CME Group Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. CME Group operates futures and options exchanges, clearing houses, electronic trading and data services across major asset classes.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Revenue | $2,914.6 million | $3,280.6 million | Down 11% |
| Operating income | $1,692.0 million | $2,021.1 million | Down 16% |
| Operating margin | 58% | 62% | Down 4 percentage points |
| Net income attributable to CME Group | $896.3 million | $1,812.3 million | Down 51% |
| Diluted EPS | $2.70 | $5.43 | Down 50% |
| Cash from operating activities | $1,216.8 million | $1,346.3 million | Down 10% |
Clearing and transaction fees were $2,371.5 million, market data and information services revenue was $387.1 million, and access and communication fees were $88.8 million. Average daily contract volume fell 15% to 11.423 million; average rate per contract rose 2% to $0.819, partly offsetting the volume decline. Fourth-quarter revenue was $660.9 million, operating income $375.6 million and net income attributable to CME Group $166.8 million.
At year-end, cash and cash equivalents were $1,604.7 million, total debt was approximately $2.86 billion (including $749.7 million classified short-term), and shareholders’ equity was $21,419.1 million. Operating cash flow exceeded capital spending of $141.8 million. CME reported $1.8 billion of unused general-purpose capacity under its revolving facility and a separate $5.0 billion clearing-house liquidity line. Clearing collateral is substantial but is not equivalent to unrestricted corporate liquidity.
Changes and unusual items
- Lower trading activity drove the revenue decline. Interest-rate and equity average daily volume fell 20% and 21%, respectively; agricultural volume increased 5%, excluding KCBT.
- Net income comparisons are distorted by tax items: 2011 included a $646.0 million reduction in tax provision following a state tax apportionment reassessment. The 2012 effective tax rate was 46.5%, versus 6.3% in 2011; 2012 also included $106.8 million of tax expense associated with the McGraw venture.
- 2012 non-operating income included a $58.9 million net gain related to the S&P/Dow Jones Indices venture contribution and sale of Credit Market Analysis, and a $5.7 million recovery on a prior impairment. CME contributed index assets to the venture and sold CMA; it acquired KCBT for $126.0 million in November.
- Operating expenses declined 3% to $1,222.6 million, reflecting lower MF Global-related costs and reduced intangible amortization, partly offset by higher compensation.
- Cash dividends were $3.70 per share in 2012, including an accelerated $1.30 variable dividend; the regular quarterly dividend was $0.45 per share.
Outlook, risks and contingencies
Management expects continued investment in technology, co-location, capacity and international and OTC clearing initiatives. Planned 2013 capital expenditures were estimated at $140–$150 million. The company stated that existing cash, securities and operating cash flow were expected to cover working capital, capital spending and commitments; it did not provide numeric revenue or earnings guidance. Management’s dividend policy targets regular distributions of approximately 50% of prior-year cash earnings, subject to board discretion.
Key risks include trading-volume sensitivity to economic conditions, low interest-rate volatility and market uncertainty; intense exchange and OTC competition; fixed costs; evolving U.S. and European regulation, including Dodd-Frank and Basel III; cybersecurity and trading-system outages; clearing-member defaults and counterparty exposures; and dependence on benchmark and index licenses. Two clearing firms each accounted for 12% of 2012 clearing and transaction fee revenue.
Legal matters include consolidated claims relating to MF Global, for which CME said it had strong defenses but could not estimate a reasonably possible loss. CME also provided a $550 million MF Global bankruptcy-trust guarantee; management considered payment very remote. In February 2013, the CFTC sued NYMEX and two former employees over alleged disclosure of confidential customer information; CME said it had strong defenses. Accrued probable and estimable legal and regulatory matters were $13.2 million at year-end.
Investor verification priorities
- Review volume trends and product mix, and whether the 2012 decline persists or average fees continue to offset it.
- Reconcile the sharp earnings comparison against the 2011 deferred-tax benefit and 2012 venture-related gains and tax charges.
- Assess unrestricted liquidity, upcoming note maturities, leverage, and the distinction between corporate cash and customer/clearing collateral.
- Track MF Global and other litigation, including the guarantee exposure, and the outcome of the CFTC’s 2013 action.
- Monitor regulatory implementation, clearing-member credit risk, system resilience, and delivery of the planned technology and international initiatives.