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CME GROUP INC. 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.1
CME-2015.6.30 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________________________
FORM 10-Q
_________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
- OR -
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to                
Commission file number 001-31553
CME GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware
 
36-4459170
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
20 South Wacker Drive, Chicago, Illinois
 
60606
(Address of principal executive offices)
 
(Zip Code)
(312) 930-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report) 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.            Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
  
Accelerated filer     o
 
 
 
 
Non-accelerated filer    o (Do not check if a smaller reporting company)
 
  
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes  ¨    No  ý
The number of shares outstanding of each of the registrant’s classes of common stock as of July 15, 2015 was as follows: 337,756,060 shares of Class A common stock, $0.01 par value; 625 shares of Class B-1 common stock, $0.01 par value; 813 shares of Class B-2 common stock, $0.01 par value; 1,287 shares of Class B-3 common stock, $0.01 par value; and 413 shares of Class B-4 common stock, $0.01 par value.

1




 CME GROUP INC.
FORM 10-Q
INDEX
 
 
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 4.
 
 
 
Item 6.
 
 

2


PART I. FINANCIAL INFORMATION
Certain Terms
Unless otherwise indicated, references to CME Group Inc. (CME Group or the company) products include references to products listed on one of its regulated exchanges or clearing houses: Chicago Mercantile Exchange Inc. (CME), Board of Trade of the City of Chicago, Inc. (CBOT), New York Mercantile Exchange, Inc. (NYMEX), Commodity Exchange, Inc. (COMEX), CME Clearing Europe Limited (CMECE) and CME Europe Limited (CME Europe). The products listed are subject to the rules and regulations of the particular entity and the applicable rulebook should be consulted. Unless otherwise indicated, references to NYMEX include its subsidiary, COMEX. The clearing houses include CME Clearing, which is our U.S. clearing house and a division of CME, and CMECE. In addition, CME serves as a swap execution facility, which is a regulated platform for swap trading, and serves as a swap data repository, which provides public data on swap transactions and stores confidential swap data for regulatory purposes.
All references to “options” or “options contracts” in the text of this document refer to options on futures contracts.
Further information about CME Group and its products can be found at http://www.cmegroup.com. Information made available on our website does not constitute a part of this Quarterly Report on Form 10-Q.
Information about Contract Volume and Average Rate per Contract
All amounts regarding contract volume and average rate per contract exclude our credit default swaps and interest rate swaps contracts.
Trademark Information
CME Group is a trademark of CME Group Inc. The Globe logo, CME, Chicago Mercantile Exchange, Globex and E-mini are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of Board of Trade of the City of Chicago, Inc. NYMEX, New York Mercantile Exchange and ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. KCBT and Kansas City Board of Trade are trademarks of The Board of Trade of Kansas City, Missouri, Inc. Dow Jones, Dow Jones Industrial Average, S&P 500 and S&P are service and/or trademarks of Dow Jones Trademark Holdings LLC, Standard & Poor's Financial Services LLC and S&P/Dow Jones Indices LLC, as the case may be, and have been licensed for use by Chicago Mercantile Exchange Inc. All other trademarks are the property of their respective owners.
Forward-Looking Statements
From time to time, in this Quarterly Report on Form 10-Q as well as in other written reports and verbal statements, we discuss our expectations regarding future performance. These forward-looking statements are identified by their use of terms and phrases such as “believe,” “anticipate,” “could,” “estimate,” “intend,” “may,” “plan,” “expect” and similar expressions, including references to assumptions. These forward-looking statements are based on currently available competitive, financial and economic data, current expectations, estimates, forecasts and projections about the industries in which we operate and management's beliefs and assumptions. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. We want to caution you not to place undue reliance on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Among the factors that might affect our performance are:
increasing competition by foreign and domestic entities, including increased competition from new entrants into our markets and consolidation of existing entities;
our ability to keep pace with rapid technological developments, including our ability to complete the development, implementation and maintenance of the enhanced functionality required by our customers while maintaining reliability and ensuring that such technology is not vulnerable to security risks;
our ability to continue introducing competitive new products and services on a timely, cost-effective basis, including through our electronic trading capabilities, and our ability to maintain the competitiveness of our existing products and services, including our ability to provide effective services to the swaps market;
our ability to adjust our fixed costs and expenses if our revenues decline;
our ability to maintain existing customers, develop strategic relationships and attract new customers;
our ability to expand and offer our products outside the United States;
changes in domestic and non-U.S. regulations, including the impact of any changes in domestic and non-U.S. laws or government policy with respect to our industry, such as any changes to regulations and policies that require increased financial and operational resources from us or our customers;

