MF Global Reports Second Quarter 2010 Results
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NEW YORK--(BUSINESS WIRE)-- MF Global Ltd. (NYSE: MF), a leading intermediary offering customized solutions in global cash, derivatives and related markets, today reported financial results for the second fiscal quarter of 2010, ended September 30, 2009.
Second Quarter Highlights
-- Revenue, net of interest and transaction-based expenses (net revenue),
was $252.0 million for the second quarter versus $372.9 million for the
same period last year.
-- GAAP net loss applicable to common shareholders was $16.0 million or
$0.13 per basic and diluted share for the second quarter, compared with
net income of $3.5 million or $0.03 per basic and diluted share for the
same period last year.1
-- Client payables were $12.2 billion at September 30, 2009 compared to
$14.0 billion at September 30, 2008. MF Global's market share in August
2009 of U.S. segregated assets was 5.8%, a 12-month high.
"We are making significant progress during this challenging market environment. The company is advancing its global growth strategy, and we are beginning to realize the multiple benefits of these efforts," said Bernard W. Dan, chief executive officer of MF Global. "During the second quarter, we expanded the valuable products and services we offer institutional clients, gaining traction in some of our new fixed income product areas while significantly growing our retail business in Asia."
"These strategic initiatives mitigated the impact of broader market conditions," Dan continued. "By pursuing high-growth, high-margin opportunities, we continue to expand MF Global's market share, indicating the industry is increasingly recognizing the advantages we deliver to clients. I believe we are well positioned to accomplish our goal of enhancing our company's profitability."
_______________________ 1GAAP net loss includes a number of unusual items, such as gains on exchange memberships, stock compensation expense related to IPO awards, and severance charges.
Second Quarter 2010 and Six Month Results
As of September 30, 2009, the company had $2.2 billion in long-term capital.2
Client payables were $12.2 billion at September 30, 2009, compared with $14.0 billion at September 30, 2008.
"During the quarter, we focused on managing the elements of our business where we can effect change for our key constituencies," said Randy MacDonald, chief financial officer of MF Global. "Despite weak industry volumes, narrow spreads and a near-zero interest rate environment, we delivered positive adjusted earnings to shareholders by controlling our fixed costs and further diversifying our revenue streams. We will continue to invest in our growth strategy, positioning our model to create long-term value for shareholders."
Revenue, net of interest and transaction-based expenses (net revenue), was $252.0 million in the second quarter, compared with net revenue of $372.9 million for the same period last year. The decline in net revenue was primarily due to a decrease in exchange volumes, lower interest rates and narrower spreads in fixed income, commodities and foreign exchange products. Net revenue for the six months ended September 30, 2009, was $523.6 million, down from $747.5 million for the same period in the prior year.
GAAP net loss applicable to common shareholders in the second quarter was $16.0 million, or a loss of $0.13 per basic and diluted share, compared with net income of $3.5 million or $0.03 per basic and diluted share in the corresponding quarter last year. MF Global reported GAAP net loss applicable to common shareholders of $48.8 million or $0.40 per basic and diluted share for the six months ended September 30, 2009 compared with net income of $16.6 million, or $0.14 per basic and diluted share for the same period in the prior year.
Second quarter GAAP results included exchange membership gains of $10.6 million or $0.04 per fully diluted share, stock compensation related to IPO awards expense of $9.2 million or $0.04 per fully diluted share, legal settlement costs of $3.4 million or $0.01 per fully diluted share and severance charges of $1.5 million or $0.01 per fully diluted share.3
Employee compensation and benefits (excluding non-recurring IPO awards) during the quarter totaled $164.4 million, or 65.2 percent of net revenue compared with $214.6 million, or 57.5 percent of net revenue in the same period last year. The increase in compensation and benefits percentage was primarily due to an increase in headcount related to the company's focus on growing certain product offerings, as well as the migration away from consulting costs to salaried employees against lower net revenue.
_______________________ 2 Long-term capital includes all sources of long-term debt and equity (at par amounts). 3 Fully diluted shares is a non-GAAP financial measure. Please see the definition of non-GAAP financial measures at the end of this release.
Non-compensation expense in the second quarter of 2010 was $92.1 million compared with $112.8 million for the same period last year. The decrease was primarily due to rationalizing the company's cost structure, which was partially offset by re-engineering costs associated with the effort to make the cost structure scalable in the long-term.
Second Quarter 2010 and Six Month Business Metrics
Total second quarter 2010 exchange traded volumes were 395.8 million contracts versus 501.4 million for the same period last year.
Second quarter 2010 execution-only volumes were 113.0 million contracts compared with 142.8 million for the same period last year. Cleared volumes for the second quarter were 282.8 million contracts versus 358.6 million for the same period in the prior year.
