CME Group Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Unless otherwise noted, amounts are U.S. dollars.
Business context
CME Group operates futures and options exchanges and provides trading, clearing, settlement, market data and related services across interest rates, equities, foreign exchange, agriculture, energy and metals. Clearing and transaction fees are the principal revenue source and are substantially tied to trading volume. The company reports one operating segment.
Financial and operating results
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $3.645 billion | $3.595 billion | +1% |
| Operating income | $2.312 billion | $2.203 billion | +5% |
| Operating margin | 63% | 61% | Up |
| Net income | $4.063 billion | $1.534 billion | +165% |
| Diluted EPS | $11.94 | $4.53 | +164% |
| Cash flow from operations | $1.840 billion | $1.743 billion | +6% |
| Cash and cash equivalents | $1.904 billion | $1.869 billion | At year-end |
| Long-term debt | $2.233 billion | $2.231 billion | At year-end |
- Clearing and transaction fees were $3.099 billion, up 2%. Total contract volume rose 4% to 4.089 billion round turns; average daily volume increased 4% to 16.3 million contracts. Average rate per contract declined 2% to $0.741.
- Market data and information services revenue fell 4% to $391.8 million; access and communication fees rose 10% to $100.8 million.
- Quarter four revenue was $900.0 million versus $912.9 million in Q4 2016; operating income was $537.3 million versus $540.2 million. Q4 net income was $2.939 billion, heavily affected by the tax benefit described below.
- Year-end total assets were $75.791 billion and shareholders’ equity was $22.412 billion. A substantial portion of reported assets and liabilities represents clearing-firm performance bonds and guaranty fund contributions, which are matched on the balance sheet and are not ordinary corporate liquidity.
- Cash dividends declared were $6.14 per share for 2017, including a $3.50 variable dividend. The board declared a $0.70 regular quarterly dividend in February 2018.
Changes versus prior year and unusual items
- Revenue growth was modest despite higher trading volume: increased volume added an estimated $109.8 million to clearing and transaction fees, partly offset by a $54.3 million impact from the lower average rate per contract.
- Operating expenses decreased 4% to $1.333 billion, contributing to higher operating income and margin. The comparison benefited from foreign-exchange movements and the absence of the $28.6 million datacenter-related loss and fees recorded in 2016.
- Net income growth was not representative of underlying operating growth. The 2017 tax provision was a benefit of $1.537 billion, versus tax expense of $753.5 million in 2016. The 2017 result included a $2.6 billion benefit from remeasuring deferred tax liabilities after U.S. tax reform, partly offset by other tax items. The company said certain tax accounting remained provisional.
- Non-operating income was $214.3 million versus $84.9 million. Investment income included an $86.5 million gain on sale of the remaining BM&FBOVESPA stake and a $2.3 million gain on sale of Bolsa Mexicana shares; other non-operating expense included distributions of interest earned on clearing collateral to clearing firms.
- Management attributed higher activity in interest rates, energy and metals to market and policy uncertainty and commodity price volatility; lower equity-market volatility contributed to a 12% fall in equity average daily volume.
Outlook, risks and contingencies
- The filing provides no quantified revenue or earnings guidance. Management expected 2018 capital expenditures of approximately $90–$100 million and anticipated no 2018 pension contribution based on year-end projections.
- Management said cash, cash equivalents, marketable securities and operating cash flow should cover working capital, capital expenditures and other commitments. The company had no borrowings under its $2.3 billion general-purpose revolving facility or its $7.0 billion clearing liquidity facility at year-end; the latter is designed for clearing contingencies, not routine corporate funding.
- CME announced the wind-down of CME Clearing Europe and CME Europe, completed by year-end 2017, and plans to exit the credit default swaps business by mid-2018. The latter represented about 2% of total revenue in each of the preceding three years, according to the filing.
- Key risks include trading-volume sensitivity to market conditions; competition and pricing pressure; regulatory change and compliance costs; cyber threats and trading-system outages; clearing-firm default and collateral risk; and dependence on licensed benchmark indexes. Two clearing firms accounted for 13% and 12% of 2017 clearing and transaction fee revenue.
- Contingencies include a CFTC suit filed in 2013 concerning alleged disclosure of confidential customer information and an antitrust-related case with a trial scheduled for June 2018. CME said it believed it had strong defenses; it recorded no accrual for legal matters deemed probable and estimable at year-end.
- The company reported investment-grade debt ratings with stable outlooks, compliance with debt covenants, and effective disclosure controls and internal control over financial reporting. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- How much of 2017 earnings and EPS growth reflects the one-time tax-law benefit, and what the normalized effective tax rate may be.
- Whether trading-volume growth can continue and whether product, venue and customer mix will keep pressuring the average rate per contract.
- The final tax accounting for the 2017 Tax Act and the expected effects of adopting new revenue-recognition and lease-accounting standards.
- Progress and financial effects of the credit default swaps exit and completed European wind-down.
- Updates on the CFTC and antitrust litigation, as well as clearing-member concentration and clearinghouse safeguards.
- The distinction between corporate cash and customer/clearing collateral when assessing liquidity, leverage and the large reported balance sheet.