10-Q 1 intl1231201710-q.htm 10-Q Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________ 
FORM 10-Q
 ____________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From              to             
Commission File Number 000-23554
____________________ 
INTL FCStone Inc.
(Exact name of registrant as specified in its charter)
____________________ 
Delaware
 
59-2921318
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
708 Third Avenue, Suite 1500
New York, NY 10017
(Address of principal executive offices) (Zip Code)
(212) 485-3500
(Registrant’s telephone number, including area code)
____________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
  
Accelerated filer
x
 
 
 
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o No  x
As of February 5, 2018, there were 18,844,502 shares of the registrant’s common stock outstanding.
 
 
 
 
 



INTL FCStone Inc.
Quarterly Report on Form 10-Q for the Quarterly Period Ended December 31, 2017
Table of Contents
 
 
Page
Part I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
Part II. OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTL FCStone Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in millions, except par value and share amounts)
December 31,
2017
 
September 30,
2017
ASSETS
 
 
 
Cash and cash equivalents
$
321.8

 
$
314.9

Cash, securities and other assets segregated under federal and other regulations (including $16.5 and $54.5 at fair value at December 31, 2017 and September 30, 2017, respectively)
464.4

 
518.8

Collateralized transactions:
 
 
 
Securities purchased under agreements to resell
559.5

 
406.6

Securities borrowed
95.7

 
86.6

Deposits with and receivables from broker-dealers, clearing organizations and counterparties (including $53.7 and $204.7 at fair value at December 31, 2017 and September 30, 2017, respectively)
2,628.2

 
2,625.1

Receivables from customers, net
254.4

 
232.7

Notes receivable
10.6

 
10.6

Income taxes receivable
0.5

 
0.4

Financial instruments owned, at fair value (includes securities pledged as collateral that can be sold or repledged of $3.4 and $19.4 at December 31, 2017 and September 30, 2017, respectively)
2,055.9

 
1,731.8

Physical commodities inventory, net (including $142.7 and $73.2 at fair value at December 31, 2017 and September 30, 2017, respectively)
244.7

 
124.8

Deferred income taxes, net
22.9

 
42.6

Property and equipment, net
40.3

 
38.7

Goodwill and intangible assets, net
57.6

 
59.4

Other assets
52.4

 
50.4

Total assets
$
6,808.9

 
$
6,243.4

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Accounts payable and other accrued liabilities (including $1.0 at fair value at September 30, 2017)
$
111.5

 
$
135.6

Payables to:
 
 
 
Customers
3,063.8

 
3,072.9

Broker-dealers, clearing organizations and counterparties (including $1.1 and $4.8 at fair value at December 31, 2017 and September 30, 2017, respectively)
197.1

 
125.7

Lenders under loans
422.9

 
230.2

Income taxes payable
7.9

 
7.3

Collateralized transactions:
 
 
 
Securities sold under agreements to repurchase
1,650.4

 
1,393.1

Securities loaned
108.8

 
111.1

Financial instruments sold, not yet purchased, at fair value
803.3

 
717.6

Total liabilities
6,365.7

 
5,793.5

Commitments and contingencies (Note 11)

 

Stockholders' Equity:
 
 
 
Preferred stock, $0.01 par value. Authorized 1,000,000 shares; no shares issued or outstanding

 

Common stock, $0.01 par value. Authorized 30,000,000 shares; 20,931,720 issued and 18,809,763 outstanding at December 31, 2017 and 20,855,243 issued and 18,733,286 outstanding at September 30, 2017
0.2

 
0.2

Common stock in treasury, at cost - 2,121,957 shares at December 31, 2017 and September 30, 2017
(46.3
)
 
(46.3
)
Additional paid-in capital
261.4

 
259.0

Retained earnings
254.6

 
261.5

Accumulated other comprehensive loss, net
(26.7
)
 
(24.5
)
Total stockholders' equity
443.2

 
449.9

Total liabilities and stockholders' equity
$
6,808.9

 
$
6,243.4

See accompanying notes to condensed consolidated financial statements.

1


INTL FCStone Inc.
Condensed Consolidated Income Statements
(Unaudited)
 
Three Months Ended December 31,
(in millions, except share and per share amounts)
2017
 
2016
Revenues:
 
 
 
Sales of physical commodities
$
7,714.4

 
$
5,896.0

Trading gains, net
85.8

 
83.0

Commission and clearing fees
77.8

 
69.2

Consulting, management, and account fees
16.6

 
15.7

Interest income
24.0

 
10.4

Other income

 
0.1

Total revenues
7,918.6

 
6,074.4

Cost of sales of physical commodities
7,706.0

 
5,888.9

Operating revenues
212.6

 
185.5

Transaction-based clearing expenses
36.9

 
33.6

Introducing broker commissions
31.1

 
28.7

Interest expense
14.3

 
8.9

Net operating revenues
130.3

 
114.3

Compensation and other expenses:
 
 
 
Compensation and benefits
77.2

 
70.6

Trading systems and market information
8.2

 
8.9

Occupancy and equipment rental
4.1

 
3.4

Professional fees
4.7

 
4.8

Travel and business development
3.5

 
3.6

Non-trading technology and support
3.1

 
2.9

Depreciation and amortization
2.7

 
2.4

Communications
1.4

 
1.2

Bad debts
1.1

 
2.5

Other
5.7

 
5.6

Total compensation and other expenses
111.7

 
105.9

Income before tax
18.6

 
8.4

Income tax expense
25.5

 
2.1

Net (loss) income
$
(6.9
)
 
$
6.3

(Loss) earnings per share:
 
 
 
Basic
$
(0.37
)
 
$
0.34

Diluted
$
(0.37
)
 
$
0.34

Weighted-average number of common shares outstanding:
 
 
 
Basic
18,419,072

 
18,248,244

Diluted
18,419,072

 
18,484,995

See accompanying notes to condensed consolidated financial statements.

2


INTL FCStone Inc.
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)

 
Three Months Ended December 31,
(in millions)
2017
 
2016
Net (loss) income
$
(6.9
)
 
$
6.3

Other comprehensive loss, net of tax:
 
 
 
Foreign currency translation adjustment
(2.2
)
 
(0.9
)
Other comprehensive loss
(2.2
)
 
(0.9
)
Comprehensive (loss) income
$
(9.1
)
 
$
5.4

 
 
 
 
See accompanying notes to condensed consolidated financial statements.

3


INTL FCStone Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended December 31,
(in millions)
2017
 
2016
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(6.9
)
 
$
6.3

Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
Depreciation and amortization
2.7

 
2.4

Bad debts
1.1

 
2.5

Deferred income taxes
19.7

 
(3.5
)
Amortization of debt issuance costs
0.3

 
1.2

Amortization of share-based compensation
1.6

 
0.8

Gain on sale of property and equipment
(0.6
)
 
(0.3
)
Changes in operating assets and liabilities, net:
 
 
 
Cash, securities and other assets segregated under federal and other regulations
24.2

 
148.3

Securities purchased under agreements to resell
(153.0
)
 
(160.9
)
Securities borrowed
(9.0
)
 

Deposits with and receivables from broker-dealers, clearing organizations, and counterparties
(14.2
)
 
(151.4
)
Receivables from customers, net
(54.0
)
 
(11.4
)
Notes receivable, net

 
(1.3
)
Income taxes receivable
(0.4
)
 
(1.3
)
Financial instruments owned, at fair value
(292.0
)
 
(129.6
)
Physical commodities inventory, net
(121.0
)
 
(88.6
)
Other assets
(2.5
)
 
(7.8
)
Accounts payable and other accrued liabilities
(20.4
)
 
(7.6
)
Payables to customers
26.7

 
(35.3
)
Payables to broker-dealers, clearing organizations and counterparties
69.6

 
(148.1
)
Income taxes payable
0.9

 
4.0

Securities sold under agreements to repurchase
257.4

 
399.1

Securities loaned
(2.3
)
 

Financial instruments sold, not yet purchased, at fair value
86.1

 
65.9

Net cash used in operating activities
(186.0
)
 
(116.6
)
Cash flows from investing activities:
 
 
 
Cash paid for acquisitions, net

 
(6.0
)
Purchase of property and equipment
(3.2
)
 
(3.0
)
Net cash used in investing activities
(3.2
)
 
(9.0
)
Cash flows from financing activities:
 
 
 
Net change in payable to lenders under loans
192.9

 
130.0

Repayment of senior unsecured notes

 
(45.5
)
Payments of note payable
(0.2
)
 
(0.2
)
Deferred payments on acquisitions
(2.3
)
 

Debt issuance costs
(0.1
)
 
(0.1
)
Exercise of stock options
1.5

 
2.0

Withholding taxes on stock option exercises
(0.8
)
 

Income tax benefit on stock options and awards

 
0.6

Net cash provided by financing activities
191.0

 
86.8

Effect of exchange rates on cash and cash equivalents
5.1

 
1.4

Net increase (decrease) in cash and cash equivalents
6.9

 
(37.4
)
Cash and cash equivalents at beginning of period
314.9

 
316.2

Cash and cash equivalents at end of period
$
321.8

 
$
278.8

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
11.3

 
$
7.6

Income taxes paid, net of cash refunds
$
5.3

 
$
2.4

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Identified intangible assets from asset acquisitions
$

 
$
6.0

See accompanying notes to condensed consolidated financial statements.

