CME Group Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited results; comparisons are with the quarter ended March 31, 2013 unless noted. CME Group operates derivatives exchanges and clearing services, as well as market-data and related businesses.
Financial performance
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Total revenue | $777.4 million | $718.6 million; up 8% |
| Operating income | $454.5 million | $405.5 million; up 12% |
| Operating margin | 58.5% | 56.4% |
| Net income attributable to CME Group | $266.8 million | $235.8 million; up 13% |
| Diluted earnings per share | $0.79 | $0.71; up 11% |
| Cash from operating activities | $383.0 million | $396.0 million; down 3% |
- Clearing and transaction fees were $652.2 million, up 10%; market-data revenue was $89.4 million, up 11%. Access and communication fees fell 5%, and other revenue fell 33%.
- Total contract volume increased 11% to 833.2 million contracts; average rate per contract declined 2% to $0.767. Management attributed higher fees principally to increased volume, partly offset by product-mix effects and incentives.
- Total expenses increased 3% to $322.9 million. Higher licensing costs, platform development, compensation and contingent-consideration expense were partly offset by lower litigation accruals and foreign-currency gains.
- Non-operating expense was $8.1 million, versus $17.9 million. Lower borrowing costs and higher income from the S&P/Dow Jones Indices venture contributed to the improvement. The effective tax rate rose to 40.3% from 38.8%.
Cash, debt and liquidity
- Cash and cash equivalents were $1.054 billion at March 31, down from $2.470 billion at December 31, 2013. The quarter’s net cash decrease was $1.416 billion.
- Financing activities used $1.770 billion, including repayment of $750 million of notes due February 2014 and $1.025 billion of cash dividends; the filing says the annual variable dividend from 2013 operations was paid in Q1.
- Long-term debt was $2.107 billion; no short-term debt remained. Notes mature in 2018, 2022 and 2043. The company reported no borrowings under its $1.8 billion revolving senior credit facility and approximately $1.8 billion of capacity for general corporate purposes.
- A separate $7.0 billion 364-day credit line is intended to provide clearing-house liquidity in specified circumstances; $5.6 billion of guaranty funds were available to collateralize it. CME reported compliance with applicable debt covenants and regulatory capital requirements.
- Reported current assets and liabilities each include $21.659 billion of performance bonds and guaranty-fund contributions, so headline current totals include substantial clearing-related balances.
Management commentary, risks and contingencies
- Volume gains were strongest in interest-rate products, up 19%, and equity products, up 11%; foreign-exchange volume fell 19%. Management cited changing interest-rate expectations and periods of market volatility, while subdued FX volatility and allegations of FX-market collusion weighed on FX activity.
- Market-data fees increased to $85 per month from $70, partly offset by fewer subscribers. The two largest data resellers generated approximately 44% of market-data revenue; one clearing firm represented 11% of clearing and transaction-fee revenue.
- Management provided no specific earnings or revenue guidance in this filing. It noted that quarterly results are not necessarily indicative of future results and cautioned that trading activity, volatility, regulation, competition, technology and other factors can affect performance.
- Legal matters include patent disputes and a CFTC action concerning alleged disclosure of confidential customer information; the company said it intended to defend itself and could not estimate potential losses in certain patent matters. Accrued probable and estimable legal and regulatory matters were $4.3 million, down from $11.3 million at year-end.
- For MF Global-related litigation, CME had reached an agreement in principle: it would assert a $29.0 million claim against the bankruptcy trustee and deliver $14.5 million of the distribution to former customers. The related $550 million guarantee was expected to be extinguished; management considered payment under it very remote.
- The filing reported no material change in market-risk exposure, no material update to annual-report risk factors, effective disclosure controls, and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether higher contract volumes and market-data pricing can continue to offset the lower average rate per contract and weaker activity in some product lines.
- The composition and timing of the $1.025 billion Q1 dividend cash outflow, and the effect of shareholder distributions on liquidity.
- Future operating costs, including platform investment, licensing, regulatory compliance and contingent-consideration obligations.
- Developments and potential financial effects of the disclosed legal and regulatory matters, including the MF Global settlement and guarantee release.
- Clearing-related liquidity exposures and the distinction between CME’s corporate cash and collateral balances reported in the consolidated statements.