CME Group Inc. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are shown below. Amounts are U.S. dollars.
Business context
CME Group operates futures exchanges and clearing businesses across interest rates, equity indexes, foreign exchange, agriculture, energy and metals. It also provides OTC derivatives clearing, market data, connectivity and related services. The company reports one operating segment. Trading activity and transaction-fee revenue are sensitive to market volume, product and customer mix, and volatility.
Key financial results
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Total revenue | $2,936.3 million | $2,914.6 million | +1% |
| Operating income | $1,637.0 million | $1,692.0 million | -3% |
| Operating margin | 56% | 58% | Down 2 percentage points |
| Net income attributable to CME Group | $976.8 million | $896.3 million | +9% |
| Diluted EPS | $2.92 | $2.70 | +8% |
| Cash from operating activities | $1,280.5 million | $1,219.7 million | +5% |
| Total average daily contract volume | 12.546 million | 11.423 million | +10% |
| Average rate per contract | $0.768 | $0.819 | -6% |
Clearing and transaction fees rose 4% to $2,460.4 million as volume increased, partly offset by lower average rates. Market data and information services revenue fell 19% to $315.4 million, reflecting the 2012 contribution of the Dow Jones index asset group and sale of Credit Market Analysis, as well as fewer market-data devices. The 2013 effective tax rate was 38.9%, versus 46.5% in 2012; the prior-year rate included deferred tax liabilities associated with the McGraw venture.
Q4 2013: Revenue was $687.0 million versus $660.9 million in Q4 2012; operating income was $323.2 million versus $375.6 million; net income attributable to CME Group was $193.1 million versus $166.8 million; diluted EPS was $0.58 versus $0.50.
Balance sheet, cash flow and capital returns
- Cash and cash equivalents were $2.47 billion at year-end, compared with $1.60 billion a year earlier. Total debt was approximately $2.86 billion, including $749.9 million classified as short-term and $2.11 billion long-term. The $750 million note due February 2014 was repaid in February 2014.
- CME Group had approximately $1.8 billion of undrawn general-purpose revolving capacity. A separate $7.0 billion, 364-day facility is intended to provide clearing-house liquidity and is supported by eligible collateral; it should not be viewed as unrestricted corporate cash.
- Cash performance bonds and guaranty-fund contributions were $21.36 billion on both the asset and liability sides at year-end, versus $6.58 billion in 2012. This client-related balance-sheet activity substantially affects reported total assets and liabilities, which rose to $54.28 billion from $38.86 billion.
- Operating cash flow was $1.28 billion. Purchases of property, net, were $125.6 million; management expected 2014 capital expenditures of approximately $175 million.
- Dividends paid in 2013 were $4.40 per share, including a $2.60 variable dividend declared in December and paid in January 2014. The company stated its intention to continue regular quarterly dividends, subject to board discretion.
Material changes, outlook and notable items
- Higher contract volume, particularly in interest rates, supported revenue growth: total contract volume increased 9%, while interest-rate average daily volume rose 22%. Lower average rate per contract reduced the revenue benefit of higher volume.
- Expenses increased 6% to $1,299.3 million. Significant items included a $27.1 million loss and related costs from the NYMEX building sale, $16.0 million of cyber-intrusion response expense, and higher compensation, bonuses, licensing and marketing costs. The 2012 comparison included a $58.9 million net gain associated with the contribution of the Dow Jones index asset group and sale of CMA.
- In July 2013, CME Group experienced a cyber intrusion that compromised certain customer information. Management reported $16.0 million of response costs and warned that future incidents could disrupt operations or result in further expense or liability.
- Management’s stated priorities included growth in global markets, new products, OTC clearing, technology and index services. The filing provides no specific earnings or revenue guidance. The company noted that market-data pricing and policy changes effective in 2014 and 2015 were expected to support revenue, but could reduce paid subscriptions.
- The business remains exposed to trading-volume and rate-per-contract volatility, intense competition, fixed operating costs, technology and cyber risks, clearing-member defaults, and extensive U.S. and international regulation. Management highlighted uncertainty around Dodd-Frank implementation, position limits, Basel III capital rules, European regulation, transaction taxes and the tax treatment of derivatives.
- Legal matters include a CFTC action against NYMEX and two former employees concerning confidential customer information, and several patent disputes for which the company could not estimate a reasonably possible loss range. Legal and regulatory accruals were $11.3 million at year-end. An MF Global class-action settlement was agreed in principle: CME would assert a $29.0 million claim and deliver half of any distribution, stated as $14.5 million, to former customers; court approval was still required, and the related $550 million financial guarantee was to be extinguished under the settlement.
Most important facts for investors to verify
- Whether higher trading volumes persist and offset the decline in average rate per contract, particularly as product and customer mix changes.
- Whether expense growth moderates after the 2013 building-sale loss, cyber-response costs and increased compensation and licensing costs.
- How much unrestricted liquidity is available after distinguishing corporate cash and the general-purpose facility from customer collateral and the collateral-backed clearing facility.
- The repayment and refinancing profile of debt, and the impact of substantial dividend distributions on future capital flexibility.
- Developments in the cyber incident, CFTC action, patent litigation and MF Global settlement, including any changes to accrued or potential liabilities.
- Whether market-data pricing changes, OTC clearing initiatives and international expansion generate durable growth without materially increasing costs or regulatory exposure.