4


INTL FCStone Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(in millions)
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss, net
 
Total
Balances as of September 30, 2017
$
0.2

 
$
(46.3
)
 
$
259.0

 
$
261.5

 
$
(24.5
)
 
$
449.9

Net loss
 
 
 
 
 
 
(6.9
)
 
 
 
(6.9
)
Other comprehensive loss
 
 
 
 
 
 
 
 
(2.2
)
 
(2.2
)
Exercise of stock options
 
 
 
 
0.8

 
 
 
 
 
0.8

Share-based compensation
 
 
 
 
1.6

 
 
 
 
 
1.6

Balances as of December 31, 2017
$
0.2

 
$
(46.3
)
 
$
261.4

 
$
254.6

 
$
(26.7
)
 
$
443.2

See accompanying notes to condensed consolidated financial statements.

5


INTL FCStone Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1Basis of Presentation and Consolidation and Accounting Standards Adopted
INTL FCStone Inc., a Delaware corporation, and its consolidated subsidiaries (collectively “INTL” or “the Company”), is a diversified global financial services organization providing execution, risk management and advisory services, market intelligence, and clearing services across asset classes and markets around the world. The Company’s services include comprehensive risk management advisory services for commercial customers; execution of listed futures and options on futures contracts on all major commodity exchanges; structured over-the-counter (“OTC”) products in a wide range of commodities; physical trading and hedging of precious metals and select other commodities; trading of more than 140 foreign currencies; market-making in international equities; fixed income; debt origination and asset management.
The Company provides these services to a diverse group of more than 20,000 predominantly wholesale organizations located throughout the world, including producers, processors and end-users of nearly all widely-traded physical commodities to manage their risks and enhance margins; to commercial counterparties who are end-users of the Company’s products and services; to governmental and non-governmental organizations; and to commercial banks, brokers, institutional investors and major investment banks.
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated balance sheet as of September 30, 2017, which has been derived from audited consolidated financial statements, and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. The Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the condensed consolidated financial statements for the interim periods presented have been reflected as required by Rule 10-01 of Regulation S-X.
Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained in the Company’s Form 10-K for the fiscal year ended September 30, 2017 filed with the SEC.
These condensed consolidated financial statements include the accounts of INTL FCStone Inc. and all other entities in which the Company has a controlling financial interest. All material intercompany transactions and balances have been eliminated in consolidation.
The Company’s fiscal year end is September 30, and the fiscal quarters end on December 31, March 31, June 30 and September 30. Unless otherwise stated, all dates refer to fiscal years and fiscal interim periods.
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant of these estimates and assumptions relate to fair value measurement for financial instruments and investments, revenue recognition, the provision for potential losses from bad debts, valuation of inventories, valuation of goodwill and intangible assets, incomes taxes, and contingencies. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.
In the condensed consolidated income statements, the total revenues reported combine gross revenues for the physical commodities business and net revenues for all other businesses. The subtotal ‘operating revenues’ in the condensed consolidated income statements is calculated by deducting physical commodities cost of sales from total revenues. The subtotal ‘net operating revenues’ in the condensed consolidated income statements is calculated as operating revenues 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 transactional volumes. Introducing broker commissions include commission paid to non-employee third parties that have introduced customers to the Company. Net operating revenues represent revenues available to pay variable compensation to risk management consultants and traders and direct non-variable expenses, as well as variable and non-variable expenses of operational and administrative employees.

6


Reclassifications
During the quarter ended December 31, 2017, the Company separately classified non-trading technology and support costs that were previously included within ‘Other’ on the condensed consolidated income statements. Additionally, during the quarter ended December 31, 2017, the Company separately classified communications related expenses separately from trading systems and market information related costs. In performing these reclassifications, the Company has made immaterial, retrospective adjustments to conform to our current period presentation. For the three months December 31, 2016, ‘Other’ expenses included $2.9 million of expenses that are now included within ‘Non-trading technology and support’ on the condensed consolidated income statements. For the three months ended December 31, 2016, ‘Trading systems and market information’ included $1.2 million of expenses that are now included within ‘Communications’ on the condensed consolidated income statements.
Accounting Standards Adopted
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), which simplifies several aspects of the accounting for share-based payment transactions. Under ASU 2016-09, excess tax benefits and tax deficiencies are recognized as income tax expense or benefit in the income statement instead of additional paid in capital. ASU 2016-09 also provides entities with the option to elect an accounting policy to estimate forfeitures of stock-based awards over the service period (current GAAP) or account for forfeitures when they occur. Under ASU 2016-09, previously unrecognized excess tax benefits should be recognized using a modified retrospective transition. In addition, amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement, as well as changes in the computation of weighted-average diluted shares outstanding, should be applied prospectively. ASU 2016-09 is effective for and was adopted by the Company in the first quarter of 2018 and the impact of the adoption resulted in the following:
During the three months ended December 31, 2017, the Company recognized excess tax benefits from stock-based compensation of $0.2 million within income tax expense on the condensed consolidated income statement and within net income on the condensed consolidated cash flow statement. Prior to adoption, the tax effect of stock-based awards would have been recognized in additional paid-in-capital on the condensed consolidated balance sheets and separately stated in the financing activities in the condensed consolidated cash flow statements. The Company has elected to adopt this guidance prospectively.
The Company has elected to estimate forfeitures of stock-based awards as they occur. The Company elected to account for forfeitures as they occur using a modified retrospective transition method. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
The excess tax benefits from the assumed proceeds available to repurchase shares were excluded in the computation of diluted earnings per share for the three months ended December 31, 2017. The Company has elected to adopt this guidance prospectively.
For the three months ended December 31, 2017, the Company has classified as a financing activity in the condensed consolidated cash flow statement $0.8 million of cash paid to taxing authorities for restricted stock shares withheld to satisfy statutory income tax withholding obligations. The retrospective application of this guidance had no impact on the condensed consolidated cash flow statement for the three months ended December 31, 2016.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” Under ASU 2015-11, inventory that is measured using the first-in, first-out (FIFO), specific identification, or average cost methods should be measured at the lower of cost or net realizable value. This ASU does not impact inventory measurement under the last-in, first-out (LIFO) or retail inventory methods. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The amendments from this update are to be applied prospectively. The Company adopted this ASU prospectively on the effective date of October 1, 2017. The adoption of this ASU has not had a material impact on our condensed consolidated financial statements.





7


Note 2Earnings (loss) per Share
The Company presents basic and diluted earnings (loss) per share (“EPS”) using the two-class method which requires all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends and therefore participate in undistributed earnings with common stockholders be included in computing earnings (loss) per share. Under the two-class method, net earnings are reduced by the amount of dividends declared in the period for each class of common stock and participating security. The remaining undistributed earnings (loss) are then allocated to common stock and participating securities, based on their respective rights to receive dividends. Restricted stock awards granted to certain employees and directors contain non-forfeitable rights to dividends at the same rate as common stock, and are considered participating securities. Basic EPS has been computed by dividing net (loss) income by the weighted-average number of common shares outstanding.
The following is a reconciliation of the numerator and denominator of the diluted earnings (loss) per share computations for the periods presented below.
 
Three Months Ended December 31,
(in millions, except share amounts)
2017
 
2016
Numerator:
 
 
 
Net (loss) income
$
(6.9
)
 
$
6.3

Less: Allocation to participating securities

 
(0.1
)
Net (loss) income allocated to common stockholders
$
(6.9
)
 
$
6.2

Denominator:
 
 
 
Weighted average number of:
 
 
 
Common shares outstanding
18,419,072


18,248,244

Dilutive potential common shares outstanding:
 
 
 
Share-based awards

 
236,751

Diluted weighted-average common shares
18,419,072

 
18,484,995

The dilutive effect of share-based awards is reflected in diluted earnings (loss) per share by application of the treasury stock method, which includes consideration of unamortized share-based compensation expense required under the Compensation – Stock Compensation Topic of the ASC.
Options to purchase 489,721 and 914,453 shares of common stock for the three months ended December 31, 2017 and 2016, respectively, were excluded from the calculation of diluted earnings per share as they would have been anti-dilutive.
Note 3Assets and Liabilities, at Fair Value
Fair value is defined by U.S. GAAP as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants on the measurement date.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company is required to develop a set of assumptions that reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many securities. This condition could cause a security to be reclassified to a lower level within the fair value hierarchy.
The Company has designed independent price verification controls and periodically performs such controls to ensure the reasonableness of such values.
In accordance with FASB ASC 820, Fair Value Measurement, the Company groups its assets and liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1 - Valuation is based upon unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 1 consists of financial assets and liabilities whose fair values are estimated using quoted market prices.
Level 2 - Valuation is based upon quoted prices for identical or similar assets or liabilities in markets that are less active, that is, markets in which there are few transactions for the asset or liability that are observable for substantially the full term. Included in Level 2 are those financial assets and liabilities for which fair values are estimated using models or other valuation methodologies. These models are primarily industry-standard models that consider various observable inputs, including time value, yield curve, volatility factors, observable current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures.