3


the costs associated with protecting our intellectual property rights and our ability to operate our business without violating the intellectual property rights of others;
decreases in revenue from our market data as a result of decreased demand;
changes in our rate per contract due to shifts in the mix of the products traded, the trading venue and the mix of customers (whether the customer receives member or non-member fees or participates in one of our various incentive programs) and the impact of our tiered pricing structure;
the ability of our financial safeguards package to adequately protect us from the credit risks of clearing members;
the ability of our compliance and risk management methods to effectively monitor and manage our risks, including our ability to prevent errors and misconduct and protect our infrastructure against security breaches and misappropriation of our intellectual property assets;
changes in price levels and volatility in the derivatives markets and in underlying equity, foreign exchange, interest rate and commodities markets;
economic, political and market conditions, including the volatility of the capital and credit markets and the impact of economic conditions on the trading activity of our current and potential customers;
our ability to accommodate increases in contract volume and order transaction traffic and to implement enhancements without failure or degradation of the performance of our trading and clearing systems;
our ability to execute our growth strategy and maintain our growth effectively;
our ability to manage the risks and control the costs associated with our strategy for acquisitions, investments and alliances;
our ability to continue to generate funds and/or manage our indebtedness to allow us to continue to invest in our business;
industry and customer consolidation;
decreases in trading and clearing activity;
the imposition of a transaction tax or user fee on futures and options on futures transactions and/or repeal of the 60/40 tax treatment of such transactions;
the unfavorable resolution of material legal proceedings; and
the seasonality of the futures business.
For a detailed discussion of these and other factors that might affect our performance, see Item 1A. of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on February 26, 2015 and Item 1A. of this Quarterly Report on Form 10-Q.

4


ITEM 1.
FINANCIAL STATEMENTS

CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except par value data; shares in thousands)
(unaudited)
 
 
June 30, 2015
 
December 31, 2014
Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
1,151.0

 
$
1,366.1

Marketable securities
 
76.3

 
74.7

Accounts receivable, net of allowance of $0.9 and $1.2
 
399.9

 
341.2

Other current assets (includes $32.0 and $37.0 in restricted cash)
 
260.0

 
196.5

Performance bonds and guaranty fund contributions
 
42,167.9

 
40,566.8

Total current assets
 
44,055.1

 
42,545.3

Property, net of accumulated depreciation and amortization of $781.5 and $741.0
 
499.2

 
508.9

Intangible assets—trading products
 
17,175.3

 
17,175.3

Intangible assets—other, net
 
2,587.6

 
2,637.4

Goodwill
 
7,569.0

 
7,569.0

Other assets (includes $73.5 and $72.4 in restricted cash)
 
1,776.9

 
1,805.6

Total Assets
 
$
73,663.1

 
$
72,241.5

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Accounts payable
 
$
22.1

 
$
36.9

Other current liabilities
 
242.6

 
927.5

Performance bonds and guaranty fund contributions
 
42,167.9

 
40,566.8

Total current liabilities
 
42,432.6

 
41,531.2

Long-term debt
 
2,241.0

 
2,107.9

Deferred income tax liabilities, net
 
7,339.8

 
7,302.7

Other liabilities
 
390.9

 
376.2

Total Liabilities
 
52,404.3

 
51,318.0

 
 
 
 
 
CME Group Shareholders’ Equity:
 
 
 
 
Preferred stock, $0.01 par value, 10,000 shares authorized at June 30, 2015 and December 31, 2014; none issued
 

 

Class A common stock, $0.01 par value, 1,000,000 shares authorized at June 30, 2015 and December 31, 2014; 336,186 and 335,452 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively
 
3.4

 
3.4

Class B common stock, $0.01 par value, 3 shares authorized, issued and outstanding as of June 30, 2015 and December 31, 2014
 

 

Additional paid-in capital
 
17,674.8

 
17,596.6

Retained earnings
 
3,575.5

 
3,317.3

Accumulated other comprehensive income (loss)
 
5.1

 
6.2

Total CME Group shareholders’ equity
 
21,258.8

 
20,923.5

Total Liabilities and Equity
 
$
73,663.1

 
$
72,241.5


See accompanying notes to unaudited consolidated financial statements.

5


CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in millions, except per share data; shares in thousands)
(unaudited)
 
 
 
Quarter Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
 
Clearing and transaction fees
 
$
681.8

 
$
609.3

 
$
1,390.0

 
$
1,261.5

Market data and information services
 
102.8

 
89.6

 
200.8

 
179.0

Access and communication fees
 
21.5

 
20.4

 
42.8

 
40.8

Other
 
13.9

 
12.3

 
29.1

 
27.7

Total Revenues
 
820.0

 
731.6

 
1,662.7

 
1,509.0

Expenses
 
 
 
 
 
 
 
 
Compensation and benefits
 
141.5

 
139.7

 
282.8

 
275.2

Communications
 
6.6

 
8.3

 
14.2

 
16.5

Technology support services
 
16.1

 
14.6

 
31.7

 
28.5

Professional fees and outside services
 
27.7

 
37.5

 
56.8

 
67.1

Amortization of purchased intangibles
 
25.0

 
25.2

 
49.9

 
50.4

Depreciation and amortization
 
33.3

 
34.3

 
65.1

 
68.4

Occupancy and building operations
 
23.5

 
23.2

 
46.3

 
46.4

Licensing and other fee agreements
 
28.8

 
25.7

 
59.4

 
54.7

Other
 
22.4

 
11.1

 
54.1

 
35.3

Total Expenses
 
324.9

 
319.6

 
660.3

 
642.5

Operating Income
 
495.1

 
412.0

 
1,002.4

 
866.5

 
 
