CME Group Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results; comparisons are with the corresponding 2014 periods. CME Group operates futures and options exchanges, clearing houses, and related market-data and services businesses.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $850.3 million (+12%) | $762.4 million | $2,513.0 million (+11%) | $2,271.4 million |
| Operating income | $516.4 million | $430.4 million | $1,518.8 million | $1,296.9 million |
| Operating margin | 60.7% | 56.5% | 60.4% | 57.1% |
| Net income attributable to CME Group | $359.9 million (+24%) | $290.0 million | $955.3 million (+16%) | $820.6 million |
| Diluted EPS | $1.06 (+23%) | $0.86 | $2.83 (+16%) | $2.44 |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $1,141.2 million | $788.9 million |
Q3 clearing and transaction fees were $715.0 million, up 11%; market-data revenue was $99.5 million, up 13%. For futures and options, contract volume rose 7% in Q3 and 8% year to date, while average rate per contract increased 5% and 2%, respectively. Aggregate average daily volume increased 7% in both periods. Q3 growth was particularly strong in equity, energy, and agricultural products; interest-rate volume declined 7%.
Total expenses rose 1% in Q3 and 2% year to date. Nine-month non-operating expense was $30.5 million, including $61.8 million of debt prepayment costs from redeeming notes; the filing also reports a termination fee related to the proposed GFI Group acquisition in the first quarter. The effective tax rate was 30.3% in Q3 and 35.8% for the first nine months, below the comparable 2014 rates of 32.4% and 36.8%.
Cash, liquidity, and debt
Cash and cash equivalents were $1,434.3 million at September 30, 2015, versus $1,366.1 million at year-end 2014. Nine-month operating cash flow was $1,141.2 million; investing cash outflow was $21.3 million and financing cash outflow was $1,051.7 million. Financing included $1,174.9 million of cash dividends, $743.7 million of net debt proceeds, and $673.0 million of debt repayment.
Long-term debt was $2,241.2 million on the balance sheet, with $2.25 billion par value outstanding, all due after 2020. CME had a $2.3 billion corporate revolving facility with no borrowings and approximately $2.3 billion of available capacity, plus a separate $7.0 billion secured facility intended for clearing-related liquidity needs, also undrawn. The company reported compliance with debt covenants and investment-grade credit ratings with stable outlooks.
Performance-bond and guaranty-fund assets and corresponding liabilities were each $49.3 billion at quarter-end, up from $40.6 billion at year-end. These clearing-related balances substantially affect reported current assets and liabilities and should not be viewed as ordinary corporate liquidity.
Changes, outlook, and risks
- Management attributed higher trading activity to market uncertainty and volatility, including global economic concerns, currency movements, crude-oil market uncertainty, and weather-related agricultural concerns. Lower interest-rate volatility weighed on interest-rate activity.
- Market-data revenue growth reflected reduced fee waivers, partly offset by lower subscriber screen counts following pricing-policy changes. Two resellers represented approximately 44% of nine-month market-data revenue.
- Expenses included reorganization and trading-floor closure costs, higher licensing fees, and a $14.5 million year-to-date benefit comparison impact from the prior-period MF Global bankruptcy claim. Management also cited continuing expense-reduction efforts.
- The filing provides no quantitative earnings or revenue guidance. Management said it expects to maintain an investment-grade rating, based on cash generation and debt-management capacity.
- Material disclosed matters include Fifth Market patent litigation, for which potential loss could not be estimated, and a CFTC action against NYMEX and two former employees concerning alleged disclosure of confidential customer information. Accrued legal and regulatory matters totaled $3.5 million at September 30.
- Management reported no material change in market-risk exposure, no material update to the annual-report risk factors, and effective disclosure controls. It noted risks including competition, technology and cybersecurity, regulation, trading-volume volatility, clearing-member credit exposure, and legal proceedings.
Investor verification points
- Verify whether trading-volume and average-rate trends persist, particularly the mix shift toward higher-rate energy, FX, and agricultural contracts.
- Assess the durability of market-data revenue growth and the significance of reseller concentration and subscriber-count declines.
- Review the composition and timing of operating cash flow, dividends, debt refinancing, and the debt prepayment charge.
- Distinguish corporate cash and borrowing capacity from customer collateral and clearing-related balances.
- Monitor the Fifth Market and CFTC proceedings, related uncertainty, and any developments affecting potential liabilities.