CME GROUP INC. quarterly report, Q1 FY2013

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CME Group Inc. — Q1 2013 Form 10-Q

Reporting period: Quarter ended March 31, 2013. Unaudited consolidated results; comparisons are with Q1 2012 unless otherwise noted. CME Group operates derivatives exchanges and clearing businesses. Management cautions that quarterly results are not necessarily indicative of future periods.

Financial performance

  • Revenue: $718.6 million, down 7% from $774.6 million. Clearing and transaction fees were $593.2 million, down 4%; market data and information services were $80.9 million, down 29%. Access and communication fees rose 9% to $21.5 million, and other revenue rose 18% to $23.0 million.
  • Profit and margins: Operating income was $405.5 million, down 10%; operating margin was 56.4%, versus 58.3%. Net income attributable to CME Group was $235.8 million, down 12%; diluted EPS was $0.71, versus $0.80. Effective tax rate was 38.8%, versus 38.6%.
  • Cash flow: Operating cash flow was $396.0 million, essentially unchanged from $395.6 million. Investing activities used $21.0 million; financing activities used $136.3 million, including $149.4 million in cash dividends. Cash and cash equivalents ended the quarter at $1.843 billion, up from $1.605 billion at year-end 2012.
  • Liquidity and debt: Total debt was approximately $2.857 billion at par, including $1.5 billion classified as short-term and $1.358 billion long-term. Cash exceeded debt by approximately $1.014 billion. The company reported about $1.8 billion of unused general-purpose revolving credit capacity and no borrowings under that facility; it was in compliance with debt covenants.
  • Other metrics: Total contract volume was 750.5 million, down 2%, while average daily volume rose 2% to 12.509 million. Average rate per contract declined 3% to $0.786. Electronic average daily volume rose 7%; open-outcry volume fell 34%.

Changes versus Q1 2012

  • Lower revenue reflected the contribution of certain Dow Jones Index assets and liabilities to S&P/Dow Jones Indices LLC and the sale of Credit Market Analysis Ltd. in 2012, as well as lower clearing and transaction fees.
  • Clearing and transaction fees declined as total contract volume fell 2% and average rate per contract fell 3%. Management attributed the rate decline to product mix and increased energy-contract incentives and discounts.
  • Market data revenue fell partly because of the prior-year asset contribution and sale, and partly because customer firms reduced subscriber counts.
  • Expenses declined 3% to $313.1 million. Lower costs following the asset contribution and sale, and the sale of two Chicago buildings, were partly offset by $14.3 million of increased currency-fluctuation losses.
  • Non-operating expense was nearly flat at $17.9 million. Higher equity-method income from S&P/DJI was offset by increased interest costs and lower investment income. Net income and diluted EPS declined despite lower expenses.

Outlook, risks and unusual items

  • Guidance: The filing provides no specific earnings or revenue guidance. Management said it expected to maintain an investment-grade credit rating, citing cash generation, debt repayment capacity and refinancing ability.
  • Debt and dividends: A $750 million note at 5.40% was due August 2013 and another $750 million note at 5.75% was due February 2014. The quarterly dividend was $0.45 per share. The 2013 annual variable dividend had been accelerated to Q4 2012.
  • Legal and regulatory matters: Matters include patent litigation, MF Global customer claims, and a CFTC suit against NYMEX and two former employees concerning alleged disclosure of confidential customer information. CME Group said it had strong defenses in the claims described; it could not estimate a reasonably possible loss for the MF Global matters. Accrued probable and estimable legal and regulatory costs were $14.2 million at March 31, 2013.
  • Clearing and other contingent exposures: CME and CME Clearing Europe transferred an average of about $2.0 billion daily for settlement in Q1. CME was contingently liable to Singapore Exchange for $231 million of letters of credit. Management considered guarantee liabilities immaterial and recorded none for the clearing guarantees described.
  • Market and operating risks: Risks include trading-activity and volatility changes, competition, customer concentration, technology performance and security, regulatory changes, clearing-member credit exposure, and the ability to manage costs and debt. Two clearing firms represented 12% and 11% of Q1 clearing and transaction fee revenue; two largest market-data resellers represented about 53% of market-data revenue.
  • Subsequent event: In April 2013, CME Group paid $80 million to acquire the non-controlling interest in CME Group Index Holdings LLC, increasing its interest in S&P/DJI from 24.4% to 27%.

Important facts for investors to verify

  • Whether trading volumes and average rate per contract stabilize or improve, particularly in energy, interest-rate and market-data-related activity.
  • How much of the revenue decline reflects the 2012 asset contribution and sale versus ongoing customer, subscriber and pricing trends.
  • The refinancing or repayment plan for the $1.5 billion of notes due in August 2013 and February 2014, and the effect of debt costs on earnings and liquidity.
  • Developments, potential exposure and timing in the patent, MF Global and CFTC proceedings; the filing does not quantify several potential losses.
  • The financial and operating impact of the April 2013 S&P/DJI interest increase and its $80 million purchase price.
  • Whether clearing and market-data customer concentration, technology/security risks and regulatory requirements change materially.