 
 
 
 
 
 
 
Non-Operating Income (Expense)
 
 
 
 
 
 
 
 
Investment income
 
18.5

 
15.1

 
24.2

 
18.3

Gains (losses) on derivative investments
 

 

 
(1.8
)
 

Interest and other borrowing costs
 
(28.6
)
 
(28.3
)
 
(60.2
)
 
(62.0
)
Equity in net earnings (losses) of unconsolidated subsidiaries
 
26.0

 
21.5

 
48.5

 
43.9

Other non-operating income (expense)
 
(62.9
)
 
1.8

 
(41.2
)
 
1.8

Total Non-Operating
 
(47.0
)
 
10.1

 
(30.5
)
 
2.0

Income before Income Taxes
 
448.1

 
422.1

 
971.9

 
868.5

Income tax provision
 
183.1

 
158.3

 
376.5

 
338.1

Net Income
 
265.0

 
263.8

 
595.4

 
530.4

Less: net income (loss) attributable to non-controlling interest
 

 

 

 
(0.2
)
Net Income Attributable to CME Group
 
$
265.0

 
$
263.8

 
$
595.4

 
$
530.6

 
 
 
 
 
 
 
 
 
Earnings per Common Share Attributable to CME Group:
 
 
 
 
 
 
 
 
Basic
 
$
0.79

 
$
0.79

 
$
1.77

 
$
1.59

Diluted
 
0.78

 
0.79

 
1.76

 
1.58

Weighted Average Number of Common Shares:
 
 
 
 
 
 
 
 
Basic
 
336,036

 
334,097

 
335,859

 
334,002

Diluted
 
337,796

 
335,800

 
337,574

 
335,705

See accompanying notes to unaudited consolidated financial statements.

6


CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
 
Quarter Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
265.0

 
$
263.8

 
$
595.4

 
$
530.4

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
 
36.9

 
31.0

 
9.2

 
55.9

Reclassification of gain on sale included in investment income
 
(6.0
)
 

 
(6.0
)
 

Income tax benefit (expense)
 
1.2

 
(1.5
)
 
1.2

 
(1.5
)
Investment securities, net
 
32.1

 
29.5

 
4.4

 
54.4

Defined benefit plans:
 
 
 
 
 
 
 
 
Net change in defined benefit plans arising during the period
 

 

 
(0.3
)
 
(3.2
)
Amortization of net actuarial (gains) losses included in compensation and benefits expense
 
0.7

 
0.1

 
1.4

 
0.2

Income tax benefit (expense)
 
(0.2
)
 
(0.1
)
 
(0.4
)
 
1.1

Defined benefit plans, net
 
0.5

 

 
0.7

 
(1.9
)
Derivative investments:
 
 
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period
 

 

 
(4.7
)
 

Ineffectiveness on cash flow hedges included in (gain) loss on derivative investments
 

 

 
1.8

 

Amortization of effective portion of net (gain) loss on cash flow hedges included in interest expense
 
(0.3
)
 
(0.4
)
 
(0.6
)
 
(0.7
)
Income tax benefit (expense)
 
0.2

 
0.2

 
1.4

 
0.3

Derivative investments, net
 
(0.1
)
 
(0.2
)
 
(2.1
)
 
(0.4
)
Foreign currency translation:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(2.6
)
 
1.8

 
(6.6
)
 
4.2

Income tax benefit (expense)
 
1.0

 
(0.7
)
 
2.5

 
(1.6
)
Foreign currency translation, net
 
(1.6
)
 
1.1

 
(4.1
)
 
2.6

Other comprehensive income, net of tax
 
30.9

 
30.4

 
(1.1
)
 
54.7

Comprehensive income
 
295.9

 
294.2

 
594.3

 
585.1

Less: comprehensive income attributable to non-controlling interests
 

 

 

 
(0.2
)
Comprehensive Income Attributable to CME Group
 
$
295.9

 
$
294.2

 
$
594.3

 
$
585.3

See accompanying notes to unaudited consolidated financial statements.

7


CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(dollars in millions, except per share data; shares in thousands)
(unaudited)
 
 
 
Class A
Common
Stock
(Shares)
 
Class B
Common
Stock
(Shares)
 
Common
Stock and
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total CME Group
Shareholders’
Equity
Balance at December 31, 2014
 
335,452

 
3

 
$
17,600.0

 
$
3,317.3

 
$
6.2

 
$
20,923.5

Net income attributable to CME Group
 
 
 
 
 
 
 
595.4

 
 
 
595.4

Other comprehensive income attributable to CME Group
 
 
 
 
 
 
 
 
 
(1.1
)
 
(1.1
)
Dividends on common stock of $1.00 per share
 
 
 
 
 
 
 
(337.2
)
 
 
 
(337.2
)
Exercise of stock options
 
652

 
 
 
42.1

 
 
 
 
 
42.1

Excess tax benefits from option exercises and restricted stock vesting
 
 
 
 
 
1.3

 
 
 
 
 
1.3

Vesting of issued restricted Class A common stock
 
46

 
 
 
(2.3
)
 
 
 
 
 
(2.3
)
Shares issued to Board of Directors
 
26

 
 
 
2.4

 
 
 
 
 
2.4

Shares issued under Employee Stock Purchase Plan
 
10

 
 
 
1.0

 
 
 
 
 
1.0

Stock-based compensation
 
 
 
 
 
33.7

 
 
 
 
 
33.7

Balance at June 30, 2015
 
336,186

 
3

 
$
17,678.2

 
$
3,575.5

 
$
5.1

 
$
21,258.8

See accompanying notes to unaudited consolidated financial statements.

