01—Abstract
Summary
Summary of the 10-Q filed August 1, 2018. Cited figures are marked; the original filing is the authoritative source.
CME Group Inc. reported a strong financial performance for the second quarter and first half of 2018, with total revenues increasing by 15%a and 17% respectively, driven primarily by a significant rise in clearing and transaction fees due to higher contract volumes across various asset classes.
This growth was fueled by increased market volatility stemming from uncertainty around Federal Reserve interest rate policies, U.S. trade policies, and potential inflation. The company also saw a substantial increase in investment income, partly due to higher reinvestment balances of performance bond collateral. Operationally, the company experienced an increase in expenses, notably due to foreign currency exchange rate fluctuations impacting restricted cash for the pending acquisition of NEX Group plc, as well as higher licensing fees and professional services costs related to the NEX transaction and ongoing litigation.
Despite rising expenses, CME Group maintained robust operating margins. The company also announced significant debt issuances to fund the NEX acquisition and continues to manage its liquidity effectively, with ample credit facilities available. Investors should note the strategic acquisition of NEX Group plc, which is expected to close in the latter half of 2018, and its potential impact on future performance.
02—Key points
Key Highlights
- Total revenues increased by 15% to $1,059.6 million for the quarter ended June 30, 2018, and by 17% to $2,168.6 million for the six months ended June 30, 2018.
- Clearing and transaction fees rose by 14% for the quarter and 19% for the six months, driven by a 13% and 21% increase in total contract volume, respectively.
- Investment income saw a substantial increase of 115% for the quarter and 59% for the six months, bolstered by higher reinvestment of performance bond collateral and gains on privately-held equity investments.
- Operating expenses increased by 23% for the quarter and 17% for the six months, largely due to foreign currency exchange rate fluctuations related to the NEX acquisition and increased licensing and professional fees.
- The company issued $1.2 billion in new fixed-rate notes in June 2018 to finance the proposed acquisition of NEX Group plc.
- Diluted earnings per common share increased by 36% to $1.66 for the quarter and by 43% to $3.42 for the six months.
- Net cash provided by operating activities significantly increased by 72% for the six months ended June 30, 2018, reflecting higher trading volumes and lower tax payments.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2018filed August 1, 2018Financial Statements
Q2 FY2018 against Q2 FY2017
| Line item | Q2 FY2018Q2 FY2017 | Change |
|---|---|---|
| Revenue | $1.06B$924.60M | +14.6% |
| Operating Expenses | $392.70M$319.40M | +22.9% |
| Operating Income | $666.90M$605.20M | +10.2% |
| Net Income | $566.10M$415.80M | +36.1% |
| EPS (Basic) | $1.67$1.23 | +35.8% |
| EPS (Diluted) | $1.66$1.22 | +36.1% |
| Shares Outstanding (Basic) | 339.46M338.56M | +0.3% |
| Shares Outstanding (Diluted) | 340.87M340.02M | +0.3% |
05—Questions
Frequently Asked Questions
What is the primary driver of CME Group's revenue growth in this period?
The primary driver of CME Group's revenue growth is the increase in clearing and transaction fees, which rose due to a significant increase in total contract volume across various asset classes, including interest rate, equity, foreign exchange, agricultural commodity, energy, and metal products. This increase in volume is attributed to higher market volatility driven by economic and geopolitical uncertainties.
How did the proposed acquisition of NEX Group plc impact the financial statements?
The proposed acquisition of NEX Group plc led to significant financial activities. CME Group issued $1.2 billion in new debt to fund the cash portion of the acquisition. Additionally, a substantial portion of cash, $1.6 billion, was restricted for this transaction. Foreign currency exchange rate fluctuations, particularly on the British pound, resulted in recognized losses in 'Other non-operating income (expense)' due to holding restricted cash denominated in foreign currency for the acquisition.
What is the outlook for CME Group's expenses, and what factors are contributing to their increase?
Operating expenses increased due to several factors, most notably foreign currency exchange rate fluctuations affecting restricted cash for the NEX acquisition. Other contributing factors include higher licensing and other fee agreements, increased professional fees and outside services related to the NEX transaction and litigation, and higher compensation and benefits expenses due to increased headcount. While expenses rose, the company maintained strong operating margins.
How has the company's tax rate changed and what is the impact?
The effective tax rate decreased significantly due to the reduction in the U.S. federal statutory tax rate from 35% to 21% effective January 1, 2018. This reduction contributed to higher net income and improved cash flows from operations.
06—Continue