10-Q 1 cboe-20180930x10q.htm 10-Q cboe_Current_Folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

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: 001‑34774

Cboe Global Markets, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

20‑5446972

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

 

400 South LaSalle Street Chicago, Illinois

60605

(Address of Principal Executive Offices)

(Zip Code)

 

(312) 786‑5600

(Registrant’s telephone number, including area code)

 

 

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       No  

 

Indicate by check mark whether the registrant has submitted electronically 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       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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.            

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).         Yes       No  

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

 

 

 

 

Class

    

October 26, 2018

Common Stock, par value $0.01

 

112,201,915 shares

 

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

7

Item 1. 

Financial Statements (unaudited)

7

 

Condensed Consolidated Balance Sheets—As of September 30, 2018 and December 31, 2017

7

 

Condensed Consolidated Statements of Income—Three and Nine Months Ended September 30, 2018 and 2017

8

 

Condensed Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2018 and 2017

9

 

Condensed Consolidated Statement of Changes in Stockholders’ Equity—Nine Months Ended September 30, 2018

10

 

Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2018 and 2017

11

 

Notes to Condensed Consolidated Financial Statements

12

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

39

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

59

Item 4. 

Controls and Procedures

62

 

 

 

PART II. OTHER INFORMATION 

63

Item 1. 

Legal Proceedings

63

Item 1A. 

Risk Factors

63

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

63

Item 3. 

Defaults upon Senior Securities

64

Item 4. 

Mine Safety Disclosures

64

Item 5. 

Other Information

64

Item 6. 

Exhibits

65

 

 

 

SIGNATURES 

66

 

 

 

 

 

2


 

CERTAIN DEFINED TERMS

Throughout this document, unless otherwise specified or the context so requires:

·

"Cboe," "we," "us," "our" or "the Company" refers to Cboe Global Markets, Inc. and its subsidiaries.

·

"ADV" means average daily volume.

·

"ADNV" means average daily notional value.

·

"Bats Global Markets" and "Bats" refer to our wholly-owned subsidiary Bats Global Markets, Inc., now known as Cboe Bats, LLC, and its subsidiaries.

·

"BYX" refers to Cboe BYX Exchange, Inc., a wholly-owned subsidiary of Cboe Global Markets, Inc.

·

"BZX" refers to Cboe BZX Exchange, Inc., a wholly-owned subsidiary of Cboe Global Markets, Inc.

·

"C2" refers to Cboe C2 Exchange, Inc. a wholly-owned subsidiary of Cboe Global Markets, Inc.

·

"Cboe Chi-X Europe" refers to our broker-dealer entity, Cboe Chi-X Europe Limited, a wholly-owned subsidiary of Cboe Global Markets, Inc., operated in the United Kingdom.

·

"Cboe Europe Equities" refers to Cboe Europe Limited, a wholly-owned subsidiary of Cboe Global Markets, Inc., the U.K. operator of our Multilateral Trading Facility ("MTF"), and our Regulated Market ("RM"), under its Recognized Investment Exchange ("RIE") status.

·

"Cboe FX" refers to Cboe FX Holdings, LLC, a wholly-owned subsidiary of Cboe Global Markets, Inc.

·

"Cboe Options" refers to Cboe Exchange, Inc., a wholly-owned subsidiary of Cboe Global Markets, Inc.

·

"Cboe SEF" refers to Cboe SEF, LLC, our swap execution facility that is a wholly-owned subsidiary of Cboe Global Markets, Inc.

·

"Cboe Trading" refers to our broker-dealer entity, Cboe Trading, Inc., a wholly-owned subsidiary of Cboe Global Markets, Inc., operated in the United States.

·

"CFE" refers to Cboe Futures Exchange, LLC, a wholly-owned subsidiary of Cboe Global Markets, Inc.

·

"CFTC" refers to the U.S. Commodity Futures Trading Commission.

·

"EDGA" refers to Cboe EDGA Exchange, Inc., a wholly-owned subsidiary of Cboe Global Markets, Inc.

·

"EDGX" refers to Cboe EDGX Exchange, Inc., a wholly-owned subsidiary of Cboe Global Markets, Inc.