8



CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (continued)
(dollars in millions, except per share data; shares in thousands)
(unaudited)
 
 
 
Class A
Common
Stock
(Shares)
 
Class B
Common
Stock
(Shares)
 
Common
Stock and
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total CME Group
Shareholders’
Equity
 
Non-Controlling Interest
 
Total Equity
Balance at December 31, 2013
 
333,852

 
3

 
$
17,508.2

 
$
3,494.6

 
$
152.0

 
$
21,154.8

 
$
5.7

 
$
21,160.5

Net income attributable to CME Group and non-controlling interest
 
 
 
 
 
 
 
530.6

 
 
 
530.6

 
(0.2
)
 
530.4

Other comprehensive income attributable to CME Group
 
 
 
 
 
 
 
 
 
54.7

 
54.7

 
 
 
54.7

Dividends on common stock of $0.94 per share
 
 
 
 
 
 
 
(315.4
)
 
 
 
(315.4
)
 
 
 
(315.4
)
Purchase of non-controlling interest
 
 
 
 
 
 
 
 
 
 
 


 
(5.5
)
 
(5.5
)
Exercise of stock options
 
298

 
 
 
11.5

 
 
 
 
 
11.5

 
 
 
11.5

Excess tax benefits from option exercises and restricted stock vesting
 
 
 
 
 
2.9

 
 
 
 
 
2.9

 
 
 
2.9

Vesting of issued restricted Class A common stock
 
64

 
 
 
(2.7
)
 
 
 
 
 
(2.7
)
 
 
 
(2.7
)
Shares issued to Board of Directors
 
24

 
 
 
1.7

 
 
 
 
 
1.7

 
 
 
1.7

Shares issued under Employee Stock Purchase Plan
 
13

 
 
 
0.9

 
 
 
 
 
0.9

 
 
 
0.9

Stock-based compensation
 
 
 
 
 
26.4

 
 
 
 
 
26.4

 
 
 
26.4

Balance at June 30, 2014
 
334,251

 
3

 
$
17,548.9

 
$
3,709.8

 
$
206.7

 
$
21,465.4

 
$

 
$
21,465.4

See accompanying notes to unaudited consolidated financial statements.


9


CME GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited) 
 
 
Six Months Ended
June 30,
 
 
2015
 
2014
Cash Flows from Operating Activities
 
 
 
 
Net income
 
$
595.4

 
$
530.4

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Stock-based compensation
 
33.7

 
26.4

Amortization of purchased intangibles
 
49.9

 
50.4

Depreciation and amortization
 
65.1

 
68.4

Gain on sale of BM&FBOVESPA shares
 
(5.9
)
 

Debt prepayment costs
 
61.8

 

Undistributed earnings, net of losses, of unconsolidated subsidiaries
 
(5.3
)
 
(19.2
)
Deferred income taxes
 
41.3

 
17.5

Change in:
 
 
 
 
Accounts receivable
 
(58.4
)
 
(31.9
)
Other current assets
 
8.1

 
(4.0
)
Other assets
 
(15.1
)
 
3.8

Accounts payable
 
(14.8
)
 
(4.1
)
Income taxes payable
 
(55.5
)
 
(27.5
)
Other current liabilities
 
(26.2
)
 
(55.2
)
Other liabilities
 
(0.1
)
 
(0.9
)
Other
 
3.7

 
0.6

Net Cash Provided by Operating Activities
 
677.7

 
554.7

 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
Proceeds from maturities of available-for-sale marketable securities
 
19.1

 
18.3

Purchases of available-for-sale marketable securities
 
(19.2
)
 
(19.1
)
Purchases of property, net
 
(60.7
)
 
(77.4
)
Proceeds from sale of building property
 

 
7.9

Investments in business ventures
 
(5.0
)
 

Proceeds from sale of BM&FBOVESPA shares
 
57.7

 

Settlement of derivative related to debt issuance
 
7.0

 

Net Cash Used in Investing Activities
 
(1.1
)
 
(70.3
)
 
 
 
 
 
Cash Flows from Financing Activities
 
 
 
 
Proceeds from debt, net of issuance costs
 
743.7

 

Repayment of debt
 
(673.0
)
 
(750.0
)
Cash dividends
 
(1,006.7
)
 
(1,182.1
)
Proceeds from exercise of stock options
 
42.1

 
11.5

Excess tax benefits related to employee option exercises and restricted stock vesting
 
1.3

 
2.9

Other
 
0.9

 
0.9

Net Cash Used in Financing Activities
 
(891.7
)
 
(1,916.8
)
 
 
 
 
 
Net change in cash and cash equivalents
 
(215.1
)
 
(1,432.4
)
Cash and cash equivalents, beginning of period
 
1,366.1

 
2,469.7

Cash and Cash Equivalents, End of Period
 
$
1,151.0

 
$
1,037.3

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 
 
 
 
Income taxes paid
 
$
393.3

 
$
322.0

Interest paid
 
46.3

 
66.8

See accompanying notes to unaudited consolidated financial statements.

