of demand and risk intolerance caused by the global fi nancial
crisis continues to adversely aff ect our debt arrangement and
placement business, the acquisition of CIBSA in Argentina in
April2009 has increased our debt trading revenues. See 2010
vs. 2009 Segment Analysis below for additional information on
activity in each of the segments.
Operating revenues for 2010 include a mark-to-market gain of
$2.5million on interest rate swap derivative contracts entered
into during the year to manage a portion of our aggregate
interest rate position.
e Company’s adjusted operating revenues were $275.0million
in 2010, compared with $97.5million in 2009, an increase of
$177.5million. e only diff erence between operating revenues
and adjusted operating revenues, a non-GAAP measure, is the
gross mark-to-market adjustment of $6.0million and $6.9million
for 2010 and 2009, respectively. e gross marked-to-market
adjustment only aff ects the adjusted operating revenues in the
C&RM segment. Adjusted operating revenues are identical to
operating revenues in all other segments.
2011 Interest expense vs. 2010 Interest expense
Interest expense: Interest expense increased from $9.9million for
2010 to $11.3million for 2011. is increase in interest expense
was primarily driven by increases in the base metal product line
and commodity fi nancing business during 2011, as well as an
increase in quarterly commitment fees and amortizable line of
credit fees on renewed and expanded committed credit facilities
closed in the fourth quarter of 2010 and fi rst quarter of 2011.
e increase in interest expense was partially off set by a decrease
in interest on subordinated debt, as FCStone,LLC, our futures