·

"Exchanges" refers to Cboe Options, C2, BZX, BYX, EDGX, and EDGA.

·

"FASB" refers to the Financial Accounting Standards Board.

·

"FCA" refers to the U.K. Financial Conduct Authority.

·

"GAAP" refers to Generally Accepted Accounting Principles in the United States.

·

"Merger" refers to our acquisition of Bats Global Markets, completed on February 28, 2017.

·

"OCC" refers to The Options Clearing Corporation.

·

"OPRA" refers to Options Price Reporting Authority, LLC.

·

"SEC" refers to the U.S. Securities and Exchange Commission.

·

"SPX" refers to our S&P 500 Index exchange-traded options products.

·

"VIX" refers to the Cboe Volatility Index methodology.

3


 

TRADEMARK AND OTHER INFORMATION

Cboe®, Bats®, BYX®, BZX®, Cboe Volatility Index®, CFE®, EDGA®, EDGX®, Silexx® and VIX® are registered trademarks, and Cboe Global MarketsSM, Cboe Futures ExchangeSM, C2SM and SPXSM and are service marks of Cboe Global Markets, Inc. and its subsidiaries. Standard & Poor's®, S&P®, S&P 100® and S&P 500® are registered trademarks of Standard & Poor's Financial Services LLC and have been licensed for use by Cboe Exchange, Inc. Dow Jones®, Dow Jones Industrial Average®, DJIA® and Dow Jones Indexes are registered trademarks or service marks of Dow Jones Trademark Holdings, LLC, used under license. MSCI, and the MSCI index names are service marks of MSCI Inc., used under license. Russell®, FTSE®, and other FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies, used under license. All other trademarks and service marks are the property of their respective owners.

This Quarterly Report on Form 10-Q includes market share and industry data that we obtained from industry publications and surveys, reports of governmental agencies and internal company surveys. Industry publications and surveys generally state that the information they contain has been obtained from sources believed to be reliable, but we cannot assure you that this information is accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on the most currently available market data. While we are not aware of any misstatements regarding industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors. We refer you to the “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and our other filings with the SEC.

4


 

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10‑Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. You can identify these statements by forward-looking words such as "may," "might," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," and the negative of these terms and other comparable terminology. All statements that reflect our expectations, assumptions or projections about the future other than statements of historical fact are forward-looking statements, including statements in the "Management’s Discussion and Analysis of Financial Condition and Results of Operations" section of this report. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from that expressed or implied by the forward-looking statements. In particular, you should consider the risks and uncertainties described under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10‑Q and our other filings with the SEC.

While we believe we have identified the risks that are material to us, these risks and uncertainties are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Some factors that could cause actual results to differ include:

·

the loss of our right to exclusively list and trade certain index options and futures products;

·

economic, political and market conditions;

·

compliance with legal and regulatory obligations;

·

price competition and consolidation in our industry;

·

decreases in trading volumes, market data fees or a shift in the mix of products traded on our exchanges;

·

legislative or regulatory changes;

·

increasing competition by foreign and domestic entities;

·

our dependence on and exposure to risk from third parties;

·

our index providers’ ability to maintain the quality and integrity of their indexes and to perform under our agreements;

·

our ability to operate our business without violating the intellectual property rights of others and the costs associated with protecting our intellectual property rights;

·

our ability to attract and retain skilled management and other personnel, including those experienced with post-acquisition integration;

·

our ability to accommodate trading volume and transaction traffic, including significant increases, without failure or degradation of performance of our systems;

5


 

·

our ability to protect our systems and communication networks from security risks, including cyber-attacks and unauthorized disclosure of confidential information;

·

challenges to our use of open source software code;

·

our ability to meet our compliance obligations, including managing potential conflicts between our regulatory responsibilities and our for-profit status;

·

damage to our reputation;

·

the ability of our compliance and risk management methods to effectively monitor and manage our risks;

·

our ability to manage our growth and strategic acquisitions or alliances effectively;

·

unanticipated difficulties or expenditures relating to the Merger, including, without limitation, difficulties that result in the failure to realize expected synergies, accretion, efficiencies and cost savings from the Merger within the expected time period (if at all), whether in connection with integration, migrating trading platforms, broadening distribution of product offerings or otherwise;

·

restrictions imposed by our debt obligations;

·

our ability to maintain an investment grade credit rating;

·

potential difficulties in our migration of trading platforms and our ability to retain employees as a result of the Merger; and

·

the accuracy of our estimates and expectations.

