CME Group Inc. — Q2 2016 Form 10-Q
Business context and reporting period. CME Group operates futures and options exchanges and clearing services, including CME, CBOT, NYMEX and COMEX. This unaudited report covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $906.4 million | $820.0 million | $1,840.6 million | $1,662.7 million |
| Operating income | $563.3 million | $495.1 million | $1,137.2 million | $1,002.4 million |
| Operating margin | 62.1% | 60.4% | 61.8% | 60.3% |
| Net income | $320.1 million | $265.0 million | $687.9 million | $595.4 million |
| Diluted EPS | $0.95 | $0.78 | $2.03 | $1.76 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $743.2 million | $677.7 million |
Q2 revenue increased 11% year over year, primarily from clearing and transaction fees, which rose 13% to $767.6 million. Futures and options contract volume increased 13%; average rate per contract was nearly flat at $0.782 versus $0.777. Electronic trading represented 89% of Q2 volume. For the first six months, total expenses rose 7% to $703.4 million, while the effective tax rate increased to 39.9% from 38.7% (Q2: 43.5% versus 40.9%).
Balance sheet, cash and debt
At June 30, cash and cash equivalents were $1,161.1 million, down from $1,692.6 million at year-end 2015. Six-month cash used in financing was $1,227.4 million, including $1,381.7 million in dividends; operating cash flow was $743.2 million. Current assets and liabilities each include about $36.1 billion of performance bonds and guaranty fund contributions, which substantially inflate reported totals and are not ordinary corporate liquidity.
Long-term debt was $2,230.2 million carrying value ($2.25 billion par), consisting of three fixed-rate note issues due 2022, 2025 and 2043. The company had no borrowings under its $2.3 billion general-purpose revolving facility or its separate $7.0 billion clearing liquidity facility; approximately $2.3 billion was available under the general-purpose facility. Management said it remained in compliance with debt covenants and expected to maintain an investment-grade rating.
Material changes and unusual items
- Six-month operating cash flow rose 10%, principally due to higher clearing and transaction fees from increased volume.
- Operating expenses increased $43.1 million for the first six months. The comparison included $28.6 million of datacenter-related loss and fees in 2016, unfavorable foreign-currency effects, and higher professional and licensing costs. Lower compensation costs partly offset these increases.
- The March datacenter transaction generated $130.0 million of proceeds but was accounted for under the financing method, not as a sale. The related assets remain on the balance sheet; a $130.0 million finance lease obligation was recorded. Lease payments extend through the lease term ending in 2031, with renewal options.
- Net non-operating income was $2.8 million in Q2 2016, versus expense of $47.0 million a year earlier. The prior-year period included $61.8 million in debt prepayment costs. Q2 2016 also included a $3.8 million impairment of a strategic investment.
- Cleared-only interest rate and credit default swap fees declined to $12.9 million in Q2 from $18.0 million, and to $28.0 million for six months from $37.5 million, reflecting reduced client activity.
Outlook, risks and contingencies
The filing provides no formal earnings or revenue guidance. Management attributed higher trading volumes to uncertainty and volatility in interest rates, equities, energy, agricultural commodities and metals, including uncertainty around the U.K. referendum; it cautioned that trading activity depends on market conditions and other factors. A regular quarterly dividend of $0.60 per share was declared on August 3, 2016, payable September 26, 2016.
Key disclosed risks include competition, technology and cybersecurity, regulatory change, trading-volume and rate-per-contract variability, clearing-member credit exposure, foreign-exchange movements, and the ability to manage costs and debt. The CFTC lawsuit against NYMEX and two former employees concerning confidential customer information remained pending; the company said it believed it had strong defenses. No legal or regulatory accrual was required at June 30, 2016. CME also reported $760.0 million of contingent letters of credit for its Singapore Exchange mutual-offset agreement. Management reported no material change in market-risk exposure, and stated disclosure controls were effective with no material internal-control changes during the quarter.
Investor verification priorities
- Confirm how much of revenue growth is attributable to durable volume and product mix versus market-driven volatility, and monitor average rate per contract.
- Assess the sustainability of cash generation after dividends and the distinction between corporate cash and clearing collateral.
- Review recurring costs and cash obligations from the datacenter financing-method transaction and lease.
- Track swap-fee trends, foreign-currency losses, tax-rate changes, and strategic investment impairments.
- Monitor the CFTC litigation, contingent guarantees and letters of credit, and continued compliance with debt and regulatory liquidity requirements.