CME Group Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Unaudited consolidated results, compared with the three months ended March 31, 2014 unless otherwise noted. CME Group operates derivatives exchanges and clearing houses.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $842.7 million | $777.4 million | Up 8% |
| Operating expenses | $335.4 million | $322.9 million | Up 4% |
| Operating income | $507.3 million | $454.5 million | Up 12% |
| Operating margin | 60.2% | 58.5% | Up 1.7 percentage points |
| Net income attributable to CME Group | $330.4 million | $266.8 million | Up 24% |
| Diluted EPS | $0.98 | $0.79 | Up 24% |
| Cash from operating activities | $418.9 million | $383.0 million | Up 9% |
- Revenue mix: Clearing and transaction fees were $708.2 million, up 9%; market data and information services were $98.0 million, up 10%; access and communication fees were $21.3 million, up 4%.
- Trading activity: Futures and options contract volume rose 10% to 914.4 million contracts; average daily volume rose 10% to 14.990 million. Average rate per contract declined 2% to $0.753, partly offsetting volume-driven fee growth. Electronic volume represented 87% of total volume.
- Cash and liquidity: Cash and cash equivalents were $1.695 billion at quarter-end, compared with $1.366 billion at December 31, 2014. Net cash used in investing activities was $24.4 million. Net cash used in financing activities was $65.8 million.
- Debt: Long-term debt was $2.852 billion, versus $2.108 billion at year-end, following issuance of $750 million of 3.00% notes due 2025. The company reported no borrowings under its $2.3 billion general-purpose revolving credit facility or its $7.0 billion secured clearing-liquidity facility.
- Dividends: The equity statement records a $0.50-per-share dividend totaling $168.4 million. Cash-flow financing activities report $838.8 million of cash dividends paid; the filing does not clearly reconcile the difference in the supplied text.
Material changes and management commentary
- Revenue growth reflected higher trading volumes, particularly in interest-rate, foreign-exchange and energy products. Management attributed activity to changing expectations for Federal Reserve policy, U.S. dollar strength and crude-oil price volatility.
- Energy average daily volume increased materially: WTI crude oil rose 69% and Brent crude oil 153%. Equity average daily volume declined 4%, which management linked to relatively low market volatility.
- Market-data revenue benefited from reduced fee waivers, partly offset by lower subscriber screen counts following pricing-policy changes. The two largest resellers accounted for approximately 46% of market-data revenue.
- Expenses rose $12.5 million. Management cited foreign-exchange effects, litigation accruals and reorganization costs, partly offset by lower depreciation and amortization, compensation costs and contingent consideration.
- Non-operating income was $16.5 million, versus expense of $8.1 million a year earlier. It included $21.7 million of other non-operating income, which management identified as a termination fee related to the proposed GFI Group acquisition. The effective tax rate fell to 36.9% from 40.3%.
Outlook, risks and unusual items
- The filing provides no specific financial guidance. Management cautions that quarterly results are not necessarily indicative of future periods.
- In April 2015, CME Group repurchased its $612.5 million notes due 2018 and paid a $60.5 million call premium. It expects to recognize a $63.6 million loss on early extinguishment of debt in Q2 2015.
- Operating risks include competition, market-volume and volatility changes, customer and reseller concentration, technology reliability and cybersecurity, regulation, and the ability to manage costs and debt. Management reported no material change in market-risk exposure since year-end.
- Pending matters include a patent infringement suit by Fifth Market and a CFTC suit involving NYMEX and two former employees. The company says it intends to defend the claims; it cannot estimate a reasonably possible loss for the Fifth Market matter. Accrued probable and estimable legal and regulatory matters totaled $3.5 million at March 31, 2015.
- Clearing collateral and performance-bond balances were $45.174 billion, with an equal corresponding liability; these amounts relate to clearing operations and should not be read as freely available corporate liquidity. Management states that its clearing guarantee liability is immaterial and unrecorded.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile the $838.8 million of cash dividends paid with the $168.4 million dividend shown in the Q1 equity statement; confirm the timing and nature of additional distributions.
- Review the Q2 impact of the 2018-note repurchase, including the $63.6 million extinguishment loss and $60.5 million call premium.
- Assess whether elevated trading volumes and revenue growth are sustainable, and monitor the lower average rate per contract and changing product and venue mix.
- Track legal and regulatory proceedings, foreign-exchange-related expense volatility, and market-data reseller concentration.
- Distinguish corporate cash and borrowing capacity from substantial clearing collateral balances and related obligations.