CME Group Inc. — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2018. CME Group operates futures and options exchanges and clearing services, alongside market data and related services. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First nine months 2018 | First nine months 2017 |
|---|---|---|---|---|
| Revenue | $904.2 million | $890.8 million | $3,072.8 million | $2,744.7 million |
| Operating income | $549.9 million | $567.6 million | $1,957.7 million | $1,773.7 million |
| Operating margin | 60.8% | 63.7% | 63.7% | 64.6% |
| Net income | $411.8 million | $308.6 million | $1,576.7 million | $1,124.2 million |
| Diluted EPS | $1.21 | $0.91 | $4.62 | $3.31 |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $1,930.4 million | $1,290.7 million |
- Q3 revenue increased 1% year over year; nine-month revenue increased 12%. Market data revenue grew 14% in Q3 and 10% year to date, partly reflecting a higher monthly fee for basic real-time data. Nine-month clearing and transaction fees rose 12%.
- Q3 operating income fell about 3% as expenses rose 10%; nine-month operating income increased about 10% while expenses rose 15%. The filing reports lower operating margins in both comparison periods.
- Q3 net income rose 34% despite lower operating income, principally as the effective tax rate declined to 26.7% from 49.2%. The nine-month effective tax rate was 25.2%, versus 42.4%.
- Average daily contract volume was down 1% in Q3 but up 14% for the first nine months. Energy volume was notably weaker in Q3, while interest-rate volume grew.
Balance sheet, cash flow and liquidity
- At September 30, cash and cash equivalents were $1.406 billion, versus $1.904 billion at year-end 2017. Total cash, cash equivalents and restricted cash were $3.030 billion; $1.622 billion was short-term restricted cash, primarily for the NEX acquisition.
- Long-term debt was $3.420 billion, compared with $2.233 billion at year-end. CME issued $1.2 billion of fixed-rate notes in June to help fund the NEX transaction. Nine-month cash dividends were $1.900 billion.
- Operating cash flow was $1.930 billion, up 50% year over year. Investing activities used $38.9 million; financing activities used $767.8 million. Cash-flow comparisons reflect, among other items, lower tax payments and prior-year proceeds from investment sales.
- The company reported no borrowings under its $2.3 billion corporate revolving facility or its $7.0 billion clearing-house secured facility at September 30. It reported about $2.3 billion of general-purpose borrowing capacity and compliance with debt covenants. The corporate facility increased to $2.4 billion effective October 1.
- Performance bonds and guaranty fund contributions were $37.844 billion on both the asset and liability sides of the balance sheet; these are customer/clearing-related balances, not ordinary corporate liquidity or debt.
Outlook, commentary and notable items
- The filing gives no quantitative earnings or revenue guidance. Management linked trading activity to interest-rate, geopolitical, trade-policy and commodity-market volatility, noting that volatility subsided in Q3 after elevated activity earlier in 2018.
- CME completed its acquisition of NEX Group on November 2, 2018, after the reporting date. The stated transaction equity value was approximately $5.6 billion. The cash consideration was funded in part with restricted cash, commercial paper and cash on hand.
- Non-operating income included $85.9 million of net realized and unrealized gains on privately held equity investments for the first nine months, while the company also recorded $51.4 million of losses on FX option and forward contracts tied to the NEX transaction. Q3 included $9.5 million of impairment charges for Pivot-related intangible and fixed assets and a $3.7 million investment impairment.
- The company cited increased professional fees, including costs related to NEX and litigation, and foreign-exchange losses on sterling-denominated acquisition cash. It also identified competition, technology and cybersecurity, regulation, market activity, clearing-member credit exposure and execution of its acquisition strategy as risks. It reported no material update to the risk factors in its 2017 Form 10-K.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. It stated that pending legal and regulatory matters were not expected to have a material financial impact, though outcomes and timing could not be predicted; no legal accrual was recorded.
Important facts for investors to verify
- How the NEX acquisition, commercial-paper funding and post-close integration affect debt, cash generation, expenses and earnings.
- Whether elevated nine-month investment gains and the reduced tax rate are sustainable; assess results excluding unusual investment, FX-hedge and impairment items.
- Trends in trading volumes, product mix and average rate per contract, particularly the Q3 decline in energy activity and the effect of volatility.
- The distinction between unrestricted corporate cash and restricted/clearing-related balances, and the liquidity available under the separate corporate and clearing facilities.
- Progress and potential outcomes of disclosed legal matters, regulatory inquiries and the company’s key operational, market and technology risks.