10


NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements consist of CME Group Inc. (CME Group) and its subsidiaries (collectively, the company), including Chicago Mercantile Exchange Inc. (CME), Board of Trade of the City of Chicago, Inc. (CBOT), New York Mercantile Exchange, Inc. (NYMEX), Commodity Exchange, Inc. (COMEX), CME Clearing Europe Limited (CMECE) and CME Europe Limited (CME Europe). CME, CBOT, NYMEX, COMEX, CMECE and CME Europe and their subsidiaries are referred to collectively as “the exchange” in the notes to the consolidated financial statements. The clearing houses include CME Clearing, which is the U.S. clearing house and a division of CME, and CMECE.
The accompanying interim consolidated financial statements have been prepared by CME Group without audit. Certain notes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, the accompanying consolidated financial statements include all normal recurring adjustments considered necessary to present fairly the financial position of the company at June 30, 2015 and December 31, 2014 and the results of operations and cash flows for the periods indicated. Quarterly results are not necessarily indicative of results for any subsequent period.
The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in CME Group’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the Securities and Exchange Commission (SEC) on February 26, 2015.
2. Performance Bonds and Guaranty Fund Contributions
Performance Bonds and Guaranty Fund Contributions. At June 30, 2015, performance bonds and guaranty fund contribution assets on the consolidated balance sheets include cash and U.S. Treasury securities with maturity dates of 90 days or less. U.S. Treasury securities are purchased by CME, at its discretion, using cash collateral. The benefits, including interest earned, and risks of ownership accrue to CME. Interest earned is included in investment income on the consolidated statements of income. At June 30, 2015, the amortized cost and fair value of the U.S. Treasury securities were both $17.6 billion. The U.S. Treasury securities will mature in the third quarter of 2015. Performance bonds and guaranty fund contribution assets also include overnight reverse repurchase agreements that were purchased by CME, at its discretion, using cash collateral. The fair value of the overnight securities under the reverse repurchase agreements was $2.5 billion at June 30, 2015.
Clearing House Contract Settlement. CME Clearing and CMECE mark-to-market open positions for all products at least once a day (twice a day for futures and options contracts). Based on values derived from the mark-to-market process, CME Clearing and CMECE require payment from clearing firms whose positions have lost value and make payments to clearing firms whose positions have gained value. Under the extremely unlikely scenario of simultaneous default by every clearing firm who has open positions with unrealized losses, the maximum exposure related to positions other than over-the-counter credit default and interest rate swap contracts would be one half day of changes in fair value of all open positions, before considering the clearing houses' ability to access defaulting clearing firms' collateral deposits. For CME's cleared-only credit default swap and interest rate swap contracts, the maximum exposure related to CME Clearing's guarantee would be one full day of changes in fair value of all open positions, before considering CME Clearing's ability to access defaulting clearing firms' collateral. During the first six months of 2015, CME Clearing and CMECE transferred an average of approximately $4.2 billion a day through their clearing systems for settlement from clearing firms whose positions had lost value to clearing firms whose positions had gained value. CME Clearing and CMECE reduce the guarantee exposure through initial and maintenance performance bond requirements and mandatory guaranty fund contributions. The company believes that the guarantee liability is immaterial and therefore has not recorded any liability at June 30, 2015.

11


3. Intangible Assets
Intangible assets consisted of the following at June 30, 2015 and December 31, 2014:
 
 
 
June 30, 2015
 
December 31, 2014
(in millions)
 
Assigned Value
 
Accumulated
Amortization
 
Net Book
Value
 
Assigned Value
 
Accumulated
Amortization
 
Net Book
Value
Amortizable Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Clearing firm, market data and other customer relationships
 
$
2,838.8

 
$
(706.7
)
 
$
2,132.1

 
$
2,838.8

 
$
(658.8
)
 
$
2,180.0

Technology-related intellectual property
 
29.4

 
(25.4
)
 
4.0

 
29.4

 
(23.5
)
 
5.9

Other
 
2.4

 
(0.9
)
 
1.5

 
2.4

 
(0.9
)
 
1.5

Total amortizable intangible assets
 
$
2,870.6

 
$
(733.0
)
 
2,137.6

 
$
2,870.6

 
$
(683.2
)
 
2,187.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Indefinite-Lived Intangible Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trade names
 
 
 
 
 
450.0

 
 
 
 
