CME Group Inc. — 2014 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014; quarterly figures below highlight the fourth quarter. CME Group operates futures and options exchanges and clearing houses across interest rates, equities, foreign exchange, agriculture, energy and metals, with related swaps clearing, market data and technology services. It reports one operating segment.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $3,112.5 million | $2,936.3 million | +6% |
| Operating income | $1,768.4 million | $1,637.0 million | +8% |
| Operating margin | 57% | 56% | +1 percentage point |
| Net income attributable to CME Group | $1,127.1 million | $976.8 million | +15% |
| Diluted EPS | $3.35 | $2.92 | +15% |
| Cash from operating activities | $1,291.4 million | $1,280.5 million | +1% |
| Cash and cash equivalents | $1,366.1 million | $2,469.7 million | Down $1,103.6 million |
| Long-term debt | $2,107.9 million | $2,107.2 million | Broadly unchanged |
Revenue was led by clearing and transaction fees of $2,616.3 million (+6%) and market data and information services of $356.3 million (+13%). Total expenses rose 3% to $1,344.1 million. The effective tax rate declined to 36.4% from 38.9%. The company reported total assets of $72.2 billion and CME Group shareholders’ equity of $20.9 billion; reported assets and liabilities include substantial customer clearing collateral.
Trading activity: Average daily contract volume rose 9% to 13.663 million, and total contract volume increased 9% to 3.443 billion. Interest-rate average daily volume grew 19%; FX fell 9%, energy fell 3% and metals fell 13%. The average rate per contract declined 3% to $0.743, primarily from a greater mix of lower-rate interest-rate contracts and higher incentives. Clearing-only interest-rate and credit-default swap fees were $59.5 million, up from $32.3 million.
Fourth quarter: Revenue was $841.1 million versus $687.0 million in Q4 2013; operating income was $471.5 million versus $323.2 million; net income attributable to CME Group was $306.5 million versus $193.1 million; and diluted EPS was $0.91 versus $0.58.
Cash, liquidity and capital allocation
- Operating cash flow was $1.291 billion. Investing activities used $199.1 million and financing activities used $2.196 billion; financing outflows included $1.497 billion of dividends and repayment of $750 million of notes.
- Debt was approximately $2.1 billion, all fixed-rate at year-end. CME Group had no borrowings under its $1.8 billion general-purpose revolving facility and reported approximately $1.8 billion of excess general-purpose borrowing capacity. A separate $7.0 billion secured facility supports clearing-house liquidity needs; no borrowings were outstanding under it.
- Cash dividends were $3.88 per share for 2014, including a $2.00 annual variable dividend. Management’s stated policy was to target regular quarterly dividends of approximately 50% of prior-year cash earnings, subject to board discretion.
- Management expected 2015 capital expenditures of approximately $150 million and estimated a $21.8 million 2015 pension contribution to meet its funding goal.
Material changes, outlook and commentary
- Revenue growth reflected higher contract volume and market-data pricing. Volume growth was strongest in interest rates; the average rate per contract declined as product mix shifted.
- Expenses increased 3%. Higher compensation, foreign-exchange losses, reorganization and exit-plan costs, licensing fees and GFI transaction expenses were partly offset by the MF Global bankruptcy claim settlement and the absence of 2013 cyber-incident response costs and the NYMEX building sale loss.
- The 2013 cyber intrusion compromised certain customer information; the company recorded $16 million of related expenses in 2013 and continued remediation spending in 2014. Management reported effective disclosure controls and internal control over financial reporting, and the auditor issued unqualified opinions.
- Management cited continued opportunities in global expansion, new products and swaps clearing, while warning that trading volumes, rates per contract, regulatory requirements and competition can materially affect results. No specific revenue or earnings guidance was provided.
- In February 2015, CME Group announced plans to close most futures trading pits in Chicago and New York by July 2, 2015; most open-outcry options markets were expected to remain open. The proposed GFI Group transaction was terminated in January 2015.
- Key risks include market-driven volume declines, intense competition, extensive regulatory change, fixed operating costs, technology and cyber-security failures, clearing-member default exposure, reliance on third-party index licenses, and customer and market-data distributor concentration. One clearing firm contributed 12% of 2014 clearing and transaction fees; the two largest market-data resellers together contributed 44% of market-data revenue.
- Legal matters included a CFTC suit against NYMEX and two former employees concerning confidential customer information; the company said it had strong defenses. Accrued legal and regulatory matters were $4.3 million at year-end. The Fifth Market patent matter’s potential loss was not estimable; a separate Garber patent matter was resolved in February 2015.
Most important facts for investors to verify
- Whether growth in trading volume can continue and offset the declining average rate per contract, particularly if product and customer mix changes.
- How much of earnings and cash generation is recurring versus affected by tax-rate changes, investment income, equity-method earnings and other unusual items.
- The composition and availability of reported cash and assets, distinguishing corporate liquidity from customer performance bonds and guaranty-fund collateral.
- Debt maturities, credit-facility terms and covenant capacity, alongside the sustainability of regular and variable dividends.
- Developments in the CFTC litigation, patent exposure, cyber remediation, regulatory requirements and the announced trading-pit closures.