CME Group Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; comparisons are with the corresponding 2015 periods. CME Group operates derivatives exchanges and clearing services, with revenue primarily from clearing and transaction fees.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $841.7 million | $850.3 million | $2,682.3 million | $2,513.0 million |
| Operating income | $525.3 million | $516.4 million | $1,662.5 million | $1,518.8 million |
| Operating margin | 62.4% | 60.7% | 62.0% | 60.4% |
| Net income | $472.8 million | $359.9 million | $1,160.7 million | $955.3 million |
| Diluted EPS | $1.39 | $1.06 | $3.43 | $2.83 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $1,205.6 million | $1,141.2 million |
- Q3 revenue decreased 1%; operating expenses fell 5% to $316.4 million. For the first nine months, revenue increased 7% while expenses increased 3% to $1,019.8 million.
- Clearing and transaction fees were $704.2 million in Q3, down 2%, and $2,267.9 million for nine months, up 8%. Futures and options volume was nearly flat in Q3 at 916.4 million contracts, but up 8% for nine months at 2,915.2 million. Average rate per contract was $0.750 in Q3 versus $0.759; nine-month rate was $0.763 in both years.
- Q3 net income rose 31% despite slightly lower revenue. Higher investment income and a lower effective tax rate contributed; the Q3 tax rate was 13.8% versus 30.3%. Nine-month net income increased 21%; the effective tax rate declined to 31.5% from 35.8%.
- Investment income was $36.5 million in Q3 versus $2.5 million and $71.3 million for nine months versus $26.7 million. The company attributed increases to higher interest earned on collateral reinvestment and investment gains, among other factors. Equity earnings from unconsolidated subsidiaries were $28.6 million in Q3 and $82.4 million for nine months.
Liquidity, debt and capital
- Cash and cash equivalents were $1,420.5 million at September 30, 2016, down from $1,692.6 million at year-end 2015. Cash-flow statement net cash used was $272.1 million for the first nine months.
- Cash from operations was $1,205.6 million; investing activities used $63.8 million and financing activities used $1,413.9 million. Financing outflows included $1,584.3 million of cash dividends.
- Long-term debt carrying value was $2,230.7 million; notes had $2.25 billion aggregate par value, with maturities in 2022, 2025 and 2043. No borrowings were outstanding under the $2.3 billion corporate revolver or the $7.0 billion clearing liquidity facility. The filing reports approximately $2.3 billion of excess corporate revolver capacity and compliance with debt covenants.
- Shareholders’ equity was $21,264.9 million. The company paid $1.80 per share in dividends during the first nine months, compared with $1.50 in the prior-year period.
- Reported current assets and liabilities include large, substantially offsetting performance-bond and guaranty-fund balances: $31,607.1 million of assets and $31,604.9 million of liabilities. These customer-related collateral balances should not be read as ordinary corporate liquidity.
Changes, outlook and material items
- Trading activity was strong in the first half but eased somewhat in Q3 as market volatility declined. Q3 average daily volume was 14.319 million contracts, essentially flat year over year; nine-month average daily volume rose 8% to 15.424 million. Energy and metals grew, while equity, foreign exchange and agricultural volumes weakened in Q3.
- Management gave no numerical earnings or revenue guidance in the provided filing text. It described volume as sensitive to volatility, economic and political conditions, regulation, competition, product mix and customer trading behavior. Management expected to maintain an investment-grade rating, citing cash generation and debt/refinancing capacity.
- A Chicago-area datacenter transaction generated $130.0 million of proceeds but was accounted for as financing, not a sale, because of continuing involvement. The company recorded $28.6 million of total losses and expenses, including a $27.1 million impairment/write-down and related costs. The lease term runs to 2031, with renewal options; the finance lease obligation is recognized on the balance sheet.
- The company released $106.3 million of valuation allowance on deferred tax assets related to its BM&FBOVESPA investment after implementing a tax strategy. In September it sold approximately 4.0 million shares and recognized a $6.4 million gain. In October, after quarter-end, it sold approximately 24.0 million additional shares, recognized an approximately $42.0 million gain in Q4, and retained an approximate 2% interest.
- In Q2 and Q3, the company recorded $5.5 million of impairment charges on a strategic investment, whose estimated fair value was zero at September 30.
- Legal and regulatory matters include a CFTC action against NYMEX and two former employees concerning alleged disclosure of confidential customer information. The company said it believes it has strong defenses. No accrual was required for probable and estimable legal matters at September 30; management said resolution of disclosed matters was not expected to materially affect results or financial position, while noting outcomes and timing cannot be predicted.
- CME was contingently liable for $760.0 million of letters of credit under its Singapore Exchange mutual-offset agreement. The company also disclosed clearing guarantees and a farmer/rancher protection fund with $98.0 million remaining available. It recorded no liability for these guarantees, which it considered immaterial.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material updates to the annual-report risk factors. Key risks include competition, technology and cybersecurity, regulation, trading-volume and rate-per-contract fluctuations, clearing-member credit risk, system reliability, and legal proceedings.
Important facts for investors to verify
- How much of earnings growth reflects recurring operating performance versus investment gains, tax benefits and the lower effective tax rate.
- Whether trading volumes and clearing-fee growth persist, particularly given Q3 softness and shifts in volatility, product mix and customer incentives.
- The ongoing cash cost and accounting treatment of the datacenter financing arrangement, including its long lease term and recorded impairment.
- The realized proceeds, gains, tax effects and remaining exposure associated with BM&FBOVESPA share sales, including the post-quarter October sale.
- Potential developments in the CFTC litigation and other regulatory matters, as well as the scope and funding of clearing-related guarantees and liquidity facilities.