INTL FCStone 2014 Annual Report Download - page 46

INTL FCSTONE INC.  Form 10K30
PART II
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
All product lines within our Securities segment experienced
growth in fiscal 2014, highlighted by double digit growth
in debt trading and asset management revenues resulting
from favorable market conditions both domestically and in
South America. Performance declined in both our Physical
Commodities and CES segments, driven by low market volatility
in exchange-traded and cash foreign exchange markets as well
as a decline in customer transactions in physical commodities’
businesses.
On the expense side, we continue to focus on maintaining
our variable cost model and limiting the growth of our non-
variable expenses. To that end, variable expenses were 56% of
total expenses in fiscal 2014 compared to 54% in fiscal 2013,
while non-variable expenses increased by 1% between the two
periods. Non-variable expense include both fixed expenses as
well as bad debts and impairments. Fixed expenses declined
$3.1 million versus the prior year to $196.6 million, while bad
debts and impairments increased $4.7 million to $5.5 million
in fiscal 2014.
Overall, income from continuing operations before tax increased
$4.8 million to $26.0 million in fiscal 2014 compared to
$21.2 million in fiscal 2013, however excluding the $9.2 million
gain on the LME and KCBT shares in fiscal 2013, income from
continuing operations before tax increased $14.0 million. Net
income from continuing operations increased $1.0 million
to $19.6 million in fiscal 2014 compared to $18.6 million in
fiscal 2013, which included the $5.8 million after tax gain on the
sale of LME and KCBT shares.
Selected Summary Financial Information
As discussed in previous filings and elsewhere in this report on
Form 10-K, U.S. GAAP requires us to carry derivatives at fair
value but physical commodities inventory at the lower of cost or
fair value. Under U.S. GAAP, gains and losses on commodities
inventory and derivatives which we intend to be offsetting are
often recognized in different periods. Additionally, in certain
circumstances, U.S. GAAP does not permit us to reflect changes
in estimated values of forward commitments to purchase and sell
commodities. In such circumstances, the forward commitments
to purchase and sell commodities, which we do not reflect in the
consolidated balance sheets, do not qualify as a derivative under
the Derivatives and Hedging Topic of the Accounting Standards
Codification (“ASC”).
ese requirements may have a temporary impact on our reported
earnings. Following the discontinuance of our physical base
metals business, we believe the effects of these requirements on
our results have lessened and whereas we previously managed our
Physical Commodities business segment as well as assessed our
overall performance on an adjusted marked-to-market basis, we
now manage both on a U.S. GAAP basis.
Discontinued Operations and Operating Segment Reorganization
During the second quarter of fiscal 2013, as a result of a change
in management strategy in our base metals product line, we
elected to pursue an exit of our physical base metals business
through the sale and orderly liquidation of then-current open
positions. We completed the exit of the physical base metals
business during the second quarter of fiscal 2014. We have
reclassified the physical base metals activities in the financial
statements for all periods presented as discontinued operations.
We continue to operate the portion of our base metals business
related to non-physical assets, conducted primarily through the
LME in our Commercial Hedging segment.
Following the discontinuance of the physical base metals business
and commencing during the second quarter of fiscal 2014, we
reorganized our operating segments into the following reportable
segments: Commercial Hedging, Global Payments, Securities,
Physical Commodities and Clearing and Execution Services. All
segment information has been revised to reflect the operating
segment reorganization retroactive to October 1, 2011. See
Note 22 – Segment and Geographic Information for further
discussion of the operating segment reorganization.
Results of Operations
Set forth below is our discussion of the results of our operations, as
viewed by management, for the fiscal years ended September 30,
2014, 2013 and 2012.
e discussion below relates only to continuing operations. All
revenues and expenses, including income tax expense, relating
to discontinued operations have been removed from disclosures
of total revenues and expenses in all periods, and are reported
net in our consolidated income statements in “(Loss) income
from discontinued operations, net of tax”.