 
450.0

Total intangible assets – other, net
 
 
 
 
 
$
2,587.6

 
 
 
 
 
$
2,637.4

Trading products(1)
 
 
 
 
 
$
17,175.3

 
 
 
 
 
$
17,175.3

(1)
Trading products represent futures and options products acquired in our business combinations with CBOT Holdings, Inc., NYMEX Holdings, Inc. and The Board of Trade of Kansas City, Missouri, Inc. Clearing and transaction fees are generated through the trading of these products. These trading products, most of which have traded for decades, require authorization from the Commodity Futures Trading Commission (CFTC). Product authorizations from the CFTC have no term limits.
Total amortization expense for intangible assets was $25.0 million and $25.2 million for the quarters ended June 30, 2015 and 2014, respectively. Total amortization expense for intangible assets was $49.9 million and $50.4 million for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, the future estimated amortization expense related to amortizable intangible assets is expected to be as follows:
(in millions)
 Amortization Expense
Remainder of 2015
$
49.7

2016
96.1

2017
95.5

2018
94.7

2019
94.7

2020
94.7

Thereafter
1,612.2

4. Long-Term Investments
In the second quarter of 2015, the company sold approximately 14.3 million shares of BM&FBOVESPA S.A. (BM&FBOVESPA) and recognized a net gain of $5.9 million within investment income on the consolidated statements of income. The company continues to own an approximate 5% interest in BM&FBOVESPA. The fair value and cost basis of the remaining investment in BM&FBOVESPA are $362.9 million and $353.9 million, respectively.
5. Debt
In April 2015, the company repaid the $612.5 million fixed rate notes due 2018 and paid a call premium of $60.5 million. As a result of the transaction, the company recognized debt prepayment costs of $61.8 million in the second quarter of 2015, which includes the call premium.

12


Long-term debt consisted of the following at June 30, 2015 and December 31, 2014: 
(in millions)
 
June 30, 2015
 
December 31, 2014
$612.5 million fixed rate notes due March 2018, stated rate of 4.40%(1)
 
$

 
$
611.0

$750.0 million fixed rate notes due September 2022, stated rate of 3.00% (2)
 
748.4

 
748.2

$750.0 million fixed rate notes due March 2025, stated rate of 3.00%(3)
 
743.9

 

$750.0 million fixed rates notes due September 2043, stated rate of 5.30% (4)
 
748.7

 
748.7

Total long-term debt
 
$
2,241.0

 
$
2,107.9

(1)
In February 2010, the company entered into a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of 4.46%.
(2)
In August 2012, the company entered into a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of 3.32%.
(3)
In December 2014, the company entered into a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of 3.11%.
(4)
In August 2012, the company entered into a forward-starting interest rate swap agreement that modified the interest obligation associated with these notes so that the interest payable on the notes effectively became fixed at a rate of 4.73%.
Long-term debt maturities, at par value, were as follows as of June 30, 2015:  
(in millions)
Par Value
2016
$

2017

2018

2019

2020

Thereafter
2,250.0

6. Contingencies
Legal and Regulatory Matters. In 2008, Fifth Market, Inc. (Fifth Market) filed a complaint against CME Group and CME in the Delaware District Court seeking a permanent injunction against CME's Globex system and unquantified enhanced damages for what the plaintiff alleges is willful infringement of two patents, in addition to costs, expenses and attorneys' fees. The case was stayed pending the outcome of CME's request for reexamination by the U.S. Patent and Trademark Office (USPTO). The reexaminations resulted in some claims being rejected and others being confirmed. In June 2013, the court lifted the stay. The validity of the patents, however, remains subject to further review by the USPTO. Based on its investigation to date and advice from legal counsel, the company believes this suit is without merit and intends to defend itself vigorously against these charges. CME filed covered business method reviews against both patents for the claims that remain after the reexaminations. All the claims asserted in the litigation have a proceeding instituted against them.  The reviews and one reexamination remain under way at the USPTO or are on appeal to the Federal Circuit.
The Fifth Market legal matter involves an alleged infringement of intellectual property which, due to its nature, involves a potential liability that is uncertain, difficult to quantify and involves a wide range of potential outcomes. We expect the re-examination and the reviews by the USPTO in the Fifth Market matter, including any appeals thereof, to result in a determination of the validity of the patent at issue which we expect will have an impact on the merits of the matter. Given the uncertainty of factors which may potentially impact the resolution of the matter, at this time the company is unable to estimate the reasonably possible loss or range of reasonably possible loss in the unlikely event it were found to be liable at trial in the matter.
In February 2013, the CFTC filed suit against NYMEX and two former employees alleging disclosure of confidential customer information in violation of the Commodity Exchange Act. NYMEX’s motion to dismiss was denied in September 2014. Based on its investigation to date and advice from legal counsel, the company believes that it has strong factual and legal defenses to the claim.

