CME Group Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated results; comparisons are with the same 2016 periods.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $890.8 million (+6%) | $841.7 million | $2,744.7 million (+2%) | $2,682.3 million |
| Operating income | $567.9 million | $525.3 million | $1,774.7 million | $1,662.5 million |
| Operating margin | 63.8% | 62.4% | 64.7% | 62.0% |
| Net income | $308.6 million | $472.8 million | $1,124.2 million | $1,160.7 million |
| Diluted EPS | $0.91 | $1.39 | $3.31 | $3.43 |
| Operating cash flow | Not separately presented for quarter | Not separately presented for quarter | $1,330.2 million | $1,232.4 million |
- Q3 clearing and transaction fees rose 7% to $756.2 million; market-data revenue declined 4% to $96.9 million. For the nine months, those categories increased 3% and decreased 5%, respectively.
- Q3 total contract volume rose 8% to 989.3 million contracts; average daily volume increased 10% to 15.704 million. Nine-month contract volume rose 6%, while average rate per contract declined 3% to $0.743.
- Expenses increased 2% in Q3 to $322.9 million, but declined 5% for the nine months to $970.0 million. Nine-month operating-expense comparison benefited from the prior-year $28.6 million datacenter sale-and-leaseback loss and related legal costs.
Liquidity, debt and capital
- Cash and cash equivalents were $1.631 billion at September 30, 2017, down from $1.869 billion at December 31, 2016. Nine-month operating cash flow was $1.330 billion; investing activities provided $200.8 million, including proceeds from investment-share sales; financing activities used $1.769 billion, principally reflecting $1.770 billion of cash dividends.
- Long-term debt carrying value was $2.233 billion, comprising three $750 million fixed-rate note issues due 2022, 2025 and 2043. No borrowings were outstanding under either revolving facility; the company reported approximately $2.3 billion of general-purpose revolver capacity and $7.0 billion of secured clearing liquidity capacity.
- Shareholders’ equity was $20.864 billion. The company reported compliance with debt-facility covenants and investment-grade credit ratings with stable outlooks.
- Reported current assets and liabilities include matching performance-bond and guaranty-fund balances of $46.942 billion; these customer-related balances substantially inflate both totals and are not ordinary corporate liquidity.
Changes, unusual items and management commentary
- Q3 net income fell 35% despite higher revenue and operating income. The effective tax rate rose to 49.2% from 13.8%, mainly due to remeasurement of deferred tax positions following a state and local tax-law change; the 2016 comparison also included a tax benefit related to a share sale.
- Nine-month non-operating income included investment gains, notably an $86.5 million net gain on the January sale of remaining BM&FBOVESPA shares and a $2.0 million gain on Bolsa Mexicana shares. Investment income also benefited from returns on reinvested clearing collateral. Higher expenses for distributing collateral interest to clearing firms were recorded in other non-operating expense.
- Volume growth reflected interest-rate, energy, agricultural and metals activity; equity volumes declined amid lower market volatility. Management cited Federal Reserve policy uncertainty, crude-oil supply shifts and weather-related crop uncertainty as volume drivers. Electronic trading represented 91% of Q3 volume, versus 88% a year earlier.
- Management reported no material change in market-risk exposure from year-end 2016 and no material update to the annual-report risk factors. No formal financial guidance is provided in the supplied filing text.
Outlook, risks and contingencies
- CME Group said it was committed to exiting its credit-default-swap clearing business by mid-2018, while continuing full clearing services during the transition. CMECE client guaranty-fund contributions had been returned by September 30; $50 million of company capital remained in the fund for transition purposes.
- CME Europe’s recognized investment exchange status and CMECE’s European clearing authorizations were revoked effective October 12, 2017, after the reporting date, following the wind-down process.
- A trial in the Eurex U.S. antitrust and business-interference case was set for April 9, 2018. The company said it believes it has strong defenses but could not estimate a reasonably possible loss range. It also cited a CFTC case concerning alleged disclosure of confidential customer information; management said it believes it has strong defenses. No accrual was required for probable and estimable legal matters.
- Key stated risks include trading-volume and volatility changes, competition, technology reliability and cybersecurity, regulation, customer and clearing-member concentration, pricing and product mix, and the ability to manage costs and debt.
Important facts for investors to verify
- How much of reported earnings and the year-over-year tax-rate change reflects recurring operations versus investment gains, tax-law remeasurement and prior-period tax items.
- Whether volume growth persists and offsets lower average rates per contract and declining market-data revenue; also monitor clearing-firm and market-data reseller concentration.
- Progress, costs and potential liabilities associated with the CDS exit and European clearing-market wind-down.
- Developments in the CFTC and Eurex U.S. proceedings, for which potential loss amounts were not clearly estimable in the filing.
- Liquidity and earnings effects of collateral reinvestment and related distributions to clearing firms; customer performance-bond balances should not be mistaken for unrestricted corporate cash.