INTL FCStone 2011 Annual Report Download - page 53

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INTL FCSTONE INC.Form10K 39
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
services including the arranging and placing of debt issues, merger
and acquisition advisory services and asset backed securitization
as well as debt trading in the international markets.
e Company has an investment in debentures for the single asset
owning company of Suriwongse Hotel located in Chiang Mai,
ailand, originally issued in August2008. Renovations on the
hotel, to be fi nanced by the debentures, have been delayed and
are currently expected to be completed by the end of fi scal2012.
During 2011, the hotel owner defaulted on the interest payment
due to debenture holders in March2011, and the Company
recorded an impairment loss of $1.7million related to the
fair value adjustment of its investment in the debentures. e
Company and other debenture holders have exercised their
rights under the share pledge provisions of the debentures, and
held a share auction of 100% of theshares of the single asset
owning company. e debenture holders won the share auction
and the previous owner of the single asset owning company,
who is also a personal guarantor of the debentures, has fi led
a complaint to revoke the completed auction. e Company
intends on vigorously defending actions taken in its capacity
as a debenture holder. Judgment on the complaint fi led by the
previous owner is expected by the third quarter of fi scal2012.
As of September30,2011, the carrying value of the debentures
is $3.6million. See Note5- Assets and Liabilities, at Fair Value
to the Consolidated Financial Statements.
Segment income decreased 66%, from $5.6million in 2010
to $1.9million in 2011, primarily as a result of the fair value
adjustment, discussed above, as well as compensation and benefi ts
costs related to the expansion of the investment banking and
advisory business acquired from the Provident Group. Variable
expenses expressed as a percentage of operating revenues increased
from 43% to 45%.
Clearing and execution services– Operating revenues in the
segment were $66.1million for 2011 as compared to $61.8million
for 2010. Operating revenues are primarily generated from two
sources: commission and clearing fee revenues from the execution
and clearing of exchange-traded futures and options on futures
contracts, and interest income derived from cash balances in
our customers’ accounts.
Commission and clearing fee revenues were relatively fl at as
exchange-traded volumes increased 2% over the prior year
period. A $0.8million proprietary trading gain related to open
commodity positions acquired from an under-margined customer
contributed to the increase in operating revenues, while the prior
year period included a $2.7million trading loss related to these
open commodity positions. e Company does not expect any
further signifi cant gains or losses from these remaining open
commodity positions prior to their expiration. Interest income
declined 18% to $2.7million in 2011 as an increase in average
customer deposits was more than off set by a decline in short-
term interest rates.
Segment income increased $3.8million from $1.1million
in 2010 to $4.9million in 2011. Segment income for 2010
includes the eff ect of a $2.3million bad debt provision related
to a disputed trade that was “given-up” to FCStone by another
futures commission merchant for a customer that held an account
with us, while 2011 includes a $1.3million recovery of bad
debt expense related to the settlement of the “given-up” trade
dispute, partially off set by a $1.0million bad debt provision
related to a clearing customer defi cit account. Variable expenses
as a percentage of operating revenues declined from 80% to 77%
and are primarily clearing and related expenses.
Other– e Company’s asset management revenues include
management and performance fees, commissions and other
revenues received by the Company for management of third
party assets and investment gains or losses on the Company’s
investments in funds or proprietary accounts managed either by
the Company’s investment managers or by independent investment
managers. In addition, this segment’s revenues include interest
income and fees earned in relation to commodity fi nancing
transactions as well as a limited amount of principal physical
commodity sales transactions related to inputs to the renewable
fuels and feed ingredient industries.
Operating revenues increased 61% from $8.9million in 2010
to $14.3million in 2011. Assets under management as of
September30,2011 were $385.0million compared with
$349.3million as of September30,2010. Operating revenues
in the asset management product line increased $1.1million to
$8.6million in 2011. Operating revenues in the grain fi nancing
and physical commodity origination product line increased
280% to $5.7million in 2011, driven by the establishment
of a committed credit facility to fi nance commodities, which
facilitated additional business as well as the expansion of our
physical inputs business into the feed ingredient industry and
increased demand for fats and oils origination from commercial
customers. Segment income was $5.6million in 2011 as compared
to $3.7million in 2010.
2010 vs. 2009 Segment Analysis
e net contribution of all the Company’s business segments was
$128.1million in 2010, compared with $54.5million in 2009. e
adjusted net contribution of all the Company’s business segments
was $134.1million in 2010, compared with $61.4million in
2009. e operations of FCStone contributed $74.5million to
both net contribution and adjusted net contribution in 2010.
Net contribution is one of the key measures used by management
to assess the performance of each segment and for decisions
regarding the allocation of the Company’s resources. Net
contribution is calculated as revenue less direct cost of sales,
interest expense, clearing and related expenses, introducing broker
commissions and variable compensation. Variable compensation
paid to risk management consultants and traders represents a
fi xed percentage of an amount equal to revenues generated,
and in some cases, revenues produced less clearing and related
charges, base salaries and an overhead allocation.