CME Group Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. Unless noted, financial amounts are in U.S. dollars. NEX results are consolidated beginning November 3, 2018, so the 2018 comparison includes only a short post-acquisition contribution.
Business context
CME Group operates derivatives exchanges and a clearing house across interest rates, equity indexes, foreign exchange, agricultural commodities, energy and metals. Its November 2018 acquisition of NEX added BrokerTec fixed-income trading, EBS FX trading and TriOptima/Traiana post-trade services. The company reported one operating segment.
Financial and operating performance
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total revenue | $4.309 billion | $3.645 billion | Up 18% |
| Operating income | $2.608 billion | $2.311 billion | Up 13%; operating margin approximately 60.5%, versus 63.4% |
| Net income attributable to CME Group | $1.962 billion | $4.063 billion | Down 52%; 2017 included a substantial tax benefit from U.S. tax reform |
| Diluted EPS | $5.71 | $11.94 | Down 52%; same tax-comparison effect |
| Cash from operating activities | $2.441 billion | $1.751 billion | Up 39% |
| Total debt at year-end | Approximately $4.4 billion | Approximately $2.2 billion | Increase reflects NEX-related financing and assumed debt |
| Cash and cash equivalents at year-end | $1.375 billion | $1.904 billion | Down approximately $529 million |
Clearing and transaction fees rose 18% to $3.667 billion, driven mainly by higher activity: total average daily contract volume increased 18% to a record 19.2 million contracts. Average rate per contract declined 2% to $0.725, principally due to product mix. Market-data revenue increased 15% to $449.6 million, including a higher basic real-time data fee; other revenue rose 25%, partly reflecting NEX.
Operating expenses increased 28% to $1.702 billion. The company attributed the increase to NEX operating costs, $75.5 million of NEX transaction costs, foreign-exchange effects, and higher compensation and licensing costs. Cash used in investing activities was $1.890 billion, primarily reflecting $1.795 billion paid for NEX net of cash acquired. Cash used in financing activities was $1.080 billion, including $2.150 billion of dividends, partly offset by debt and commercial-paper proceeds.
Fourth quarter: Revenue was $1.237 billion, operating income $649.9 million, and net income attributable to CME Group $385.5 million; diluted EPS was $1.09. In fourth-quarter 2017, revenue was $900.0 million, operating income $536.9 million, net income $2.939 billion, and diluted EPS $8.63. The large year-over-year net-income and EPS decline chiefly reflects the unusually large 2017 tax benefit, rather than a comparable change in operating performance.
Material changes, outlook and risks
- NEX acquisition: Completed November 2, 2018, for approximately $5.6 billion of equity value, including cash and CME shares; CME also assumed approximately $1.0 billion of NEX debt. NEX contributed $91.2 million of transaction fees from November 3 through year-end. Purchase-price allocation remained preliminary, including $3.236 billion of acquired goodwill.
- Financing and liquidity: CME issued $1.2 billion of notes in 2018 and had $389.9 million of commercial paper outstanding at year-end. It reported approximately $2.0 billion of excess general-purpose borrowing capacity under its $2.4 billion revolving facility; a separate $7.0 billion secured facility is available for specified clearing-house liquidity needs. Management said existing cash, securities and operating cash flow should cover working-capital needs and commitments.
- Capital returns and spending: Management expected 2019 capital expenditures of approximately $180–$190 million and intended to continue regular quarterly dividends, subject to board discretion. The board declared a $0.75-per-share regular dividend payable in March 2019 and a $1.75-per-share variable dividend, paid in January 2019.
- Management commentary: Management linked record volumes to market uncertainty, including interest-rate policy, trade policy and volatility. It identified growth, international expansion, revenue diversification and customer capital efficiency as strategic priorities. No specific revenue or earnings guidance was provided.
- Unusual items: 2018 included a $73.6 million foreign-currency transaction loss, largely associated with British-pound cash held for the acquisition, and $62.3 million of losses on derivative contracts. CME also recognized $97.4 million of net realized and unrealized gains on certain privately held equity investments and $13.4 million of impairment charges on intangible and fixed assets, plus $4.7 million of impairment charges on private equity investments.
- Key risks and contingencies: Trading-based revenue is sensitive to activity, volatility, customer mix and pricing. Other material risks include cyberattack or system outage, clearing-member or counterparty default, intense competition, regulatory change (including proposed EU clearing rules and Brexit), LIBOR transition, and successful integration and realization of NEX synergies. The filing disclosed pending litigation, including a CFTC suit involving NYMEX and former employees and an appeal in the Eurex U.S. case; no legal accrual was recorded because matters were not considered probable and estimable.
Important facts for investors to verify
- Track post-acquisition NEX revenue, costs, integration progress and whether expected efficiencies and strategic benefits materialize.
- Separate recurring operating trends from the 2017 tax-reform benefit and 2018 acquisition, foreign-exchange, derivative and investment items when assessing earnings comparability.
- Monitor volume, product mix and average rate per contract, which jointly influence transaction-fee growth and margins.
- Review debt maturities, commercial-paper refinancing and liquidity resources; distinguish corporate cash from clearing-member collateral and other restricted funds.
- Follow developments in clearing regulation, LIBOR replacement, cyber and operational resilience, and the disclosed litigation and tax uncertainties.