INTL FCStone 2012 Annual Report Download - page 50
Download and view the complete annual report
Please find page 50 of the 2012 INTL FCStone annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.INTL FCSTONE INC.Form10K34
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
e acquisition of the Hanley Companies in Q4 2010 led to an
increased o ering of structured OTC products to our commercial
customers, contributing to the signi cant increase in operating
revenues, primarily re ected within ‘trading gains, net’ in our
consolidated income statements, in 2011 as compared to the
prior year.
In addition, our precious metals product line revenues grew
due to a signi cant increase in trading activity as a result of
increased global economic demand, while base metal product
line revenues expanded with widening spreads driven by market
volatility and rising prices. Operating revenues in the Foreign
Exchange segment in 2011 increased primarily as a result of
higher volumes in the global payments business and higher
commercial hedging activity, most notably in Brazil, as well
as increased trading activity in both our speculative customer
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 scal 2010. 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 $4.2 million
and unrealized losses of $0.2 million 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 $1.0 million and $2.5 million, respectively, on
interest rate swap derivative contracts. ese interest rate swaps
are not designated for hedge accounting treatment, and changes
in the fair values of these interest rate swaps, which are volatile
and can uctuate from period to period, are recorded in earnings
on a quarterly basis. As of September30, 2011, $1.1 billion in
notional principal of interest rate swaps were outstanding with
a weighted-average life of 14 months.
e Company’s adjusted operating revenues were $414.8 million
in 2011, compared with $275.0 million in 2010, an increase of
$139.8 million, or 51%. e only di erence between operating
revenues and adjusted operating revenues, a non-GAAP measure,
is the gross marked-to-market adjustment of $(8.4) million and
$6.0 million for 2011 and 2010, respectively. e gross marked-
to-market adjustment only a ects the adjusted operating revenues
in the C&RM segment. Adjusted operating revenues are identical
to operating revenues in all other segments.
2012 Interest expense vs. 2011 Interest expense
Interest expense: Interest expense increased from $11.3 million
for 2011 to $11.6 million for 2012. is increase was due to
increases in the average borrowings on our credit facilities,
primarily related to base metals activities, during 2012. e
increase was partially o set by a decrease in interest paid to
customers, impact from the interest rate swaps discussed below
and the result of the conversion of the remaining balance of the
Company’s convertible subordinated debt in September 2011.
In 2008, the Company entered into two three-year interest
rate swaps for a total notional value of $100 million, which
were originally designated as cash ow hedges. e Company
previously discontinued hedge accounting for one of the swaps.
Hedge accounting for the remaining swap was discontinued
during 2011, which resulted in reclassifying a portion of the
deferred loss to earnings during the year. e e ective portion
of the change in cash ows from the interest rate swaps had the
e ect of increasing the Company’s reported interest expense by
$1.0 million during 2011. During 2011, both interest rate swap
contracts, each with a notional value of $50 million, matured.
See Note 4 to the Consolidated Financial Statements for further
information.
2011 Interest expense vs. 2010 Interest expense
Interest expense: Interest expense increased from $9.9 million for
2010 to $11.3 million for 2011. is increase in interest expense
was primarily driven by increases in the base metal product line
and commodity 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 rst quarter of 2011.
e increase in interest expense was partially o set by a decrease
in interest on subordinated debt, as FCStone, LLC, our futures
commission merchant, repaid substantially all of its subordinated
debt during the rst six months of 2010, and did not renew
the subordinated credit facility. In 2008, the Company entered
into two three-year interest rate swaps for a total notional value
of $100 million, which were originally designated as cash ow
hedges. e Company previously discontinued hedge accounting
for one of the swaps. Hedge accounting for the remaining swap
was discontinued during 2011, which resulted in reclassifying a
portion of the deferred loss to earnings during the year. During
2011, both interest rate swap contracts, each with a notional
value of $50 million, matured. See Note 4 to the Consolidated
Financial Statements for further information.