CME Group Inc. — Q2 2017 Form 10-Q
Business context and reporting period. CME Group operates futures and options exchanges and clearing services, with revenue primarily from clearing and transaction fees. This unaudited report covers the quarter and six months ended June 30, 2017, compared with the same 2016 periods; balance-sheet comparisons are with December 31, 2016.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $924.6 million | $906.4 million | $1,853.9 million | $1,840.6 million |
| Operating income | $605.6 million | $563.3 million | $1,206.8 million | $1,137.2 million |
| Operating margin | 65.5% | 62.1% | 65.1% | 61.8% |
| Net income | $415.8 million | $320.1 million | $815.6 million | $687.9 million |
| Diluted EPS | $1.22 | $0.95 | $2.40 | $2.03 |
| Operating cash flow | Not presented separately | Not presented separately | $823.0 million | $753.7 million |
- Q2 revenue rose 2%; six-month revenue rose 1%. Clearing and transaction fees increased 3% in Q2 and 1% for the six months. Market data revenue declined 7% and 6%, respectively; access and communication fees increased 11% and 12%.
- Futures and options volume increased 7% in Q2 and 5% for the six months, while average rate per contract fell 4% in both periods. Management attributed the rate decline primarily to customer and product mix, partly offset by a rate increase effective in Q1.
- Aggregate average daily volume rose 9% in Q2 and 5% for the six months. Interest-rate and energy volumes strengthened; equity and agricultural volumes weakened.
- Expenses fell 7% in Q2 and 8% for the six months. Lower prior-year datacenter-related costs, favorable foreign-exchange movements, reduced professional fees and lower occupancy costs contributed; compensation and bonus expenses increased.
- Cash and cash equivalents were $1.36 billion at June 30, down from $1.87 billion at year-end. Long-term debt was $2.23 billion carrying value, with $2.25 billion par value. The company had no borrowings under its $2.3 billion general-purpose revolver or $7.0 billion clearing liquidity facility, and reported compliance with debt covenants.
Material changes, outlook and risks
- Non-operating income was $31.7 million in Q2 and $137.5 million for the six months, versus $2.8 million and $7.4 million in 2016. Results included an $86.5 million net gain on the sale of remaining BM&FBOVESPA shares. Higher investment income also reflected reinvestment balances and rates; increased interest distributions to clearing firms were recorded as other non-operating expense.
- The six-month cash-flow statement shows $244.0 million proceeds from the BM&FBOVESPA sale, $1.55 billion of cash dividends paid, and a $506.3 million net decrease in cash and cash equivalents. Operating cash flow increased 9% year over year.
- Management expects an estimated $85–$90 million of additional non-cash state income-tax expense in Q3 2017, largely from remeasuring deferred tax positions after Illinois raised its corporate tax rate effective July 1. No other specific financial guidance is provided in the filing.
- Performance-bond and guaranty-fund balances were $47.4 billion on both the asset and liability sides; CME held $38.6 billion in its Federal Reserve Bank of Chicago account. These clearing-related balances are not equivalent to unrestricted corporate liquidity. Management considers its guarantee liability immaterial and recorded no liability for clearing guarantees.
- Legal matters include a CFTC case concerning alleged disclosure of confidential customer information and an antitrust case for which trial was set for April 2018. The company says it has strong defenses; it cannot estimate a reasonably possible loss range for the antitrust matter. No accrual was recorded for legal matters considered probable and estimable.
- Management reported no material change in market-risk exposure, effective disclosure controls, and no material updates to the annual-report risk factors. Key risks include trading activity and volatility, competition, technology and cybersecurity, regulation, clearing-member credit exposure, and legal outcomes.
Important facts for investors to verify
- How much earnings growth is sustainable apart from the BM&FBOVESPA sale gain, market-related investment income and tax benefits or charges?
- Whether volume growth can continue to offset lower average rates per contract and market-data revenue declines.
- The effect of the anticipated Illinois tax remeasurement and other tax items on reported earnings and cash taxes.
- Liquidity available for corporate purposes versus clearing-member collateral, and the potential demands on clearing facilities in a default or market disruption.
- Developments in the disclosed litigation, particularly the antitrust case and its unquantified potential exposure.