8


Level 3 - Valuation is generated from prices or valuation techniques that require an input that is both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). Level 3 comprises financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are not readily observable from objective sources.
Financial and nonfinancial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). A market is active if there are sufficient transactions on an ongoing basis to provide current pricing information for the asset or liability, pricing information is released publicly, and price quotations do not vary substantially either over time or among market makers. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.
The guidance requires the Company to consider counterparty credit risk of all parties of outstanding derivative instruments that would be considered by a market participant in the transfer or settlement of such contracts (exit price). The Company’s exposure to credit risk on derivative financial instruments relates to the portfolio of OTC derivative contracts as all exchange-traded contracts held can be settled on an active market with a credit guarantee by the respective exchange. The Company requires each counterparty to deposit margin collateral for all OTC instruments and is also required to deposit margin collateral with counterparties. The Company has assessed the nature of these deposits and used its discretion to adjust each based on the underlying credit considerations for the counterparty and determined that the collateral deposits minimize the exposure to counterparty credit risk in the evaluation of the fair value of OTC instruments as determined by a market participant.
Fair value of financial and nonfinancial assets and liabilities that are carried on the Condensed Consolidated Balance Sheets at fair value on a recurring basis
Cash and cash equivalents reported at fair value on a recurring basis includes certificates of deposit, which are stated at cost plus accrued interest, which approximates fair value.
Cash, securities and other assets segregated under federal and other regulations reported at fair value on a recurring basis include the value of pledged investments, primarily U.S. Treasury obligations and commodities warehouse receipts.
Deposits with and receivables from broker-dealers, clearing organizations and counterparties and payable to customers and broker-dealers, clearing organizations and counterparties include the value of pledged investments, primarily U.S. Treasury obligations and foreign government obligations. These balances also include the fair value of exchange-traded options on futures and exchange-cleared OTC swaps and options determined by quoted prices on the applicable exchange.
Financial instruments owned and sold, not yet purchased include the value of common and preferred stock, American Depository Receipts (“ADRs”), and Global Depository Receipts (“GDRs”), exchangeable foreign ordinary equities, ADRs, and GDRs, corporate and municipal debt obligations, U.S. Treasury obligations, U.S. government agency obligations, foreign government obligations, agency mortgage-backed obligations, asset-backed obligations, derivative financial instruments, commodities warehouse receipts, exchange firm common stock, and mutual funds and investments in managed funds. The fair value of exchange firm common stock is determined by quoted market prices, and the fair value of exchange memberships is determined by recent sale transactions.
Physical commodities inventory recorded at fair value on a recurring basis includes precious metals that are a part of the trading activities of a regulated broker-dealer subsidiary and is recorded at fair value using spot prices. Physical commodities inventory also includes agricultural commodities that are a part of the trading activities of a non-broker dealer subsidiary and are also recorded at net realizable value using spot prices. Precious metals inventory held by subsidiaries that are not broker-dealers are valued at fair value on a non-recurring basis. Except as disclosed in Note 6, the Company did not have any fair value adjustments for assets or liabilities measured at fair value on a non-recurring basis as of December 31, 2017 and September 30, 2017.
Cash equivalents, securities, commodities warehouse receipts, physical commodities inventory, derivative financial instruments and contingent liabilities are carried at fair value, on a recurring basis, and are classified and disclosed into three levels in the fair value hierarchy.
The following section describes the valuation methodologies used by the Company to measure classes of financial instruments at fair value and specifies the level within the fair value hierarchy where various financial instruments are classified.
The Company uses quoted prices in active markets, where available, and classifies such instruments within Level 1 of the fair value hierarchy. Examples include U.S. Treasury obligations, commodities warehouse receipts, some common and preferred stock, ADRs, and GDRs, some exchangeable foreign ordinary equities, ADRs, and GDRs, some corporate and municipal obligations, physical precious metals, agricultural, and energy commodities, equity investments in exchange firms, mutual funds,

9


as well as futures and options on futures contracts traded on national exchanges. The fair value of exchange memberships is determined by recent sale transactions and is included within Level 1.
When instruments are traded in secondary markets and observable prices are not available for substantially the full term, the Company generally relies on internal valuation techniques or prices obtained from third-party pricing services or brokers or a combination thereof, and accordingly, classified these instruments as Level 2. Examples include U.S. government agency obligations, agency-mortgage backed obligations, asset-backed obligations, foreign government obligations, some common and preferred stock, ADRs, and GDRs, certain exchangeable foreign ordinary equities, ADRs, and GDRs, OTC commodity and foreign exchange forwards, swaps, and options, OTC firm purchase and sale commitments related to precious metals commodities, and OTC firm purchase and sale commitments related to the Company’s agricultural and energy commodities.
Derivatives without a quoted price in an active market and derivatives executed OTC are valued using internal valuation techniques, including pricing models which utilize significant inputs observable to market participants. The valuation techniques and inputs depend on the type of derivative and the nature of the underlying instrument. The key inputs depend upon the type of derivative and the nature of the underlying instrument and include interest yield curves, foreign exchange rates, commodity prices, volatilities and correlation. These derivative instruments are included within Level 2 of the fair value hierarchy.
With the exception of certain derivative instruments, financial instruments owned and sold are primarily valued using third party pricing sources. Third party vendors compile prices from various sources and often apply matrix pricing for similar securities when no prices are observable. The Company reviews the pricing methodologies provided by the various vendors in order to determine if observable market information is being used, versus unobservable inputs. When evaluating the propriety of an internal trader price compared with vendor prices, considerations include the range and quality of vendor prices. Trader or broker prices are used to ensure the reasonableness of a vendor price; however valuing financial instruments involves judgments acquired from knowledge of a particular market. If a trader asserts that a vendor or market price is not reflective of market value, justification for using the trader price, including recent sales activity where possible, must be provided to and approved by the appropriate levels of management. Financial instruments owned and sold that are valued using third party pricing sources are included within either Level 1 or Level 2 of the fair value hierarchy based upon the observability of the inputs used and the level of activity in the market.
Level 3 comprises financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies utilizing significant inputs that are not readily observable from objective sources. Included in Level 3 are some common stock and ADRs, some corporate and municipal obligations, and contingent liabilities. Level 3 assets and liabilities are valued using an income approach based upon management developed discounted cash flow projections, which are an unobservable input.
The fair value estimates presented herein are based on pertinent information available to management as of December 31, 2017 and September 30, 2017. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.




10


The following tables set forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis, as of December 31, 2017 by level in the fair value hierarchy.
 
December 31, 2017
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Unrestricted cash equivalents - certificate of deposits
$
4.7

 
$

 
$

 
$

 
$
4.7

Commodities warehouse receipts
14.9

 

 

 

 
14.9

U.S. Treasury obligations
1.6

 

 

 

 
1.6

Securities and other assets segregated under federal and other regulations
16.5

 

 

 

 
16.5

U.S. Treasury obligations
219.1

 

 

 

 
219.1

"To be announced" (TBA) and forward settling securities

 
1.7

 

 
(0.6
)
 
1.1

Foreign government obligations

 
6.2

 

 

 
6.2

Derivatives
3,068.1

 
188.7

 

 
(3,429.5
)
 
(172.7
)
Deposits with and receivables from broker-dealers, clearing organization and counterparties
3,287.2

 
196.6

 

 
(3,430.1
)
 
53.7

Common and preferred stock, ADRs, and GDRs
30.5

 
3.4

 
0.1

 

 
34.0

Exchangeable foreign ordinary equities, ADRs, and GDRs
9.0

 
1.1

 

 

 
10.1

Corporate and municipal bonds
45.1

 
0.6

 

 

 
45.7

U.S. Treasury obligations
76.8

 

 

 

 
76.8

U.S. government agency obligations

 
587.7

 

 

 
587.7

Foreign government obligations

 
11.3

 

 

 
11.3

Agency mortgage-backed obligations

 
1,053.4

 

 

 
1,053.4

Asset-backed obligations

 
21.6

 