13


In the normal course of business, the company discusses matters with its regulators raised during regulatory examinations or otherwise subject to their inquiry and oversight. These matters could result in censures, fines, penalties or other sanctions. Management believes the outcome of any resulting actions will not have a material impact on its consolidated financial position or results of operations. However, the company is unable to predict the outcome or the timing of the ultimate resolution of these matters, or the potential fines, penalties or injunctive or other equitable relief, if any, that may result from these matters.
In addition, the company is a defendant in, and has potential for, various other legal proceedings arising from its regular business activities. While the ultimate results of such proceedings against the company cannot be predicted with certainty, the company believes that the resolution of any of these matters on an individual basis will not have a material impact on its consolidated financial position or results of operations.
At June 30, 2015 and December 31, 2014, the company had accrued $3.5 million and $4.3 million, respectively, for legal and regulatory matters that were probable and estimable.
Intellectual Property Indemnifications. Certain agreements with customers and other third parties related to accessing the CME platforms; utilizing market data services; and licensing CME SPAN software may contain indemnifications from intellectual property claims that may be made against them as a result of their use of the applicable products and/or services. The potential future claims relating to these indemnifications cannot be estimated and therefore no liability has been recorded.
7. Guarantees
Mutual Offset Agreement. CME and Singapore Exchange Limited (SGX) have a mutual offset agreement with a current term through October 2015. This agreement enables market participants to open a futures position on one exchange and liquidate it on the other. The term of the agreement will automatically renew for a one-year period unless either party provides advance notice of their intent to terminate. CME must maintain U.S. Treasury securities or irrevocable, standby letters of credit as collateral for this agreement. At June 30, 2015, CME was contingently liable to SGX on letters of credit totaling $410.0 million. Regardless of the collateral, CME guarantees all cleared transactions submitted through SGX and would initiate procedures designed to satisfy these financial obligations in the event of a default, such as the use of performance bonds and guaranty fund contributions of the defaulting clearing firm. The company believes that its guarantee liability is immaterial and therefore has not recorded any liability at June 30, 2015.
Family Farmer and Rancher Protection Fund. In 2012, the company established the Family Farmer and Rancher Protection Fund (the Fund). The Fund is designed to provide payments, up to certain maximum levels, to family farmers, ranchers and other agricultural industry participants who use the company's agricultural products and who suffer losses to their segregated account balances due to their CME clearing member becoming insolvent. Under the terms of the Fund, farmers and ranchers are eligible for up to $25,000 per participant. Farming and ranching cooperatives are eligible for up to $100,000 per cooperative. The Fund was established with a maximum of $100.0 million available for distribution to participants. Since its establishment, the Fund has made payments of approximately $2.0 million, which leaves $98.0 million available for future claims. If, at any time, payments due to participants were to exceed the amount remaining in the fund, payments would be pro-rated. Clearing members and customers must register in advance with the company and provide certain documentation in order to substantiate their eligibility. The company believes that its guarantee liability is immaterial and therefore has not recorded any liability at June 30, 2015.

14


8. Accumulated Other Comprehensive Income
The following tables present changes in the accumulated balances for each component of other comprehensive income attributable to CME Group, including current period other comprehensive income and reclassifications out of accumulated other comprehensive income:
(in millions)
Investment Securities
 
Defined Benefit Plans
 
Derivative Investments
 
Foreign Currency Translation
 
Total
Balance at December 31, 2014
$
(22.9
)
 
$
(31.3
)
 
$
62.6

 
$
(2.2
)
 
$
6.2

Other comprehensive income before reclassifications and income tax benefit (expense)
9.2

 
(0.3
)
 
(4.7
)
 
(6.6
)
 
(2.4
)
Amounts reclassified from accumulated other comprehensive income
(6.0
)
 
1.4

 
1.2

 

 
(3.4
)
Income tax benefit (expense)
1.2

 
(0.4
)
 
1.4

 
2.5

 
4.7

Net current period other comprehensive income attributable to CME Group
4.4

 
0.7

 
(2.1
)
 
(4.1
)
 
(1.1
)
Balance at June 30, 2015
$
(18.5
)
 
$
(30.6
)
 
$
60.5

 
$
(6.3
)
 
$
5.1

(in millions)
Investment Securities
 
Defined Benefit Plans
 
Derivative Investments
 
Foreign Currency Translation
 
Total
Balance at December 31, 2013
$
98.9

 
$
(12.8
)
 
$
65.0

 
$
0.9

 
$
152.0

Other comprehensive income before reclassifications and income tax benefit (expense)
55.9

 
(3.2
)
 

 
4.2

 
56.9

Amounts reclassified from accumulated other comprehensive income

 
0.2

 
(0.7
)
 

 
(0.5
)
Income tax benefit (expense)
(1.5
)
 
1.1

 
0.3

 
(1.6
)
 
(1.7
)
Net current period other comprehensive income attributable to CME Group
54.4

 
(1.9
)
 
(0.4
)
 
2.6

 
54.7

Balance at June 30, 2014
$
153.3

 
$
(14.7
)
 
