CME Group Inc. — Q1 2016 Form 10-Q
Business context and reporting period
Unaudited results for the quarter ended March 31, 2016, compared with the quarter ended March 31, 2015. CME Group operates futures and options exchanges and clearing businesses; its principal revenue source is clearing and transaction fees.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $934.2 million | $842.7 million | +11% |
| Clearing and transaction fees | $796.1 million | $708.2 million | +12% |
| Operating expenses | $360.3 million | $335.4 million | +7% |
| Operating income | $573.9 million | $507.3 million | +13% |
| Operating margin | 61.4% | 60.2% | +1.2 percentage points |
| Net income | $367.8 million | $330.4 million | +11% |
| Diluted EPS | $1.09 | $0.98 | +11% |
| Operating cash flow | $519.7 million | $418.9 million | +24% |
Futures and options contract volume rose 13% to 1,033.6 million contracts; the average rate per contract was approximately unchanged at $0.756. Average daily volume increased 13% to 16.944 million contracts. Equity volume rose 28%, energy 18%, metals 23%, and interest rates 9%; foreign exchange was down 1% and agriculture was up 1%. Cleared-only swaps fee revenue declined to $15.1 million from $19.6 million.
Market data and information services revenue increased 5% to $102.4 million, partly because partial fee waivers in place during 2015 ended. Access and communication fees were $21.6 million, up 1%.
Liquidity, debt, and cash flow
Cash and cash equivalents were $1.146 billion at March 31, 2016, down from $1.693 billion at year-end. Cash from operations was $519.7 million; investing activities used $27.3 million and financing activities used $1.039 billion. Financing cash outflows included $1.179 billion of dividends. The equity statement separately reports common dividends of $0.60 per share, or $203.1 million; the filing does not explain the full composition of the larger cash-dividend figure in the cash flow statement in the excerpts provided.
Long-term debt had a $2.230 billion carrying value and $2.250 billion par value, consisting of three fixed-rate note issues due in 2022, 2025, and 2043. The company had no borrowings under its $2.3 billion general-purpose revolving facility or its $7.0 billion clearing liquidity facility. It reported approximately $2.3 billion of excess general-purpose borrowing capacity and compliance with debt covenants. The clearing facility was supported by $6.7 billion of eligible guaranty funds. Credit outlooks were stable, with S&P rating the company AA- long term and Moody’s Aa3.
Reported total current assets of $39.253 billion and current liabilities of $37.848 billion include substantial performance-bond and guaranty-fund balances, which are largely matched ($37.497 billion of related assets versus $37.494 billion of related liabilities). These customer and clearing-related balances should not be treated as ordinary corporate liquidity. CME reported compliance with applicable CFTC financial requirements.
Material changes, unusual items, and risks
- Management attributed higher trading revenue and volume principally to volatility and uncertainty around Federal Reserve policy, equity markets, and crude oil prices. The operating margin expanded despite higher expenses.
- Operating expenses included $28.6 million of datacenter-related losses and costs. In March, CME received $130 million from a datacenter transaction but accounted for it under the financing method because of continuing involvement; the property remained on the balance sheet, was written down, and the proceeds were recorded as a finance lease obligation. The initial lease term runs through March 2031.
- Non-operating income fell to $4.6 million from $16.5 million. Q1 2015 included a $22.5 million net termination fee related to the proposed GFI Group acquisition; Q1 2016 also had higher expense for distributing interest earned on reinvested performance-bond collateral.
- A CFTC lawsuit against NYMEX and two former employees concerning alleged disclosure of confidential customer information remains unresolved. CME said it believes it has strong factual and legal defenses. The Fifth Market patent litigation was settled and dismissed with prejudice in March 2016; the patents at issue were held invalid and not infringed.
- No legal or regulatory matters were accrued at March 31, 2016. Management said other known proceedings were not expected individually to materially affect financial position or results, while noting outcomes and timing can be uncertain.
- Management identified risks including competition, trading-volume and volatility changes, customer and product mix affecting rates, technology reliability and cybersecurity, regulatory change, clearing-member credit exposure, and legal proceedings. No material change in market-risk exposure or material update to annual-report risk factors was reported.
Guidance and outlook
The filing provides no numerical revenue, earnings, or volume guidance. Management expects to maintain an investment-grade rating, citing cash generation and ability to repay or refinance debt. It also expects foreign-exchange gains and losses to continue. Quarterly results are not necessarily indicative of future periods.
Important facts for investors to verify
- Whether elevated trading volumes persist and how volatility, product mix, incentives, and customer mix affect clearing fees and average rates.
- The recurring cost and cash-flow implications of the datacenter financing arrangement, including lease payments and the retained asset.
- The nature of the $1.179 billion cash-dividend outflow and its reconciliation with the $203.1 million common-dividend amount in the equity statement.
- Developments in the CFTC litigation and other regulatory matters, and any resulting financial or operational impact.
- How much reported cash and current assets are available for corporate purposes after excluding restricted funds and clearing-related collateral.