INTL FCStone 2011 Annual Report Download - page 49

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INTL FCSTONE INC.Form10K 35
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
Clearing and Related Expenses: Clearing and related expenses
increased 326% from $16.0million in 2009 to $68.2million in
2010. e increase was primarily driven by the Company’s addition
of the CES segment, as a result of the FCStone acquisition, and
increased clearing costs in CIBSA, acquired in April2009. is
increase was partially off set by a signifi cant decline in clearing
costs in the Securities segment related to lower volumes in the
international equities business.
Introducing Broker Commissions: Introducing broker
commissions were $18.9million in 2010 and relate to the
exchange-traded futures and options on futures business acquired
in the FCStone transaction which closed on September30,2009,
the last day of fi scal year2009.
Other Non-Interest Expenses: Other non-interest expenses
increased by 281% from $13.1million in 2009 to $49.9million
in 2010. e operations of FCStone contributed $29.3million in
other non-interest expenses in 2010. Other non-interest expenses
include bad debt expense, net, of $5.8million. During 2010,
FCStone recorded a charge to bad debt expense of approximately
$2.3million related to a disputed trade that was “given-up” to
FCStone by another FCM for a customer that held an account
with us. Despite expressly informing the FCM that the Company
would not accept the “give-up” trade, the “give-up” trade was
submitted through the electronic clearing process and erroneously
cleared by FCStone, generating a defi cit in the customer’s trading
account. e customer lacked the fi nancial capacity to cover the
account defi cit. In addition, in Q42010, the Company recorded a
$2.5million provision against a receivable from a Dubai customer
to whom INTL Commodities DMCC had consigned gold to.
While the Company had a security interest in property to secure
the amount of the receivable, it was uncertain as to whether the
entire amount of the receivable would be collected. In addition,
during 2010 the Company recorded an impairment charge of
$1.1million related to its investment in INTL Sieramet.
Provision for Taxes: e eff ective income tax rate on a U.S.
GAAP basis was 35.6% in 2010, compared with 19.9% in 2009.
is change was primarily due to changes in the geographic
mix of profi ts or losses. Our eff ective income tax rate can vary
from period to period depending on, among other factors, the
geographic and business mix of our earnings, the level of our
pre-tax earnings and the level of our tax credits. In 2010, 25% of
the income from continuing operations, before tax is attributable
from U.S. jurisdictions. In 2009, the Company had a loss from
continuing operations, before tax benefi t, attributable from
U.S. jurisdictions.
Variable vs. Fixed Expenses
(In millions)
Year Ended September30,
2011 % of Total 2010 % of Total 2009 % of Total
VARIABLE VS. FIXED EXPENSES
Variable compensation and benefi ts $ 99.9 28% $ 51.3 21% $ 23.3 34%
Variable clearing and related expenses 74.8 21% 66.4 28% 15.9 23%
Introducing broker commissions 24.9 8% 18.9 8% — —%
Total variable expenses 199.6 57% 136.6 57% 39.2 57%
Fixed expenses 146.6 41% 98.8 41% 27.1 39%
Bad debts and impairments 6.2 2% 5.8 2% 3.0 4%
Total non-variable expenses 152.8 43% 104.6 43% 30.1 43%
TOTAL NONINTEREST EXPENSES $ 352.4 100% $ 241.2 100% $ 69.3 100%
e Company seeks to make its non-interest expenses variable
to the greatest extent possible, and to keep its fi xed costs
as low as possible. e table above shows an analysis of the
Company’s total non-interest expenses for the years ended
September30,2011,2010 and 2009, respectively.
Historically, the Company’s variable expenses have consisted
of variable compensation paid to traders and risk management
consultants, bonuses paid to operational employees, clearing
and related expenses and introducing broker commissions.
Accrued administrative and executive bonuses have historically
been shown as fi xed expenses. As administrative and executive
bonuses accruals are either directly or indirectly determined by
profi tability of the Company, we have included these accruals
as variable expenses in the table above. e amounts related
to these accruals which had previously been reported as fi xed
expenses for the years ended September30,2010 and 2009,
were $5.0million and $5.5million, respectively.
As a percentage of total non-interest expenses, variable expenses
were consistently 57% in 2011,2010 and 2009, respectively.