Total volumes for the six month period ended September 30, 2009, were 825.5 million contracts, versus 1,044.0 million for the same period in the prior year. Execution-only volumes were 244.5 million contracts compared to 298.6 million for the same period in the prior year. Cleared volumes were 581.0 million contracts versus 745.4 million for the same period in the prior year.
Principal transactions for the second quarter of 2010 totaled $40.2 million versus $69.2 million in the same period last year. Including net interest income from related financing transactions, aggregate revenue from principal transactions totaled $76.1 million in the second quarter of 2010 compared with $94.1 million in the same period in the prior year.
Net revenue from the investment of client payables and excess cash, including net interest income and related principal transaction revenue, was $32.6 million for the second quarter of 2010 compared with $77.7 million in the same period last year. Please see the attached table for comparison periods.
Business Developments
Change of Domicile to Delaware
As previously disclosed, MF Global has been in the process of evaluating whether to change its jurisdiction of incorporation from Bermuda to Delaware, to best support our business and growth strategies, and more specifically, our focus on diversifying our business within financial services, as well as to improve our ability to respond to our current and anticipated competitive and regulatory landscape. Upon the effectiveness of the domestication and discontinuance, the jurisdiction of incorporation with respect to our parent company, MF Global Ltd., would change from Bermuda to Delaware. Although neither the domestication nor the discontinuance requires shareholder approval, both the domestication and discontinuance are subject to the final approval of our board of directors. On November 4, 2009, MF Global filed a Registration Statement on Form S-4 with the Securities and Exchange Commission. The registration statement will register the common stock and preferred stock of the Delaware company into which the outstanding common shares and preference shares of the Bermuda company will be converted on a one-for-one basis upon completion of a domestication in accordance with Section 388 of the General Corporation Law of the State of Delaware and the concurrent discontinuance from Bermuda under the Companies Act 1981 of Bermuda.
Enhanced Global Team
New Head of Foreign Exchange
In August, MF Global appointed Paul G. Farrell as global head of foreign exchange. Mr. Farrell, who held several management positions at JPMorgan Chase from 1973 to 2008, is responsible for managing MF Global's foreign exchange business across all customers, products and geographies around the world.
New Head of Equities
Peter Forlenza was named global head of equities in September. Mr. Forlenza is responsible for managing the company's equity and equity derivatives business across all customers and product lines. Most recently, Mr. Forlenza created and launched Outpost Investment Group, LLC, a multi-asset class global macro hedge fund based in New York. He also served in a number of management positions at Bank of America Securities, LLC, including global head of equities and global head of cash equities.
North American Chief Operating Officer
Robert Lyons joined MF Global as chief operating officer for North America, overseeing the region's operational controls and its administrative and reporting procedures. From 1987 until 2008, he served in a number of capacities within the Global Equities Division at Bear Stearns & Co. Inc, including chief operating officer and chief financial officer.
Product Offering Expansion
MF Global launched an independent, equities research, sales and execution team on September 8, 2009 to provide global clients with insight and analysis on Japan's most liquid stocks. The offering further advances the company's Asian expansion strategy and leverages the success of its existing European research model.
Earnings Conference Call Information
MF Global will hold a conference call to discuss the second quarter 2010 results today at 8:00 a.m. EST. The call is open to the public.
Dial-in information U.S./Canada: +1 866 312 9464 International: +1 706 643 0009 Conference ID: 34458047
Listeners to the call should dial in approximately 10 minutes prior to the start of the call.
Webcast information
A live audio webcast of the presentation will also be available on the investor relations section of the MF Global Web site, at http://www.mfglobalinvestorrelations.com, and will be available for replay shortly after the event.
About MF Global
MF Global Ltd. (NYSE: MF), is a leading intermediary offering customized solutions in global cash, derivatives and related markets. It provides execution and clearing services for exchange-traded and over-the-counter derivative products as well as for non-derivative foreign exchange products and securities in the cash market. MF Global is uniquely diversified across products, trading markets, customers and regions. Its worldwide client base includes financial institutions, industrial groups, hedge funds and other asset managers as well as professional traders and private/retail clients. MF Global operates in 14 countries on more than 70 exchanges, providing access to some of the largest financial markets in the world and is the leader by volume on many of these markets. For more information, please visit www.mfglobal.com.
Forward-Looking Statement
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Forward-looking statements in this press release, including statements relating to the Company's future revenues and earnings, plans, strategies, objectives, expectations and intentions, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy, and some of which might not be anticipated. We caution you not to place undue reliance on these forward-looking statements. We refer you to the Company's latest Annual Report on Form 10-K and Quarterly Report on Form 10-Q on file with the Securities and Exchange Commission (SEC), and any amendments thereto, for a description of the risks and uncertainties the Company faces. This press release includes certain non-GAAP financial measures, as defined under SEC rules. A reconciliation of these measures is included in the financial information later in this release, which is available on the Company's website at www.mfglobal.com.