 

 
21.6

Derivatives
1.4

 
1,577.8

 

 
(1,444.3
)
 
134.9

Commodities leases

 
178.9

 

 
(168.5
)
 
10.4

Commodities warehouse receipts
56.1

 

 

 

 
56.1

Exchange firm common stock
8.9

 

 

 

 
8.9

Mutual funds and other
5.0

 

 

 

 
5.0

Financial instruments owned
232.8

 
3,435.8

 
0.1

 
(1,612.8
)
 
2,055.9

Physical commodities inventory, net
142.7

 

 

 

 
142.7

Total assets at fair value
$
3,683.9

 
$
3,632.4

 
$
0.1

 
$
(5,042.9
)
 
$
2,273.5

Liabilities:
 
 
 
 
 
 
 
 
 
TBA and forward settling securities

 
1.7

 

 
(0.6
)
 
1.1

Derivatives
3,169.6

 
212.5

 

 
(3,382.1
)
 

Payable to broker-dealers, clearing organizations and counterparties
3,169.6

 
214.2

 

 
(3,382.7
)
 
1.1

Common and preferred stock, ADRs, and GDRs
48.6

 
1.2

 

 

 
49.8

Exchangeable foreign ordinary equities, ADRs, and GDRs
10.2

 

 

 

 
10.2

Corporate and municipal bonds
0.3

 

 

 

 
0.3

U.S. Treasury obligations
404.6

 

 

 

 
404.6

U.S. government agency obligations

 
35.5

 

 

 
35.5

Agency mortgage-backed obligations

 
3.9

 

 

 
3.9

Derivatives

 
1,634.6

 

 
(1,385.3
)
 
249.3

Commodities leases

 
186.4

 

 
(136.7
)
 
49.7

Financial instruments sold, not yet purchased
463.7

 
1,861.6

 

 
(1,522.0
)
 
803.3

Total liabilities at fair value
$
3,633.3

 
$
2,075.8

 
$

 
$
(4,904.7
)
 
$
804.4

 
(1)
Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.


11


The following table sets forth the Company’s financial and nonfinancial assets and liabilities accounted for at fair value, on a recurring basis, as of September 30, 2017 by level in the fair value hierarchy.
 
September 30, 2017
(in millions)
Level 1
 
Level 2
 
Level 3
 
Netting and
Collateral
(1)
 
Total
Assets:
 
 
 
 
 
 
 
 
 
Unrestricted cash equivalents - certificates of deposits
$
3.8

 
$

 
$

 
$

 
$
3.8

Commodities warehouse receipts
21.0

 

 

 

 
21.0

U.S. Treasury obligations
33.5

 

 

 

 
33.5

Securities and other assets segregated under federal and other regulations
54.5

 

 

 

 
54.5

U.S. Treasury obligations
244.7

 

 

 

 
244.7

"To be announced" (TBA) and forward settling securities

 
8.8

 

 

 
8.8

Foreign government obligations

 
6.4

 

 

 
6.4

Derivatives
2,608.6

 
289.1

 

 
(2,952.9
)
 
(55.2
)
Deposits with and receivables from broker-dealers, clearing organizations, and counterparties
2,853.3

 
304.3

 

 
(2,952.9
)
 
204.7

Common and preferred stock, ADRs, and GDRs
31.2

 
3.4

 
0.1

 

 
34.7

Exchangeable foreign ordinary equities, ADRs, and GDRs
9.2

 
1.2

 

 

 
10.4

Corporate and municipal bonds
28.2

 
0.9

 

 

 
29.1

U.S. Treasury obligations
60.0

 

 

 

 
60.0

U.S. government agency obligations

 
368.9

 

 

 
368.9

Foreign government obligations

 
10.2

 

 

 
10.2

Agency mortgage-backed obligations

 
920.9

 

 

 
920.9

 Asset-backed obligations

 
47.3

 

 

 
47.3

Derivatives
1.3

 
1,413.4

 

 
(1,252.6
)
 
162.1

Commodities leases

 
174.1

 

 
(138.7
)
 
35.4

Commodities warehouse receipts
38.5

 

 

 

 
38.5

Exchange firm common stock
8.3

 

 

 

 
8.3

Mutual funds and other
6.0

 

 

 

 
6.0

Financial instruments owned
182.7

 
2,940.3

 
0.1

 
(1,391.3
)
 
1,731.8

Physical commodities inventory, net
73.2

 

 

 

 
73.2

Total assets at fair value
$
3,167.5

 
$
3,244.6

 
$
0.1

 
$
(4,344.2
)
 
$
2,068.0

Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable and other accrued liabilities - contingent liabilities
$

 
$

 
$
1.0

 
$

 
$
1.0

TBA and forward settling securities

 
4.9

 

 
(0.1
)
 
4.8

Derivatives
2,476.2

 
292.8

 

 
(2,769.0
)
 

Payable to broker-dealers, clearing organizations and counterparties
2,476.2

 
297.7

 

 
(2,769.1
)
 
4.8

Common and preferred stock, ADRs, and GDRs
33.7

 
0.7

 

 

 
34.4

Exchangeable foreign ordinary equities, ADRs, and GDRs
10.3

 
0.2

 

 

 
10.5

Corporate and municipal bonds
0.3

 

 

 

 
0.3

U.S. Treasury obligations
285.9

 

 

 

 
285.9

U.S. government agency obligations

 
27.9

 

 

 
27.9

Agency mortgage-backed obligations

 
0.1

 

 

 
0.1

Derivatives

 
1,427.2

 

 
(1,110.2
)
 
317.0

Commodities leases

 
191.1

 

 
(149.6
)
 
41.5

Financial instruments sold, not yet purchased
330.2

 
1,647.2

 

 
(1,259.8
)
 
717.6

Total liabilities at fair value
$
2,806.4

 
$
1,944.9

 
$
1.0

 
$
(4,028.9
)
 
$
723.4

(1)
Represents cash collateral and the impact of netting across the levels of the fair value hierarchy. Netting among positions classified within the same level is included in that level.
Realized and unrealized gains and losses are included in ‘trading gains, net’ and ‘interest income’ in the condensed consolidated income statements.

12


Information on Level 3 Financial Assets and Liabilities
The Company’s financial assets at fair value classified in Level 3 of the fair value hierarchy as of December 31, 2017 and September 30, 2017 are summarized below:
(in millions)
December 31, 2017
 
September 30, 2017
Total Level 3 assets
$
0.1

 
$
0.1

Level 3 assets for which the Company bears economic exposure
$
0.1

 
$
0.1

Total assets
$
6,808.9

 
$
6,243.4

Total assets at fair value
$
2,273.5

 
$
2,068.0

Total Level 3 assets as a percentage of total assets
%
 
%
Level 3 assets for which the Company bears economic exposure as a percentage of total assets
%
 
%
Total Level 3 assets as a percentage of total financial assets at fair value
%
 
%
The following tables set forth a summary of changes in the fair value of the Company’s Level 3 financial assets and liabilities during the three months ended December 31, 2017 and 2016, including a summary of unrealized gains (losses) during the respective periods on the Company’s Level 3 financial assets and liabilities still held as of December 31, 2017.
 
Level 3 Financial Assets and Financial Liabilities For the Three Months Ended December 31, 2017
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Purchases/issuances
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
0.1

 
$

 
$

 
$

 
$

 
$

 
$
0.1

 
$
0.1

 
$

 
$

 
$

 
$

 
$

 
$
0.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Level 3 Financial Assets and Financial Liabilities For the Three Months Ended December 31, 2016
(in millions)
Balances at
beginning of
period
 
Realized gains
(losses) during
period
 
Unrealized
gains (losses)
during period
 
Purchases/issuances
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock and ADRs
$
0.2

 
$

 
$

 
$

 
$

 
$

 
$
0.2

Corporate and municipal bonds
3.0

 

 

 

 
(3.0
)
 

 

 
$
3.2

 
$

 
$

 
$

 
$
(3.0
)
 
$

 
$
0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Balances at
beginning of
period
 
Realized (gains)
losses during
period
 
Unrealized
(gains) losses
during period
 
Purchases/issuances
 
Settlements
 
Transfers in
or (out) of
Level 3
 
Balances at
end of period
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent liabilities
$
0.8

 
$

 
$

 
$

 
$

 
$

 
$
0.8

The Company is required to make additional future cash payments based on certain financial performance measures of an acquired business. The Company was required to remeasure the fair value of contingent consideration arrangements on a recurring basis. As of September 30, 2017, the Company had classified its liability for the contingent consideration within Level 3 of the fair value hierarchy because the fair value was determined using significant unobservable inputs, which included projected cash flows. The estimated fair value of the earn-outs was based upon management-developed earnings forecasts for the remaining contingency period, which was a Level 3 input in the fair value hierarchy. The fair value of the contingent consideration increased by less than $0.1 million during the three months ended December 31, 2017 and 2016 with the corresponding amount classified as ‘other’ in the condensed consolidated income statements. The contingency period for the contingent consideration arrangements ended as of December 31, 2017. The accrued balance of $1.0 million is included within ‘accounts payable and other accrued liabilities’ on the condensed consolidated balance sheet at an amount approximating fair value with the final payment due in February 2018.

