CME Group Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This annual filing also reports fourth-quarter results; it is not a standalone quarterly filing. CME Group operates futures and options exchanges and clearing, settlement, market-data and related services across major asset classes.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $3,595.2 million | $3,326.8 million | +8% |
| Operating income | $2,202.7 million | $1,988.7 million | +11% |
| Operating margin | 61% | 60% | +1 percentage point |
| Net income attributable to CME Group | $1,534.1 million | $1,247.0 million | +23% |
| Diluted EPS | $4.53 | $3.69 | +23% |
| Operating cash flow | $1,716.0 million | $1,515.3 million | +13% |
| Cash and cash equivalents at year-end | $1,868.6 million | $1,692.6 million | +$176.0 million |
| Long-term debt at year-end | $2,231.2 million | $2,229.3 million | Broadly unchanged |
Clearing and transaction fees were $3,036.4 million, up 9%; market-data revenue was $406.5 million, up 2%. Total contract volume increased 12% to 3,943.7 million contracts, while average rate per contract declined 2% to $0.754. Electronic trading represented 88% of total volume.
Fourth-quarter 2016 revenue was $912.9 million, operating income $540.2 million, net income attributable to CME Group $373.4 million and diluted EPS $1.10. Comparable fourth-quarter 2015 figures were $813.8 million, $469.9 million, $291.7 million and $0.86, respectively.
Cash and debt figures should be read in context: the balance sheet includes large clearing-member performance-bond and guaranty-fund balances, which are not equivalent to cash available for general corporate use. The company reported $2.2 billion of total indebtedness and approximately $2.3 billion of unused general-purpose revolving borrowing capacity.
Changes and notable items
- Revenue growth was led by higher volume: total average daily volume rose 12%, including energy volume up 23%, metals up 34%, interest rates up 12% and equities up 10%. Management attributed activity to market volatility and uncertainty, including oil-market developments, the U.K. referendum and U.S. elections.
- Clearing and transaction fee growth was partly offset by lower average rates, reflecting a higher member-trade mix and increased volume incentives.
- Net income benefited from non-operating income of $84.9 million, versus a $31.9 million expense in 2015. Investment income included a $48.4 million gain on sales of BM&FBOVESPA shares; the effective tax rate fell to 32.9% from 36.3%, partly reflecting tax benefits related to that investment.
- Expenses rose 4% to $1,392.5 million. A $28.6 million datacenter transaction loss and expense, higher professional fees, foreign-exchange losses and licensing costs contributed to the increase. A separate $5.5 million impairment was recorded on a strategic investment.
- Operating cash flow increased to $1,716.0 million. Investing activities provided $53.7 million, including proceeds from BM&FBOVESPA share sales; financing activities used $1,593.7 million, including $1,787.2 million of cash dividends.
- Cash dividends declared per share totaled $5.65 in 2016, including a $3.25 annual variable dividend. The board declared a $0.66 regular quarterly dividend in February 2017. Management’s stated policy targets regular dividends of 50%–60% of prior-year cash earnings, subject to board discretion.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. CME Group expected 2017 capital expenditures of approximately $105 million and estimated a $13.9 million pension contribution to meet its funding objective. Management said it expected existing cash, investments and operating cash generation to support working capital and commitments, while retaining borrowing facilities as liquidity sources.
Management highlighted uncertain trading volumes, intense competition, regulatory change and related compliance costs, technology reliability and cybersecurity, clearing-member default and collateral risks, customer and revenue concentration, and the potential effects of Brexit. One clearing firm accounted for 13% and another for 11% of 2016 clearing and transaction-fee revenue. The 2013 CFTC lawsuit concerning alleged disclosure of confidential customer information remained outstanding; the company said it believed it had strong defenses. No accrual was required for probable and estimable legal or regulatory matters at year-end 2016.
The company sold its Chicago-area datacenter for $130 million and leased back part of the property, but accounted for the transaction under the financing method because of continuing involvement. It also sold its remaining BM&FBOVESPA stake in January 2017 for approximately $244.1 million. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Key facts for investors to verify
- How sustainable 2016’s volume-led revenue growth is, particularly if market volatility subsides, and how trading mix and incentives affect average rates.
- The recurring earnings contribution versus one-time or market-sensitive items, including the BM&FBOVESPA gain, related tax benefits and datacenter and investment impairments.
- Corporate liquidity and debt capacity, distinguishing CME Group’s own available resources from customer clearing collateral and related restricted balances.
- Developments in the CFTC lawsuit, other regulatory matters, cybersecurity and operational resilience, and the implications of regulatory changes and Brexit.
- Dividend sustainability, planned capital spending and the expected implementation effects of new accounting standards, including revenue recognition and lease accounting.