INTL FCStone 2013 Annual Report Download - page 56

INTLFCSTONEINC.Form10K 35
PART II
ITEM7Management’s Discussion and Analysis of Financial Condition and Results ofOperations
revenues in this segment were constrained by low short-term
interest rates.
Operating revenues and adjusted operating revenues in the
Other segment increased by 9% and 15%, respectively. ese
increases were primarily caused by the expansion of our grain
nancing and physical commodity origination product lines,
which were partially oset by lower asset management revenues.
See Segment Information below for additional information on
activity in each of the operating segments.
In 2012, operating revenues include realized gains of $2.5 million
and unrealized losses of $1.1 million on interest rate swap derivative
contracts used to manage a portion of our aggregate interest rate
position. In 2011, operating revenues included realized gains of
$4.2 million and unrealized losses of $0.2 million on interest
rate swap derivative contracts. ese interest rate swaps were not
designated for hedge accounting treatment, and changes in the
fair values of these interest rate swaps, which can be volatile and
can uctuate from period to period, were recorded in earnings
on a quarterly basis. As of September30, 2012, $765 million in
notional principal of interest rate swaps were outstanding with
a weighted-average remaining life of 6 months.
Interest and Transactional Expenses
Year Ended September 30, 2013 Compared to
Year Ended September 30, 2012
Transaction-based clearing expenses: Transaction-based clearing
expenses increased 4% from $105.4 million in scal 2012 to
$110.1 million in scal 2013, and were 24% of adjusted operating
revenues in scal 2013 compared to 23% in scal 2012. is
increase in expense is primarily related to higher ADR conversion
and exchange fees in the Securities segment activities, resulting
from internal revenue growth as well as the acquisition of the
accounts of Tradewire Securities in the Securities segment.
Introducing broker commissions: Introducing broker
commissions increased 31% from $31.0 million in scal 2012
to $40.5 million in scal 2013. is increase is primarily due
to the addition of several new introducing broker relationships,
particularly in our CES segment, that followed the bankruptcy
ling of MF Global in October 2011. Additionally, expanded
activities through our acquisitions of the LME metals team and
the accounts of Tradewire Securities have resulted in an increase
in introducing broker commission expenses.
Interest expense: Interest expense increased from $11.6 million
during scal 2012 to $12.5 million during scal 2013. isincrease
is primarily due to higher average outstanding borrowings during
scal 2013 compared to scal 2012, on our loan facilities used for
working capital needs and commodity nancing and facilitation.
On July 22, 2013, we completed the oering of $45.5 million
aggregate principal amount of our 8.5% Senior Notes due July
2020, which added $0.8 million of interest expense in scal
2013, partially oset by the expiration of a credit facility used
for physical base metals activities.
Year Ended September 30, 2012 Compared to
Year Ended September 30, 2011
Transaction-based clearing expenses: Transaction-based clearing
expenses increased 39% from $75.6 million in scal 2011 to
$105.4 million in scal 2012, and were 23% of adjusted operating
revenues in scal 2012 compared to 18% in scal2011. is
increase in expense was primarily due to a 59% increase in
exchange-traded customer volume, a 38% increase in OTC trading
volumes in the C&RM segment in the Hanley Companies, as
well as an increase in trading volume in our equities market-
making business and activity from the acquisitions of Ambrian
Commodities Limited and TRX Futures Limited.
Introducing broker commissions: Introducing broker
commissions increased by 29% from $24.0 million in scal 2011 to
$31.0 million in scal 2012. is increase was primarily due to an
increase in exchange-traded volumes from our introducingbrokers,
particularly in our CES segment as several new introducing broker
relationships were opened following the bankruptcy ling of MF
Global in October 2011.
Interest expense: Interest expense increased from $11.3 million
in scal 2011 to $11.6 million in scal 2012. is increase was
due to increases in the average borrowings on our credit facilities,
primarily related to base metals activities, during scal 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 our
convertible subordinated debt in September 2011.
In scal 2008, we entered into two three-year interest rate swaps
for a total notional value of $100 million, which were originally
designated as cash ow hedges. We previously discontinued
hedge accounting for one of the swaps. We discontinued hedge
accounting for the remaining swap during scal 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 our
reported interest expense by $1.0 million during scal 2011.
During scal 2011, both interest rate swap contracts, each with
a notional value of $50 million, matured.
Net Operating Revenues
Net operating revenues is one of the key measures used by
management to assess the performance of our operating segments.
Net operating revenue is calculated as operatingrevenue less
transaction-based clearing expenses, introducing broker commissions
and interest expense. Transaction-based clearing expenses represent
variable expenses paid to executing brokers, exchanges, clearing
organizations and banks in relation to our transactional volumes.
Introducing broker commissions include commission paid to
non-employee third parties that have introduced customers to
us. Net operating revenues represent revenues available to pay
variable compensation to risk management consultants, traders
and administrative employees as well as non-variable expenses.