$
64.6

 
$
3.5

 
$
206.7

9. Fair Value Measurements
The company uses a three-level classification hierarchy of fair value measurements for disclosure purposes.
Level 1 inputs, which are considered the most reliable evidence of fair value, consist of quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs consist of observable market data, such as quoted prices for similar assets and liabilities in active markets, or inputs other than quoted prices that are directly observable.
Level 3 inputs consist of unobservable inputs which are derived and cannot be corroborated by market data or other entity-specific inputs.
Level 1 assets generally include U.S. Treasury securities and investments in publicly traded mutual funds with quoted market prices. In general, the company uses quoted prices in active markets for identical assets to determine the fair value of marketable securities and equity investments. If quoted prices are not available to determine fair value, the company uses other inputs that are directly observable.
Assets included in level 2 generally consist of asset-backed securities. Asset-backed securities were measured at fair value based on matrix pricing using prices of similar securities with similar inputs such as maturity dates, interest rates and credit ratings.
The company determined the fair value of its contingent consideration liabilities, considered level 3 liabilities, using a discounted cash flow model to calculate the present value of future payouts. The liabilities were included in level 3 because management used significant unobservable inputs, including a discount rate of 20% and payout probabilities ranging from 75% to 100%. Significant changes in any of those inputs in isolation would result in a significantly different fair value.

15


Financial assets and liabilities recorded in the consolidated balance sheet as of June 30, 2015 were classified in their entirety based on the lowest level of input that was significant to each asset or liability's fair value measurement. The following tables present financial instruments measured at fair value on a recurring basis:
 
 
June 30, 2015
(in millions)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets at Fair Value:
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
19.1

 
$

 
$

 
$
19.1

Mutual funds
 
56.7

 

 

 
56.7

Equity securities
 
0.1

 

 

 
0.1

Asset-backed securities
 

 
0.4

 

 
0.4

Total Marketable Securities
 
75.9

 
0.4

 

 
76.3

Performance bonds and guaranty fund contributions:
 
 
 
 
 
 
 
 
U.S. Treasury securities (1)
 
17,574.8

 

 

 
17,574.8

Equity investments
 
383.2

 

 

 
383.2

Total Assets at Fair Value
 
$
18,033.9

 
$
0.4

 
$

 
$
18,034.3

 
 
 
 
 
 
 
 
 
Liabilities at Fair Value:
 
 
 
 
 
 
 
 
Contingent consideration
 
$

 
$

 
$
17.8

 
$
17.8

Total Liabilities at Fair Value
 
$

 
$

 
$
17.8

 
$
17.8

(1) Performance bonds and guaranty fund contributions on the consolidated balance sheet at June 30, 2015 include cash collateral that has been invested in U.S. Treasury securities.
There were no transfers of assets or liabilities between level 1, level 2 and level 3 during the first six months of 2015. The following is a reconciliation of level 3 liabilities valued at fair value on a recurring basis during the first six months of 2015. There were no level 3 assets valued at fair value on a recurring basis during the first six months of 2015.
(in millions)
Contingent Consideration
Fair value of liability at December 31, 2014
$
17.7

Realized and unrealized (gains) losses:
 
Included in other expenses
0.1

Fair value of liability at June 30, 2015
$
17.8

There were no level 3 assets or level 3 liabilities valued at fair value on a nonrecurring basis during the first six months of 2015.
The following presents the estimated fair value of fixed rate notes, which are carried at amortized cost on the consolidated balance sheets. The fair values of the fixed rate notes due 2022, 2025 and 2043, which are classified as level 2 under the fair value hierarchy, were estimated using quoted market prices. At June 30, 2015, the fair values of the fixed rate notes were as follows:
(in millions)
Fair Value
Level 2:
 
$750.0 million fixed rate notes due September 2022, stated rate of 3.00% 
$
752.1

$750.0 million fixed rate notes due March 2025, stated rate of 3.00%
727.9

$750.0 million fixed rates notes due September 2043, stated rate of 5.30%
825.8


16



10. Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to the company by the weighted average number of shares of all classes of CME Group common stock outstanding for each reporting period. Diluted earnings per share reflects the increase in shares using the treasury stock method to reflect the impact of an equivalent number of shares of common stock if stock options were exercised and restricted stock awards were converted into common stock. Anti-dilutive stock options and restricted stock awards were as follows for the periods presented:
 
Quarter Ended
June 30,
 
Six Months Ended
June 30,
(in thousands)
2015
 
2014
 
2015
 
2014
Stock options
456

 
1,480

 
456

 
1,480

Stock awards
8

 

 
11

 

Total
464

 
1,480

 
467

 
1,480

The following table presents the earnings per share calculation for the periods presented:
 
 
Quarter Ended
June 30,
 
Six Months Ended
June 30,
 
 
2015
 
2014
 
2015
 
2014
Net Income Attributable to CME Group (in millions)
 
$
265.0

 
$
263.8

 
$
595.4

 
$
530.6

Weighted Average Number of Common Shares (in thousands):
 
 
 
 
 
 
 
 
Basic
 
336,036

 
334,097

 
335,859

 
334,002

Effect of stock options and restricted stock awards
 
1,760

 
1,703

 
1,715

 
1,703

Diluted
 
337,796


335,800

 
337,574