13


The Company reports transfers in and out of Levels 1, 2 and 3, as applicable, using the fair value of the securities as of the beginning of the reporting period in which the transfer occurred. The Company did not have any transfers in and out of Levels 1, 2, and 3 during the three months ended December 31, 2017 and 2016.
Additional disclosures about the fair value of financial instruments that are not carried on the Condensed Consolidated Balance Sheets at fair value
Many, but not all, of the financial instruments that the Company holds are recorded at fair value in the Condensed Consolidated Balance Sheets. The following represents financial instruments in which the ending balance at December 31, 2017 and September 30, 2017 was not carried at fair value in accordance with U.S. GAAP on our Condensed Consolidated Balance Sheets:
Short-term financial instruments: The carrying value of short-term financial instruments, including cash and cash equivalents, cash segregated under federal and other regulations, securities purchased under agreements to re-sell and securities sold under agreements to re-purchase, and securities borrowed and loaned are recorded at amounts that approximate the fair value of these instruments due to their short-term nature and level of collateralization. These financial instruments generally expose us to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market rates. Under the fair value hierarchy, cash and cash equivalents and cash segregated under federal and other regulations are classified as Level 1. Securities purchased under agreements to re-sell and securities sold under agreements to re-purchase, and securities borrowed and loaned are classified as Level 2 under the fair value hierarchy as they are generally overnight and are collateralized by common stock, U.S. Treasury obligations, U.S. government agency obligations, agency mortgage-backed obligations, and asset-backed obligations.
Receivables and other assets: Receivables from broker-dealers, clearing organizations, and counterparties, receivables from customers, net, notes receivables, net and certain other assets are recorded at amounts that approximate fair value due to their short-term nature and are classified as Level 2 under the fair value hierarchy.
Payables: Payables to customers and payables to brokers-dealers, clearing organizations, and counterparties are recorded at amounts that approximate fair value due to their short-term nature and are classified as Level 2 under the fair value hierarchy.
Lender under loans: Payables to lenders under loans carry variable rates of interest and thus approximate fair value and are classified as Level 2 under the fair value hierarchy.
Note 4Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk
The Company is party to certain financial instruments with off-balance sheet risk in the normal course of its business. The Company has sold financial instruments that it does not currently own and will therefore be obliged to purchase such financial instruments at a future date. The Company has recorded these obligations in the condensed consolidated financial statements as of December 31, 2017 and September 30, 2017 at the fair values of the related financial instruments. The Company will incur losses if the fair value of the underlying financial instruments increases subsequent to December 31, 2017. The total financial instruments sold, not yet purchased of $803.3 million and $717.6 million as of December 31, 2017 and September 30, 2017, respectively, includes $249.3 million and $317.0 million for derivative contracts, respectively, which represented a liability to the Company based on their fair values as of December 31, 2017 and September 30, 2017.
Derivatives
The Company utilizes derivative products in its trading capacity as a dealer in order to satisfy customer needs and mitigate risk. The Company manages risks from both derivatives and non-derivative cash instruments on a consolidated basis. The risks of derivatives should not be viewed in isolation, but in aggregate with the Company’s other trading activities. The majority of the Company’s derivative positions are included in the condensed consolidated balance sheets in ‘Deposits with and receivables from broker-dealers, clearing organizations and counterparties’, ‘Financial instruments owned, at fair value’, ‘Financial instruments sold, not yet purchased, at fair value’ and ‘Payables to broker-dealers, clearing organizations and counterparties’.
The Company employs an interest rate risk management strategy using derivative financial instruments in the form of interest rate swaps as well as outright purchases of medium-term U.S. Treasury notes to manage a portion of the aggregate interest rate position. The Company’s objective when using interest rate swaps under the strategy, is to invest certain amounts of customer deposits in high quality, short-term investments and swap the resulting variable interest earnings into medium-term interest earnings. When used, the risk mitigation of these interest rate swaps are not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC, and as a result are recorded at fair value, with changes in the fair value of the interest rate swaps recorded within 'trading gains, net' in the condensed consolidated income statements.

14


Listed below are the fair values of the Company’s derivative assets and liabilities as of December 31, 2017 and September 30, 2017. Assets represent net unrealized gains and liabilities represent net unrealized losses.
 
December 31, 2017
 
September 30, 2017
(in millions)
Assets (1)
 
Liabilities (1)
 
Assets (1)
 
Liabilities (1)
Derivative contracts not accounted for as hedges:
 
 
 
 
 
 
 
Exchange-traded commodity derivatives
$
2,515.9

 
$
2,660.1

 
$
2,094.2

 
$
1,975.0

OTC commodity derivatives
1,208.9

 
1,270.9

 
1,084.0

 
1,110.3

Exchange-traded foreign exchange derivatives
53.0

 
32.3

 
66.0

 
52.0

OTC foreign exchange derivatives
533.4

 
530.8

 
618.5

 
609.8

Exchange-traded interest rate derivatives
203.1

 
234.8

 
228.4

 
203.6

OTC interest rate derivatives
24.2

 
24.2

 

 

Exchange traded equity index derivatives
297.5

 
263.6

 
221.3

 
245.4

TBA and forward settling securities
1.7

 
1.7

 
8.8

 
4.9

Gross fair value of derivative contracts
4,837.7

 
5,018.4

 
4,321.2

 
4,201.0

Impact of netting and collateral
(4,874.4
)
 
(4,768.0
)
 
(4,205.5
)
 
(3,879.2
)
Total fair value included in ‘Deposits with and receivables from broker-dealers, clearing organizations, and counterparties’
$
(171.6
)
 
 
 
$
(46.4
)
 
 
Total fair value included in ‘Financial instruments owned, at fair value’
$
134.9

 
 
 
$
162.1

 
 
Total fair value included in ‘Payables to broker-dealers, clearing organizations and counterparties
 
 
$
1.1

 
 
 
$
4.8

Fair value included in ‘Financial instruments sold, not yet purchased, at fair value’
 
 
$
249.3

 
 
 
$
317.0

(1)
As of December 31, 2017 and September 30, 2017, the Company’s derivative contract volume for open positions were approximately 6.8 million and 6.1 million contracts, respectively.
The Company’s derivative contracts are principally held in its Commercial Hedging and Clearing and Execution Services segments. The Company assists its Commercial Hedging segment customers in protecting the value of their future production by entering into option or forward agreements with them on an OTC basis. The Company also provides its Commercial Hedging segment customers with option products, including combinations of buying and selling puts and calls. The Company mitigates its risk by offsetting the customer’s transaction simultaneously with one of the Company’s trading counterparties or with a similar but not identical exchange-traded position. The risk mitigation of these offsetting trades is not within the documented hedging designation requirements of the Derivatives and Hedging Topic of the ASC. These derivative contracts are traded along with cash transactions because of the integrated nature of the markets for these products. The Company manages the risks associated with derivatives on an aggregate basis along with the risks associated with its proprietary trading and market-making activities in cash instruments as part of its firm-wide risk management policies. In particular, the risks related to derivative positions may be partially offset by inventory, unrealized gains in inventory or cash collateral paid or received.
The Company has derivative instruments, which consist of mortgage-backed TBA securities and forward settling transactions that are used to manage risk exposures in the trading inventory of the Company’s domestic institutional fixed income business. The fair value on these transactions are recorded in deposits with and receivables from or payables to broker-dealers, clearing organizations and counterparties. Realized and unrealized gains and losses on securities and derivative transactions are reflected in ‘trading gains, net’.

