CME Group Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with the quarter ended March 31, 2018 unless stated otherwise. CME Group operates futures and options exchanges, clearing services, market data and related businesses. The quarter includes NEX, acquired in November 2018, so several revenue and expense comparisons reflect the acquisition as well as underlying activity.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $1,179.6 million | $1,109.0 million | +6% |
| Operating expenses | $548.6 million | $368.1 million | +49% |
| Operating income | $631.0 million | $740.9 million | Down 15% |
| Operating margin | 53.5% | 66.8% | Down 13.3 percentage points |
| Net income attributable to CME Group | $496.9 million | $598.8 million | Down 17% |
| Diluted EPS | $1.39 | $1.76 | Down 21% |
| Operating cash flow | $669.2 million | $825.0 million | Down 19% |
Clearing and transaction fees were $952.6 million, down 2%; market data and information services revenue was $130.1 million, up 37%; and other revenue was $96.9 million, up 139%. Transaction fees included $122.9 million from NEX cash markets businesses. Management attributed market data growth to NEX and higher fees for basic real-time data, and other revenue growth primarily to NEX.
Futures and options contract volume fell 16% to 1,136.6 million contracts, while average rate per contract increased 1% to $0.713. Average daily volume declined 16% across the reported aggregate, which management associated with lower volatility than in early 2018. Expenses rose substantially, including purchased-intangible amortization of $80.7 million versus $23.7 million, with increases also tied to NEX staffing, technology and occupancy.
Non-operating income was $9.2 million, compared with $47.8 million. Investment income increased 14% to $178.7 million; interest and borrowing costs increased to $48.1 million from $30.1 million; and other non-operating expense was $161.9 million, including a $14.4 million net loss on derivative contracts. The effective tax rate declined to 22.5% from 24.1%, principally reflecting recognition of certain previously reserved tax assets, partly offset by deferred tax effects.
Cash, debt and liquidity
- Cash and cash equivalents were $997.4 million at March 31, 2019, down from $1,374.5 million at year-end. Operating activities provided $669.2 million; investing used $48.6 million and financing used $997.7 million. Financing outflows included $892.1 million of cash dividends and $569.2 million of debt repayments, partly offset by $462.3 million of net commercial-paper issuance.
- Long-term debt was $4,292.0 million, including $854.7 million of commercial paper; no short-term debt was outstanding. The company repaid euro-denominated notes and a yen-denominated term loan due in March 2019.
- CME Group reported approximately $1.5 billion of excess general-purpose borrowing capacity under its $2.4 billion revolving senior credit facility, with commercial paper backstopped by that facility. It reported compliance with debt covenants and investment-grade ratings with stable outlooks.
- Performance bonds and guaranty fund contributions were $33.6 billion on both the asset and liability sides of the balance sheet and principally relate to clearing operations; these balances should not be viewed as ordinary corporate cash or liquidity.
Changes, outlook and notable matters
- The NEX acquisition materially expanded the business and affected reported revenue, expenses, debt and intangible-asset amortization. Management cited lower trading volume and higher operating expenses as drivers of the decline in operating cash flow.
- Management gave no specific earnings or revenue guidance in the filing. It said it expected to maintain an investment-grade rating, citing cash generation, debt repayment capacity and refinancing ability.
- On May 7, 2019, the board declared a regular quarterly dividend of $0.75 per share, payable June 25 to shareholders of record June 10.
- Adoption of the lease accounting standard on January 1, 2019 resulted in recognition of a $568.0 million lease liability and a $448.2 million right-of-use asset. At March 31, operating lease liabilities were $561.0 million.
- The company reported no material change in market-risk exposure and no material update to its annual-report risk factors. It stated disclosure controls were effective; NEX was excluded from the quarter-end internal-control assessment while integration continued.
- Legal and regulatory proceedings included a CFTC action against NYMEX and two former employees, for which management said it believed it had strong defenses, and an appeal of the dismissal of the Eurex antitrust case. No legal accrual was recorded because matters were not considered probable and estimable; management did not expect material effects, while noting outcomes cannot be predicted with certainty.
Key facts for investors to verify
- How much of revenue growth and expense growth reflects NEX, and how the acquired businesses perform as integration progresses.
- Whether contract volumes recover from the 16% year-over-year decline, given management’s stated sensitivity to market volatility, policy uncertainty and product mix.
- The ongoing effect of NEX-related amortization and other costs on operating margin and earnings.
- Debt and liquidity trends, including commercial-paper balances, refinancing needs and the distinction between corporate funds and clearing collateral.
- Developments in the disclosed legal matters, regulatory inquiries and integration of NEX into internal controls.