Non-GAAP Financial Measures
In this press release, we provide certain earnings per share ratios based on a fully diluted number of shares ("fully diluted shares"). In accordance with the regulations of the U.S. Securities and Exchange Commission, earnings per share ratios based on fully diluted shares are considered to be non-GAAP financial measures because fully diluted shares represents shares outstanding, as determined on a GAAP basis, with certain adjustments that are made outside of GAAP. We use fully diluted shares for certain ratios for the reasons described further below.
The presentation of fully diluted shares and ratios based on fully diluted shares are not intended to be considered in isolation from, as a substitute for or as superior to, the financial information prepared and presented in accordance with GAAP, and our presentation of this measure may be different from non-GAAP financial measures used by other companies.
To determine fully diluted shares, weighted average common shares outstanding are adjusted at September 30, 2009 to add back shares underlying restricted shares and share unit awards ("IPO awards") granted in connection with our IPO which are not considered dilutive under U.S. GAAP and, therefore, not included in diluted common shares outstanding. These shares are not considered dilutive because, in part, of the value of these awards in relation to the market price of our outstanding common shares. In addition, common shares outstanding are also adjusted at September 30, 2009 to include the impact of our outstanding Series A Preference Shares, Series B Preference Shares and Convertible Notes, on an if-converted basis. For the three months ended September 30, 2009 weighted average common shares outstanding is adjusted by 3.6 million, 12.0 million, 14.4 million and 19.6 million shares, related to IPO awards, Series A Preference Shares, Series B Preference Shares and Convertible Notes, respectively. We believe it is meaningful to investors to present ratios based on fully diluted shares because it demonstrates the dilution that investors will experience at the end of the three-year vesting period of our IPO awards and when our Series A Preference Shares, Series B Preference Shares and Convertible Notes are converted. It is also how our management internally views dilution.
MF Global Ltd.
Consolidated Statements of Operations
(Dollars in thousands, except share data)
Three months ended Six months ended
September 30, September 30,
2009 2008 2009 2008
Revenues
Execution only 79,647 106,969 158,935 226,032
commissions
Cleared commissions 262,795 370,682 522,320 744,855
Principal 40,182 69,235 85,893 132,396
transactions
Interest income 100,835 272,259 213,024 618,078
Other 9,374 14,322 23,012 25,963
Total revenues 492,833 833,467 1,003,184 1,747,324
Interest and
transaction-based
expenses:
Interest expense 35,082 171,726 71,208 410,523
Execution and 146,257 220,965 288,392 453,668
clearing fees
Sales commissions 59,452 67,888 120,024 135,591
Total interest and
transaction-based 240,791 460,579 479,624 999,782
expenses
Revenues, net of
interest and 252,042 372,888 523,560 747,542
transaction-based
expenses
Expenses
Employee
compensation and
benefits (excluding 164,409 214,561 337,078 425,226
non-recurring IPO
awards)
Employee
compensation
related to 9,168 17,237 18,013 34,981
non-recurring IPO
awards
Communications and 28,663 31,474 55,821 63,900
technology
Occupancy and 9,766 11,229 19,467 21,484
equipment costs
Depreciation and 14,241 13,993 27,859 28,158
amortization
Professional fees 17,380 19,034 37,382 50,054
General and other 21,382 31,824 59,713 47,319
IPO-related costs 23 5,267 894 10,735
Impairment of 618 - 1,160 -
goodwill
Total other expenses 265,650 344,619 557,387 681,857
Gains on exchange 10,606 15,765 11,244 15,117
seats and shares
Loss on
extinguishment of - - 9,682 -
debt
Interest on 9,987 21,986 20,512 36,203
borrowings
(Loss)/income before
provision for income (12,989 ) 22,048 (52,777 ) 44,599
taxes
(Benefit)/provision (4,977 ) 11,201 (19,403 ) 17,927
for income taxes
Equity in income/
(loss) of
unconsolidated 310 (754 ) 930 (1,632 )
companies (net of
tax)
Net (loss)/income (7,702 ) 10,093 (32,444 ) 25,040
Net income
attributable to 631 682 1,041 1,238
noncontrolling
interest
Net (loss)/income
attributable to MF $ (8,333 ) $ 9,411 $ (33,485 ) $ 23,802
Global Ltd.