15


The Company enters into TBA securities transactions for the sole purpose of managing risk associated with the purchase of mortgage pass-through securities. TBA securities are included within deposits with and receivables from and payables to broker-dealers, clearing organizations and counterparties. Forward settling securities represent non-regular way securities and are included in financial instruments owned and sold. As of December 31, 2017 and September 30, 2017, these transactions are summarized as follows:
 
December 31, 2017
 
September 30, 2017
(in millions)
Gain / (Loss)
 
Notional Amounts
 
Gain / (Loss)
 
Notional Amounts
Unrealized gain on TBA securities purchased within receivables from broker-dealers, clearing organizations and counterparties and related notional amounts (1)
$
0.9

 
$
525.4

 
$

 
$
51.3

Unrealized loss on TBA securities purchased within receivables from broker-dealers, clearing organizations and counterparties and related notional amounts (1)
$
(0.1
)
 
$
203.1

 
$
(2.9
)
 
$
1,236.8

Unrealized gain on TBA securities sold within payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
$
0.5

 
$
(554.8
)
 
$
5.8

 
$
(1,881.9
)
Unrealized loss on TBA securities sold within payables to broker-dealers, clearing organizations and counterparties and related notional amounts (1)
$
(1.4
)
 
$
(1,041.7
)
 
$
(0.1
)
 
$
(404.1
)
Unrealized gain (loss) on forward settling securities purchased within receivables from broker-dealers, clearing organizations and counterparties and related notional amounts
$
0.3

 
$
240.2

 
$
(2.0
)
 
$
882.9

Unrealized (loss) gain on forward settling securities sold within receivables from and payables to broker-dealers, clearing organizations and counterparties and related notional amounts
$
(0.2
)
 
$
(107.6
)
 
$
3.0

 
$
(590.2
)
(1) The notional amounts of these instruments reflect the extent of the Company's involvement in TBA and forward settling securities and do not represent risk of loss due to counterparty non-performance.
 
 
 
 
 
 
 
The following table sets forth the Company’s gains (losses) related to derivative financial instruments for the three months ended December 31, 2017 and 2016 in accordance with the Derivatives and Hedging Topic of the ASC. The net gains set forth below are included in ‘Cost of sales of physical commodities’ and ‘Trading gains, net’ in the condensed consolidated income statements.
 
Three Months Ended December 31,
(in millions)
2017
 
2016
Commodities
$
7.7

 
$
4.9

Foreign exchange
2.3

 
1.2

Interest rate
0.4

 
(1.0
)
TBA and forward settling securities
(0.4
)
 
13.4

Net gains from derivative contracts
$
10.0

 
$
18.5

Credit Risk
In the normal course of business, the Company purchases and sells financial instruments, commodities and foreign currencies as either principal or agent on behalf of its customers. If either the customer or counterparty fails to perform, the Company may be required to discharge the obligations of the nonperforming party. In such circumstances, the Company may sustain a loss if the fair value of the financial instrument or foreign currency is different from the contract value of the transaction.
The majority of the Company’s transactions and, consequently, the concentration of its credit exposure are with commodity exchanges, customers, broker-dealers and other financial institutions. These activities primarily involve collateralized and uncollateralized arrangements and may result in credit exposure in the event that a counterparty fails to meet its contractual obligations. The Company’s exposure to credit risk can be directly impacted by volatile financial markets, which may impair the ability of counterparties to satisfy their contractual obligations. The Company seeks to control its credit risk through a variety of reporting and control procedures, including establishing credit and/or position limits based upon a review of the counterparties’ financial condition and credit ratings. The Company monitors collateral levels on a daily basis for compliance with regulatory and internal guidelines and requests changes in collateral levels as appropriate.
The Company is a party to financial instruments in the normal course of its business through customer and proprietary trading accounts in exchange-traded and OTC derivative instruments. These instruments are primarily the result of the execution of orders for commodity futures, options on futures, OTC swaps and options and spot and forward foreign currency contracts on behalf of its customers, substantially all of which are transacted on a margin basis. Such transactions may expose the Company to significant credit risk in the event margin requirements are not sufficient to fully cover losses which customers may incur. The Company controls the risks associated with these transactions by requiring customers to maintain margin deposits in compliance with individual exchange regulations and internal guidelines. The Company monitors required margin levels daily

16


and, therefore, may require customers to deposit additional collateral or reduce positions when necessary. The Company also establishes credit limits for customers, which are monitored daily. The Company evaluates each customer’s creditworthiness on a case by case basis. Clearing, financing, and settlement activities may require the Company to maintain funds with or pledge securities as collateral with other financial institutions. Generally, these exposures to both customers and exchanges are subject to master netting, or customer agreements, which reduce the exposure to the Company by permitting receivables and payables with such customers to be offset in the event of a customer default. Management believes that the margin deposits held as of December 31, 2017 and September 30, 2017 were adequate to minimize the risk of material loss that could be created by positions held at that time. Additionally, the Company monitors collateral fair value on a daily basis and adjusts collateral levels in the event of excess market exposure. Generally, these exposures to both customers and counterparties are subject to master netting or customer agreements which reduce the exposure to the Company.
Derivative financial instruments involve varying degrees of off-balance sheet market risk whereby changes in the fair values of underlying financial instruments may result in changes in the fair value of the financial instruments in excess of the amounts reflected in the condensed consolidated balance sheets. Exposure to market risk is influenced by a number of factors, including the relationships between the financial instruments and the Company’s positions, as well as the volatility and liquidity in the markets in which the financial instruments are traded. The principal risk components of financial instruments include, among other things, interest rate volatility, the duration of the underlying instruments and changes in foreign exchange rates. The Company attempts to manage its exposure to market risk through various techniques. Aggregate market limits have been established and market risk measures are routinely monitored against these limits.
Note 5Allowance for Doubtful Accounts
The allowance for doubtful accounts related to receivables from customers was $7.6 million as of December 31, 2017 and September 30, 2017. The allowance for doubtful accounts related to deposits with and receivables from broker-dealers, clearing organizations, and counterparties was$48.1 million and $47.0 million as of December 31, 2017 and September 30, 2017, respectively.
During the three months ended December 31, 2017, the Company recorded bad debt expense of $1.1 million, primarily related to the Company’s Physical Commodities segment. During the three months ended December 31, 2017, the Company recorded an additional provision related to a bad debt in the physical coal business for amounts due to the Company from a coal supplier for demurrage and other charges related to contracts with delivery dates subsequent to September 30, 2017.
During the three months ended December 31, 2016, the Company recorded bad debt expense of $2.5 million. The provision for bad debts was primarily related to $2.5 million of LME Metals customer deficits in the Company’s Commercial Hedging segment.
Note 6Physical Commodities Inventory
The Company’s inventories consist of finished physical commodities. Inventories by component of the Company’s Physical Commodities segment are shown below.
(in millions)
December 31,
2017
 
September 30,
2017
Physical Ag & Energy(1)
$
125.1

 
$
65.1

Precious metals - held by broker-dealer subsidiary(2)
20.1

 
13.3

Precious metals - held by non-broker-dealer subsidiaries(3)
99.5

 
46.4

Physical commodities inventory
$
244.7

 
$
124.8

(1) Physical Ag & Energy maintains agricultural commodity inventories, including corn, soybeans, wheat, dried distillers grain, canola, sorghum, coffee, cocoa, cotton, and others. The agricultural commodity inventories are carried at net realizable value, which approximates fair value less disposal costs, with changes in net realizable value included as a component of ‘cost of sales of physical commodities’ on the condensed consolidated income statements. The agricultural inventories have reliable, readily determinable and realizable market prices, have relatively insignificant costs of disposal and are available for immediate delivery. Physical Ag & Energy also maintains energy related inventory, primarily kerosene, which is valued at the lower of cost or net realizable value.
(2) Precious metals held by the Company’s subsidiary, INTL FCStone Ltd, a United Kingdom based broker-dealer subsidiary, is measured at fair value, with changes in fair value included as a component of ‘trading gains, net’ on the condensed consolidated income statements, in accordance with U.S. GAAP accounting requirements for broker-dealers.
(3) Precious metals inventory held by subsidiaries that are not broker-dealers are valued at the lower of cost or net realizable value.

17


The Company has recorded lower of cost or net realizable adjustments for certain precious metals inventory of $1.3 million and $0.7 million as of December 31, 2017 and September 30, 2017, respectively. The adjustments are included in ‘cost of sales of physical commodities’ in the condensed consolidated income statements.
Note 7Goodwill
The carrying value of goodwill is allocated to the Company’s operating segments as follows:
(in millions)
December 31,
2017
 
September 30,
2017
Commercial Hedging
$
30.3

 
$
30.7

Global Payments
6.3

 
6.3

Physical Commodities
2.4

 
2.4

Securities
6.9

 
7.7

Goodwill
$
45.9

 
$
47.1

The Company recorded $1.2 million in foreign exchange revaluation adjustments on goodwill for the three months ended December 31, 2017.
Note 8Intangible Assets
The gross and net carrying values of intangible assets as of the balance sheet dates, by major intangible asset class are as follows (in millions):
 
December 31, 2017
 
September 30, 2017
 
Gross Amount
 
Accumulated
Amortization
 
Net Amount
 
Gross Amount
 
Accumulated
Amortization
 
Net Amount
Intangible assets subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
Software programs/platforms
2.7

 
(2.5
)
 
0.2

 
2.7

 
(2.5
)
 
0.2

Customer base
20.0

 
(8.5
)
 
11.5

 
20.0

 
(7.9
)
 
12.1

Total intangible assets
$
22.7

 
$
(11.0
)
 
