CME Group Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statements are unaudited. CME Group operates futures and options exchanges and clearing services, as well as market data and other transaction services. Results include NEX from November 3, 2018, following its November 2018 acquisition, so comparisons with 2018 are not fully like-for-like.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,272.7 million | $1,059.6 million | $2,452.3 million | $2,168.6 million |
| Operating income | $698.6 million | $666.9 million | $1,329.6 million | $1,407.8 million |
| Operating margin | 54.9% | 62.9% | 54.2% | 64.9% |
| Net income attributable to CME Group | $513.8 million | $566.1 million | $1,010.7 million | $1,164.9 million |
| Diluted EPS | $1.43 | $1.66 | $2.82 | $3.42 |
| Effective tax rate | 26.7% | 25.2% | 24.7% | 24.6% |
- Q2 revenue rose 20%, while total expenses rose 46% to $574.1 million. Six-month revenue increased 13%, while expenses rose 48% to $1,122.7 million.
- Clearing and transaction fees were $1,051.8 million in Q2 and $2,004.4 million for the half-year. Market data revenue was $128.3 million and $258.4 million, respectively; other revenue was $92.6 million and $189.5 million.
- Q2 listed futures and options volume increased 12%, but average rate per contract declined 8% to $0.693. For the first half, volume decreased 3% and average rate declined 4% to $0.703. Management attributed rate pressure primarily to product mix and pricing incentives.
- Net cash provided by operating activities was $1,142.9 million for the first six months, down from $1,347.8 million. Investing activities used $89.9 million; financing activities used $1,487.3 million. Cash, cash equivalents and restricted cash ended the period at $942.9 million.
Balance sheet and liquidity
- At June 30, 2019, cash and cash equivalents were $937.7 million; marketable securities were $81.8 million. Long-term debt was $4,072.9 million, including $634.7 million of commercial paper; short-term debt was zero. The company repaid approximately $574 million of euro notes and a yen term loan in March.
- CME reported a $2.4 billion revolving senior credit facility, with no borrowings and approximately $1.7 billion of excess borrowing capacity for general corporate purposes. A separate $7.0 billion secured facility supports clearing-house liquidity needs; it also had no borrowings. Management reported compliance with debt covenants and expected to maintain investment-grade ratings.
- Performance bonds and guaranty fund contributions were $32.5 billion on both the asset and liability sides at June 30. These balances relate to clearing operations and should not be treated as ordinary corporate cash or debt.
- Shareholders’ equity was $26.5 billion. Cash dividends paid in the first half were $1,159.9 million.
Material changes, outlook and risks
- NEX contributed new cash-market transaction revenue of $120.7 million in Q2 and $243.6 million in the first half, as well as additional market data and other services revenue. Its integration also materially increased compensation, technology, occupancy and purchased-intangible amortization expenses.
- Management said Q2 market volatility rose amid changing expectations for Federal Reserve policy and uncertainty over U.S. trade policy. Interest-rate and equity-index activity increased in Q2; foreign-exchange, energy and metals volumes were weaker. First-half volume trends varied by product.
- Investment income declined to $139.3 million in Q2 from $241.9 million, partly reflecting weaker results from privately held equity investments. Higher borrowing costs and expenses associated with interest earned on clearing collateral also weighed on non-operating results.
- Unusual items included $21.6 million of unrealized losses on assets held for sale, $12.3 million of losses on certain fixed assets, and $18.7 million of impairment charges on three privately held equity investments during the first half. The filing gives no numerical earnings or revenue guidance.
- Risks discussed include trading-volume and volatility changes, competition, technology reliability and cybersecurity, regulatory change, clearing-member and counterparty risks, market-data demand, and execution of the NEX integration. Management reported no material change to the annual-report risk factors and no material change in market-risk exposure.
- Legal matters include a CFTC case concerning alleged disclosure of confidential customer information and an appeal of a dismissed antitrust case. The company recorded no legal accrual, stating no loss was probable and estimable at period end; management did not expect the matters to materially affect results, but outcomes and timing remain uncertain.
- The new lease standard was adopted January 1, 2019, resulting in initial recognition of a $568.0 million lease liability and a $448.2 million right-of-use asset. NEX was excluded from the quarter-end internal-control assessment while integration continued; management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of revenue growth and future profitability is attributable to NEX, and whether integration costs and synergies develop as expected.
- Whether volume growth can offset continuing pressure on average revenue per contract and the effects of shifts in product and customer mix.
- The persistence of elevated expense growth, lower operating margins, and investment-related losses or impairments.
- Commercial-paper refinancing and liquidity capacity, while distinguishing corporate resources from the substantially larger clearing-related collateral balances.
- Developments in the disclosed legal and regulatory matters, and progress in bringing NEX within CME Group’s internal-control assessment.