Dividends declared 7,678 3,238 15,356 3,238
on preferred stock
Cumulative and
participating - 2,677 - 3,985
dividends
Net (loss)/income
applicable to common $ (16,011 ) $ 3,496 $ (48,841 ) $ 16,579
shareholders
(Loss)/earnings per
share:
Basic $ (0.13 ) $ 0.03 $ (0.40 ) $ 0.14
Diluted $ (0.13 ) $ 0.03 $ (0.40 ) $ 0.14
Weighted average
number of common
shares outstanding:
Basic 123,254,930 120,503,557 123,087,787 120,279,627
Diluted 123,254,930 120,503,557 123,087,787 120,279,627
MF Global Ltd.
Consolidated Balance Sheets
(Dollars in thousands, except share data)
September 30, March 31,
2009 2009
Assets
Cash and cash equivalents $ 796,794 $ 639,183
Restricted cash and segregated securities 9,641,583 9,670,494
Securities purchased under agreements to resell 21,596,697 12,902,670
Securities borrowed 12,084,932 8,624,906
Securities received as collateral 53,013 54,488
Securities owned 11,587,792 3,605,908
Receivables:
Brokers, dealers and clearing organizations 2,692,686 2,473,341
Customers 579,886 415,532
Affiliates - 95
Other 40,681 36,884
Memberships in exchanges, at cost 6,565 6,370
Furniture, equipment and leasehold improvements, 67,917 62,717
net
Intangible assets, net 136,608 151,688
Other assets 208,812 191,359
TOTAL ASSETS 59,493,966 38,835,635
Liabilities and Equity
Short-term borrowings, including current portion 152,291 148,835
of long-term borrowings
Securities sold under agreements to repurchase 32,403,380 14,271,698
Securities loaned 4,747,119 5,951,679
Obligation to return securities borrowed 53,013 54,488
Securities sold, not yet purchased, at fair 5,142,509 2,884,591
value
Payables:
Brokers, dealers and clearing organizations 2,414,169 1,077,379
Customers 12,242,492 11,766,390
Affiliates - 1,602
Gains on exchange seats and shares 191,182 293,207
Long-term borrowings 698,681 938,007
TOTAL LIABILITIES 58,044,836 37,387,876
Preference shares, $1.00 par value per share
Series A Convertible, cumulative 96,167 96,167
Series B Convertible, non-cumulative 128,035 128,035
EQUITY
Common shares, $1.00 par value per share 121,495 120,723
Treasury shares (202 ) (97 )
Receivable from shareholder (29,779 ) (29,779 )
Additional paid-in capital 1,353,921 1,335,449
Accumulated other comprehensive income (net of (9,931 ) (24,015 )
tax)
Accumulated deficit (224,982 ) (191,497 )
Noncontrolling interest 14,406 12,773
TOTAL EQUITY 1,224,928 1,223,557
TOTAL LIABILITIES AND EQUITY $ 59,493,966 $ 38,835,635
Supplementary Data
The table below calculates total principal transactions
revenue for the periods presented:
Three months ended Six months ended
September 30, September 30,
2009 2008 2009 2008
(dollars in millions) (dollars in millions)
Principal transactions $ 40.2 $ 69.2 $ 85.9 $ 132.4
Net interest generated from
principal transactions and 35.9 24.9 78.7 61.4
related financing transactions
Total principal transactions $ 76.1 $ 94.1 $ 164.6 $ 193.8
revenue
The table below provides an analysis of the components of net
interest income for the periods presented:
Three months ended Six months ended
September 30, September 30,
2009 2008 2009 2008
(dollars in millions) (dollars in millions)
Net interest generated from
client payables and excess $ 29.9 $ 75.6 $ 63.2 $ 146.1
cash
Net interest generated from
principal transactions and 35.9 24.9 78.7 61.4
related financing transactions
Total net interest income $ 65.8 $ 100.5 $ 141.9 $ 207.5
The table below calculates Net Revenues from Client Payables and
Excess Cash for the periods presented:
Three months ended Six months ended
September 30, September 30,
2009 2008 2009 2008
(dollars in millions) (dollars in millions)
Net interest generated from
client payables and excess $ 29.9 $ 75.6 $ 63.2 $ 146.1
cash
Principal transactions
revenues from investment of 2.7 2.1 2.9 1.2
client payables
Total net revenues from client $ 32.6 $ 77.7 $ 66.1 $ 147.3
payables and excess cash
The table below presents
volumes for the periods
presented:
Three months ended Six months ended
September 30, September 30,
2009 2008 2009 2008
(contracts in millions) (contracts in millions)
Execution-only volumes 113.0 142.8 244.5 298.6
Cleared volumes 282.8 358.6 581.0 745.4
Total exchange-traded futures 395.8 501.4 825.5 1,044.0
and options volumes
The table below presents yield
for the periods presented:
Three months ended
September 30,
2009 2008
Execution (1) $ 0.57 $ 0.58
Cleared (1) $ 0.40 $ 0.42
(1) Excludes net commission and volume unrelated to
exchange-traded derivative activities.
Source: MF Global Ltd.
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