$
11.7

 
$
22.7

 
$
(10.4
)
 
$
12.3

Amortization expense related to intangible assets was $0.6 million and $0.7 million for the three months ended December 31, 2017 and 2016, respectively.
As of December 31, 2017, the estimated future amortization expense was as follows:
(in millions)
 
Fiscal 2018 (remaining nine months)
$
1.6

Fiscal 2019
2.2

Fiscal 2020
2.0

Fiscal 2021
1.9

Fiscal 2022 and thereafter
4.0

 
$
11.7

Note 9Credit Facilities
Variable-Rate Credit Facilities
The Company has four committed credit facilities under which the Company and its subsidiaries may borrow up to $532.0 million, subject to the terms and conditions for these facilities. The amounts outstanding under these credit facilities are short term borrowings and carry variable rates of interest, thus approximating fair value. The Company’s committed credit facilities consist of the following:
$262.0 million facility available to INTL FCStone Inc. for general working capital requirements.
$75.0 million facility available to the Company’s wholly owned subsidiary, INTL FCStone Financial, Inc., for short-term funding of margin to commodity exchanges. The facility is subject to annual review and guaranteed by INTL FCStone Inc.
$170.0 million facility available to the Company’s wholly owned subsidiary, FCStone Merchant Services, LLC, for financing traditional commodity financing arrangements and commodity repurchase agreements. The facility is subject to annual review and is guaranteed by INTL FCStone Inc.

18


$25.0 million facility available to the Company’s wholly owned subsidiary, INTL FCStone Ltd, for short-term funding of margin to commodity exchanges. The facility is subject to annual review and is guaranteed by INTL FCStone Inc.
The Company also has a secured, uncommitted loan facility, under which the Company’s wholly owned subsidiary, INTL FCStone Ltd may borrow up to approximately $25.0 million, collateralized by commodities warehouse receipts, to facilitate financing of commodities under repurchase agreement services to its customers, subject to certain terms and conditions of the credit agreement.
The Company also has a secured, uncommitted loan facility, under which the Company’s wholly owned subsidiary, INTL FCStone Financial, Inc. may borrow up to $50.0 million, collateralized by commodities warehouse receipts, to facilitate U.S. commodity exchange deliveries of its customers, subject to certain terms and conditions of the credit agreement. There were $32.1 million and $23.0 million in borrowings outstanding under this credit facility at December 31, 2017, and September 30, 2017, respectively.
The Company also has a secured, uncommitted loan facility, under which the Company’s wholly owned subsidiary, INTL FCStone Financial, Inc. may borrow for short term funding of firm and customer securities margin requirements, subject to certain terms and conditions of the agreement. The uncommitted amount available to be borrowed is not specified, and all requests for borrowing are subject to the sole discretion of the lender. The borrowings are secured by first liens on firm owned marketable securities or customer owned securities which have been pledged to us under a clearing arrangement. The amounts borrowed under the facilities are payable on demand. As of December 31, 2017, there were $37.0 million in borrowings outstanding under this credit facility and no borrowings outstanding as of September 30, 2017.

The Company also has a secured, uncommitted loan facility, under which the Company’s wholly owned subsidiary, INTL FCStone Financial, Inc. may borrow up to $100.0 million for short term funding of firm and customer securities margin requirements, subject to certain terms and conditions of the agreement. The borrowings are secured by first liens on firm owned marketable securities or customer owned securities which have been pledged to us under a clearing arrangement. The amounts borrowed under the facilities are payable on demand. There were $2.0 million and $11.0 million in borrowings outstanding under this credit facility at December 31, 2017, and September 30, 2017, respectively.
Note Payable to Bank
The Company has a loan from a commercial bank, secured by equipment purchased with the proceeds. The note is payable in monthly installments, ending in March 2020. The note bears interest at a rate per annum equal to LIBOR plus 2.00%.
The following table sets forth a listing of credit facilities, the current committed amounts as of the report date on the facilities, outstanding borrowings on the facilities, as well as indebtedness on a promissory note as of December 31, 2017 and September 30, 2017:
(in millions)
 
 
 
 
 
 
 
 
Credit Facilities
 
 
 
 
 
Amounts Outstanding
 
Borrower
 Security
Renewal / Expiration Date
 
Total Commitment
 
December 31,
2017
 
September 30,
2017
Committed Credit Facilities
 
 
 
 
 
 
 
 
 
INTL FCStone Inc.
Pledged shares of certain subsidiaries
March 18, 2019
 
$
262.0

 
$
210.0

 
$
150.0

 
INTL FCStone Financial, Inc.
None
April 5, 2018

75.0


36.5



 
FCStone Merchants Services, LLC
Certain commodities assets
May 1, 2018
 
170.0

 
103.5

 
44.2

 
INTL FCStone Ltd.
None
November 7, 2018
 
25.0

 

 

 
 
 
 
 
$
532.0

 
350.0

 
194.2

 
 
 
 
 
 
 
 
 
 
Uncommitted Credit Facilities
 
 
 
 
 
 
 
 
 
INTL FCStone Financial, Inc.
Commodities warehouse receipts and certain pledged securities
n/a
 
$

 
$
71.1

 
$
34.0

 
INTL FCStone Ltd.
Commodities warehouse receipts
n/a
 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Note Payable to Bank
 
 
 
 
 
 
 
 
 
Monthly installments, due March 2020 and secured by certain equipment
 
 
 
1.8

 
2.0

Total indebtedness
 
 
 
 
 
$
422.9

 
$
230.2


19


As reflected above, $270.0 million of the Company’s committed credit facilities are scheduled to expire within twelve months of this filing. The Company intends to renew or replace this facility when it expires, and based on the Company’s liquidity position and capital structure, the Company believes it will be able to do so.
The Company’s credit facility agreements contain financial covenants relating to financial measures on a consolidated basis, as well as on a certain stand-alone subsidiary basis, including minimum tangible net worth, minimum regulatory capital, minimum net unencumbered liquid assets, maximum net loss, minimum fixed charge coverage ratio and maximum funded debt to net worth ratio. Failure to comply with these covenants could result in the debt becoming payable on demand. As of December 31, 2017, the Company was in compliance with all of its financial covenants under its credit facilities.
Note 10Securities and Commodity Financing Transactions
The Company’s outstanding notes receivable in connection with repurchase agreements for agricultural and energy commodities, whereby the customers sell to the Company certain commodity inventory and agree to repurchase the commodity inventory at a future date at a fixed price were $1.8 million and $0.8 million as of December 31, 2017 and September 30 2017, respectively.
The Company enters into securities purchased under agreements to resell, securities sold under agreements to repurchase, securities borrowed and securities loaned transactions to, among other things, finance financial instruments, acquire securities to cover short positions, acquire securities for settlement, and to accommodate counterparties’ needs. These agreements are recorded as collateralized financings at their contractual amounts plus accrued interest. The related interest is recorded in the consolidated income statements as interest income or interest expense, as applicable. In connection with these agreements and transactions, it is the policy of the Company to receive or pledge cash or securities to adequately collateralize such agreements and transactions in accordance with general industry guidelines and practices. The value of the collateral is valued daily and the Company may require counterparties to deposit additional collateral or return collateral pledged, when appropriate. The carrying amounts of these agreements and transactions approximate fair value due to their short-term nature and the level of collateralization.
The Company pledges financial instruments owned to collateralize repurchase agreements. At December 31, 2017, financial instruments owned, at fair value of $3.4 million were pledged as collateral under repurchase agreements. The counterparty has the right to repledge the collateral in connection with these transactions. These financial instruments owned have been pledged as collateral and have been parenthetically disclosed on the consolidated balance sheet.
The Company also has repledged securities borrowed and securities held on behalf of correspondent brokers to collateralize securities loaned agreements with a fair value of $101.9 million as of December 31, 2017.
In addition, as of December 31, 2017, the Company pledged financial instruments owned, at fair value of $1,687.3 million as collateral for tri-party repurchase agreements. For these securities, the counterparties do not have the right to sell or repledge the collateral.
At December 31, 2017, the Company has accepted collateral that it is permitted by contract to sell or repledge. This collateral consists primarily of securities received in reverse repurchase agreements, securities borrowed agreements, and margin securities held on behalf of correspondent brokers. The fair value of such collateral at December 31, 2017, was $819.0 million of which $472.8 million was used to cover securities sold short which are recorded in financial instruments sold, not yet purchased on the consolidated balance sheet. In the normal course of business, this collateral is used by the Company to cover financial instruments sold, not yet purchased, to obtain financing in the form of repurchase agreements, and to meet counterparties’ needs under lending arrangements. At December 31, 2017, substantially all of the above collateral had been delivered against financial instruments sold, not yet purchased or repledged by the Company to obtain financing.

