CME Group Inc. — Q2 2013 Form 10-Q
Business context and period: CME Group operates futures and options exchanges and clearing services. This unaudited filing covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $816.1 million | $795.9 million | $1,534.7 million | $1,570.5 million |
| Operating income | $507.8 million | $469.2 million | $913.3 million | $920.4 million |
| Operating margin | 62% | 59% | 60% | 59% |
| Net income attributable to CME Group | $311.2 million | $244.9 million | $547.0 million | $511.5 million |
| Diluted EPS | $0.93 | $0.74 | $1.64 | $1.54 |
| Operating cash flow | Not separately presented for the quarter | $768.8 million | $657.8 million |
- Q2 revenue rose 3%, led by clearing and transaction fees, up 8% to $692.5 million. Market data revenue fell 28% to $79.4 million, largely reflecting the index-business contribution to S&P/Dow Jones Indices and the sale of Credit Market Analysis, as well as lower subscriber counts.
- For the first half, revenue declined 2%. Clearing and transaction fees rose 2%, while market data revenue fell 29% to $160.3 million.
- Contract volume increased: aggregate average daily volume was up 16% in Q2 and 9% for the first half. Average rate per contract declined 8% in Q2 and 6% for the first half, reflecting product mix and higher incentives and discounts, partially offsetting volume gains.
- Total expenses declined 6% in Q2 and 4% in the first half. Lower costs following the index-business contribution and CMA sale were partially offset by higher bonuses, licensing costs, salaries and, for the first half, foreign-currency losses.
- Non-operating results were $0.3 million expense in Q2 and $18.2 million expense for the first half, versus income of $41.5 million and $23.7 million in 2012. The prior-year periods included a $65.2 million transaction-related gain. 2013 results included equity-method income from S&P/DJI.
Financial position, cash flow and liquidity
- At June 30, cash and cash equivalents were $1.968 billion, versus $1.605 billion at year-end 2012. Operating cash flow for the first half was $768.8 million, up from $657.8 million; management attributed the increase primarily to higher cash collateral related to an interest-rate swap.
- Cash performance bonds and guaranty fund contributions, and the corresponding liability, were each $14.276 billion, up from $6.585 billion at year-end. The increase reflected higher open interest and a change in clearing-firm collateral preference; these balances are not ordinary corporate cash liquidity.
- Debt totaled approximately $2.858 billion at par: $1.5 billion due in August 2013 and February 2014, $612.5 million due in 2018, and $750 million due in 2022. The company repaid the $750 million August 2013 notes in August, after quarter-end.
- CME Group reported an undrawn $1.8 billion revolving senior credit facility and approximately $1.8 billion of excess borrowing capacity for general corporate purposes. It also maintained a separate clearing-house liquidity line of up to $5.0 billion, supported in part by $4.9 billion of eligible guaranty-fund collateral. The company reported compliance with debt covenants and investment-grade ratings with stable outlooks.
- First-half cash dividends were $299.8 million. After quarter-end, the board declared a regular dividend of $0.45 per share, payable September 25, 2013.
Material changes, outlook and risks
- Q2 net income rose 27% and diluted EPS rose 26%; first-half net income rose 7% and diluted EPS rose 6%. The lower effective tax rates—38.7% in 2013 versus 50.4% in Q2 2012 and 45.0% for the first half of 2012—were affected by tax items associated with the 2012 S&P/DJI venture and CMA transaction. The filing does not provide specific forward earnings or revenue guidance.
- Management linked stronger Q2 volumes mainly to increased interest-rate market volatility in May and June amid changing expectations for Federal Reserve policy. Agricultural volume declined with lower weather-related volatility; energy and currency activity varied by product and market conditions.
- In April, CME Group purchased the remaining non-controlling interest in CME Group Index Holdings for $80 million, increasing its S&P/DJI interest from 24.4% to 27%. The company recorded a $180 million tax benefit and a $2.3 million gain in additional paid-in capital, not as operating earnings.
- Other Q2 items included $5.1 million of Hurricane Sandy business-interruption insurance proceeds. First-half other revenue also included $8.8 million recognized under a technology agreement with BM&FBOVESPA.
- Legal matters include patent disputes, the MF Global customer class action, and a CFTC suit against NYMEX and two former employees. The company says it believes it has defenses; potential losses in key matters could not be reasonably estimated. Accrued probable and estimable legal and regulatory matters were $13.3 million.
- Other risks include trading-volume and rate-per-contract variability, competition, technology and cybersecurity, regulation, clearing-member and market risks, foreign exchange exposure, and legal outcomes. The company reported a $10.4 million first-half foreign-currency loss related to British-pound cash balances. Disclosure controls were assessed as effective, with no material change in internal control reported.
Investor verification checklist
- Verify whether higher trading volumes persist and how product mix, pricing incentives and average rate per contract affect transaction revenue.
- Assess continuing market-data subscriber trends and the post-transaction contribution from S&P/DJI and other investments.
- Review the drivers of first-half operating cash flow and distinguish corporate liquidity from clearing collateral balances.
- Confirm debt repayment and refinancing needs after the August 2013 note maturity, and monitor leverage and available credit capacity.
- Track material legal and regulatory proceedings, including any changes to estimated exposure or accrued contingencies.
- Separate recurring earnings from tax-related equity items, prior-year transaction gains, insurance proceeds and other unusual items.