CME Group Inc. — Q3 2019 Form 10-Q
Business context and period: Unaudited results cover the quarter and nine months ended September 30, 2019, compared with the same 2018 periods. CME operates futures and options exchanges, clearing services, market-data businesses and cash-market platforms. Results include NEX, acquired November 2, 2018, from November 3 onward; therefore, year-over-year comparisons include NEX revenue and expenses in 2019 but not in the comparable 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,277.3 million | $904.2 million | $3,729.6 million | $3,072.8 million |
| Operating income | $685.2 million | $549.9 million | $2,014.8 million | $1,957.7 million |
| Operating margin | 53.6% | 60.8% | 54.0% | 63.7% |
| Net income attributable to CME Group | $636.3 million | $411.8 million | $1,647.0 million | $1,576.7 million |
| Diluted EPS | $1.78 | $1.21 | $4.60 | $4.62 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $1,953.1 million | $1,930.4 million |
Q3 revenue rose 41%, operating income 25%, net income 55% and diluted EPS 47%. Nine-month revenue increased 21%, while net income rose 4%; diluted EPS was nearly flat, down from $4.62 to $4.60. Clearing and transaction fees rose 38% in Q3 and 16% year to date; market-data revenue rose 17% and 22%, respectively. Other revenue increased substantially, largely reflecting NEX.
Q3 listed futures and options volume increased 32% to 1,295.8 million contracts, while the average rate per contract fell 8% to $0.693. For the first nine months, volume rose 7%, but the average rate fell 5% to $0.699. Management attributed the volume increases chiefly to greater market volatility and the mix of interest-rate and equity-index products; those product shifts and higher member trading volume contributed to lower rates per contract.
Liquidity, debt and other balance-sheet items
- At September 30, 2019, cash and cash equivalents were $1,210.1 million, versus $1,374.5 million at year-end 2018. Net cash used in financing was $1,977.5 million, including $569.2 million of debt repayments and $1,427.8 million of cash dividends. Operating cash flow was $1,953.1 million; investing activities used $136.7 million.
- Debt carrying value was $3,873.3 million, including $435.0 million of commercial paper; no short-term debt was outstanding. CME repaid €350 million of notes and a ¥19.1 billion term loan in March. It reported approximately $1.9 billion of excess capacity under its $2.4 billion general-purpose revolving facility and no borrowings under that facility.
- Reported current assets and liabilities include large performance-bond and guaranty-fund balances—$41,161.3 million and $41,160.4 million, respectively—primarily customer collateral, not ordinary corporate liquidity. CME also held $26.0 billion in its Federal Reserve Bank of Chicago cash account for clearing-related purposes.
- Total assets were $79,417.6 million and total equity was $26,813.3 million. The company paid common dividends of $2.25 per share in the first nine months, including $0.75 per share in Q3.
Material changes, outlook and risks
- Expense growth outpaced revenue growth: total expenses rose 67% in Q3 and 54% year to date. Higher compensation, purchased-intangible amortization, technology costs and impairments were significant contributors; NEX-related operations accounted for much of the increase. Operating margin declined versus 2018.
- In Q3, the company recorded a $28.6 million unrealized loss on certain intangible assets related to assets held for sale. For the first nine months, it reported $61.1 million of losses on assets held for sale and impairments, $18.7 million of fixed-asset losses and $19.2 million of investment impairments.
- The Q3 effective tax rate was 12.0% versus 26.7%; the nine-month rate was 20.3% versus 25.2%. Management attributed the lower rates primarily to the Foreign Derived Intangible Income deduction, including estimated benefits for 2018 and through Q3 2019.
- Management linked Q3 volume strength to changing Federal Reserve rate expectations, rate cuts and trade-policy uncertainty. Volume remains sensitive to volatility, economic and political conditions, regulation, competition, product mix and customer trading activity. No specific financial guidance or quantified forward outlook is provided in the supplied filing text.
- Legal and regulatory matters include a CFTC case involving alleged disclosure of confidential customer information and an appeal of a dismissed antitrust case. No accrual was recorded because matters were not considered probable and estimable; management did not expect other proceedings to have a material impact, while acknowledging uncertain outcomes and timing.
- Management reported no material change in market-risk exposure and no material update to risk factors. Disclosure controls were deemed effective. NEX was excluded from the quarter-end internal-control assessment while integration continued.
Important facts for investors to verify
- How much of revenue and earnings growth reflects NEX consolidation versus underlying organic performance, and whether NEX integration delivers expected benefits.
- Whether higher trading volumes persist and how product/customer mix affects the average rate per contract and margins.
- The nature, timing and potential further impact of assets held for sale, impairment charges and ongoing NEX purchase-price allocation.
- Corporate cash and available borrowing capacity separately from customer collateral and other restricted or clearing-related funds; also monitor debt, dividend cash requirements and legal-case developments.