20


The following tables provide the contractual maturities of gross obligations under repurchase and securities lending agreements as of December 31, 2017 and September 30, 2017 (in millions):
 
December 31, 2017
 
Overnight and Open
Less than 30 Days
30-90 Days
Over 90 Days
Total
Securities sold under agreements to repurchase
$1,121.4
$239.0
$290.0

$1,650.4
Securities loaned
108.8



108.8
Gross amount of secured financing
$1,230.2
$239.0
$290.0
$0.0
$1,759.2
 
September 30, 2017
 
Overnight and Open
Less than 30 Days
30-90 Days
Over 90 Days
Total
Securities sold under agreements to repurchase
$640.2
$432.9
$320.0

$1,393.1
Securities loaned
111.1



111.1
Gross amount of secured financing
$751.3
$432.9
$320.0

$1,504.2
The following table provides the underlying collateral types of the gross obligations under repurchase and securities lending agreements as of December 31, 2017 and September 30, 2017 (in millions):
Securities sold under agreements to repurchase:
December 31, 2017
 
September 30, 2017
U.S. Treasury obligations
$
3.2

 
$
7.0

U.S. government agency obligations
358.2

 
332.6

Asset-backed obligations
75.0

 
36.4

Agency mortgage-backed obligations
1,214.0

 
1,017.1

Total securities sold under agreements to repurchase
$
1,650.4

 
$
1,393.1

 
 
 
 
Securities loaned:
 
 
 
Common stock
108.8

 
111.1

Total securities loaned
108.8

 
111.1

Gross amount of secured financing
$
1,759.2

 
$
1,504.2

Note 11Commitments and Contingencies
Legal Proceedings
From time to time and in the ordinary course of business, the Company is involved in various legal actions and proceedings, including tort claims, contractual disputes, employment matters, workers’ compensation claims and collections. The Company carries insurance that provides protection against certain types of claims, up to the policy limits of the insurance.
As of December 31, 2017 and September 30, 2017, the condensed consolidated balance sheets include loss contingency accruals recorded prior to these periods then ended, which are not material, individually or in the aggregate, to the Company’s financial position or liquidity. In the opinion of management, possible exposure from loss contingencies in excess of the amounts accrued, is not likely to be material to the Company’s earnings, financial position or liquidity.
There have been no material changes to the legal actions and proceedings as compared to September 30, 2017.
Contractual Commitments
Self-Insurance
The Company self-insures its costs related to medical and dental claims. The Company is self-insured, up to a stop loss amount, for eligible participating employees and retirees, and for qualified dependent medical and dental claims, subject to deductibles and limitations. As of December 31, 2017, the Company had $0.7 million accrued for self-insured medical and dental claims included in ‘accounts payable and other liabilities’ in the condensed consolidated balance sheet.

21


Note 12Capital and Other Regulatory Requirements
The Company’s activities are subject to significant governmental regulation, both in the United States and overseas. The subsidiaries of the Company were in compliance with all of their regulatory requirements as of December 31, 2017, as follows:
(in millions)
 
 
 
 
 
As of December 31, 2017
Subsidiary
Regulatory Authority
Jurisdiction
 
Requirement Type
 
Actual
 
Minimum
Requirement
INTL FCStone Financial Inc.
SEC and Commodity Futures Trading Commission ("CFTC")
United States
 
Net capital
 
$
136.1

 
$
74.2

INTL FCStone Financial Inc.
CFTC
United States
 
Segregated funds
 
$
2,256.9

 
$
2,204.4

INTL FCStone Financial Inc.
CFTC
United States
 
Secured funds
 
$
164.4

 
$
147.8

INTL FCStone Financial Inc.
SEC
United States
 
Customer reserve
 
$
12.0

 
$

INTL FCStone Financial Inc.
SEC
United States
 
PAB reserve
 
$
10.7

 
$
10.2

INTL Custody & Clearing Soluntions Inc.
SEC
United States
 
Net capital
 
$
1.7

 
$
0.1

SA Stone Wealth Management Inc.
SEC
United States
 
Net capital
 
$
4.2

 
$
0.3

INTL FCStone Ltd(1)
Financial Conduct Authority ("FCA")
United Kingdom
 
Net capital
 
$
191.8

 
$
90.2

INTL FCStone Ltd
FCA
United Kingdom
 
Segregated funds
 
$
113.8

 
$
113.8

INTL Netherlands BV(1)
FCA
United Kingdom
 
Net capital
 
$
191.1

 
$
90.2

INTL FCStone DTVM Ltda.
Brazilian Central Bank and Securities and Exchange Commission of Brazil
Brazil
 
Capital adequacy
 
$
12.6

 
$
0.5

INTL Gainvest S.A.
National Securities Commission ("CNV")
Argentina
 
Capital adequacy
 
$
4.5

 
$
0.2

INTL Gainvest S.A.
CNV
Argentina
 
Net capital
 
$
3.0

 
$
0.1

INTL CIBSA S.A.
CNV
Argentina
 
Capital adequacy
 
$
5.0

 
$
0.9

INTL CIBSA S.A.
CNV
Argentina
 
Net capital
 
$
1.7

 
$
0.5

(1) INTL Netherlands BV is a holding company that includes the ownership equity of INTL FCStone Ltd. The associated net capital amounts and minimum requirements should not be considered in aggregate.
Certain other non-U.S. subsidiaries of the Company are also subject to capital adequacy requirements promulgated by authorities of the countries in which they operate. As of December 31, 2017, these subsidiaries were in compliance with their local capital adequacy requirements.
Note 13Other Expenses
Other expenses for the three months ended December 31, 2017 and 2016 consisted of the following:
 
Three Months Ended December 31,
(in millions)
2017
 
2016
Insurance
$
0.6

 
$
0.5

Advertising, meetings and conferences
0.9

 
0.9

Office supplies and printing
0.4

 
0.6

Other clearing related expenses
0.5

 
0.4

Other non-income taxes
1.2

 
1.1

Other
2.1

 
2.1

Total other expenses
$
5.7

 
$
5.6


22


Note 14Accumulated Other Comprehensive Loss, Net
Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income. Other comprehensive loss includes net actuarial losses from defined benefit pension plans and foreign currency translation adjustments.
The following table summarizes the changes in accumulated other comprehensive loss, net for the three months ended December 31, 2017.
(in millions)
 
Foreign Currency Translation Adjustment
 
Pension Benefits Adjustment
 
Accumulated Other Comprehensive Loss
Balances as of September 30, 2017
 
$
(21.5
)
 
$
(3.0
)
 
$
(24.5
)
Other comprehensive loss, net of tax
 
(2.2
)
 

 
(2.2
)
Balances as of December 31, 2017
 
$
(23.7
)
 
$
(3.0
)
 
$
(26.7
)
 
 
 
 
 
 
 
Note 15Income Taxes
The income tax provision for interim periods is comprised of tax on ordinary income (loss) provided at the most recent estimated annual effective tax rate, adjusted for the tax effect of discrete items. Management uses an estimated annual effective tax rate based on the forecasted pretax income (loss) and statutory tax rates in the various jurisdictions in which it operates. The Company’s effective tax rate differs from the U.S. statutory rate primarily due to state and local taxes, and differing statutory tax rates applied to the income of non-U.S. subsidiaries. The Company records the tax effect of certain discrete items, including the effects of changes in tax laws, tax rates and adjustments with respect to valuation allowances or other unusual or nonrecurring tax adjustments, in the interim period in which they occur, as an addition to, or reduction from, the income tax provision, rather than being included in the estimated effective annual income tax rate. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective income tax rate.
The Company is required to assess its deferred tax assets and the need for a valuation allowance at each reporting period. This assessment requires judgment on the part of management with respect to benefits that may be realized. The Company will record a valuation allowance against deferred tax assets when it is considered more likely than not that all or a portion of the deferred tax assets will not be realized.
Effects of the Tax Cuts and Jobs Act
On December 22, 2017, the President of the United States signed and enacted into law H.R. 1, the Tax Cuts and Jobs Act (“the Tax Reform”). Among the significant changes to the U.S. Internal Revenue Code, the Tax Reform lowers the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. The Company will compute its income tax expense (benefit) for the September 30, 2018 tax year using a U.S. statutory tax rate of 24.5%. The 21% U.S. statutory tax rate will apply to fiscal years ending September 30, 2019 and thereafter. For the three months ended December 31, 2017, the Company recorded tax expense of $8.9 million related to the remeasurement of deferred tax assets and liabilities. The provisional remeasurement amount is anticipated to change as data becomes available allowing more accurate scheduling of certain deferred tax assets and liabilities. The Tax Reform also includes a one-time mandatory repatriation transition tax on previously untaxed accumulated and current earnings and profits (E&P) of certain of the Company’s foreign subsidiaries. To