For a detailed discussion of these and other factors that might affect our performance, see Part II, Item 1A of this Report. We do not undertake, and expressly disclaim, any duty to update any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this filing.

6


 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Cboe Global Markets, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(unaudited)

(in millions, except par value data and share amounts)

 

 

 

 

 

 

 

 

 

    

September 30, 

    

December 31, 

 

 

 

2018

 

2017

 

Assets

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

136.8

 

$

143.5

 

Financial investments

 

 

0.9

 

 

47.3

 

Accounts receivables, net

 

 

221.9

 

 

217.3

 

Income taxes receivable

 

 

59.8

 

 

17.2

 

Other current assets

 

 

16.1

 

 

9.4

 

Total Current Assets

 

 

435.5

 

 

434.7

 

Investments

 

 

88.7

 

 

82.7

 

Land

 

 

4.9

 

 

4.9

 

Property and equipment, net

 

 

65.9

 

 

73.9

 

Goodwill

 

 

2,697.6

 

 

2,707.4

 

Intangible assets, net

 

 

1,768.2

 

 

1,902.6

 

Other assets, net

 

 

58.7

 

 

59.5

 

Total Assets

 

$

5,119.5

 

$

5,265.7

 

Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

147.8

 

$

153.8

 

Section 31 fees payable

 

 

15.1

 

 

105.6

 

Deferred revenue

 

 

13.4

 

 

15.4

 

Income taxes payable

 

 

 —

 

 

2.6

 

Current portion of long-term debt

 

 

299.6

 

 

 —

 

Contingent consideration liabilities

 

 

3.0

 

 

56.6

 

Total Current Liabilities

 

 

478.9

 

 

334.0

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

915.1

 

 

1,237.9

 

Income tax liability

 

 

81.7

 

 

78.8

 

Deferred income taxes

 

 

475.4

 

 

488.2

 

Other non-current liabilities

 

 

7.1

 

 

6.8

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Redeemable Noncontrolling Interest

 

 

9.4

 

 

9.4

 

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

Preferred stock, $0.01 par value: 20,000,000 shares authorized, no shares issued and outstanding at September 30, 2018 and December 31, 2017

 

 

 —

 

 

 —

 

Common stock, $0.01 par value: 325,000,000 shares authorized, 125,052,178 and 111,626,297 shares issued and outstanding, respectively at September 30, 2018 and 124,705,786 and 112,741,217 shares issued and outstanding, respectively at December 31, 2017

 

 

1.2

 

 

1.2

 

Common stock in treasury, at cost, 13,425,881 shares at September 30, 2018 and 11,964,569 shares at December 31, 2017

 

 

(715.0)

 

 

(558.3)

 

Additional paid-in capital

 

 

2,654.5

 

 

2,623.7

 

Retained earnings

 

 

1,185.4

 

 

993.3

 

Accumulated other comprehensive income, net

 

 

25.8

 

 

50.7

 

Total Stockholders’ Equity

 

 

3,151.9

 

 

3,110.6

 

Total Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity

 

$

5,119.5

 

$

5,265.7

 

 

See accompanying notes to condensed consolidated financial statements.

7


 

Cboe Global Markets, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(unaudited)

(in millions, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended  September 30, 

 

Nine Months Ended  September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction fees

 

$

411.8

 

$

423.3

 

$

1,423.7

 

$

1,133.6

 

Access fees

 

 

34.3

 

 

30.1

 

 

94.1

 

 

77.6

 

Exchange services and other fees

 

 

19.3

 

 

20.0

 

 

62.3

 

 

55.3

 

Market data fees

 

 

47.6

 

 

46.8

 

 

154.3

 

 

117.3

 

Regulatory fees

 

 

55.2

 

 

83.5

 

 

260.8

 

 

205.1

 

Other revenue

 

 

7.7

 

 

7.7

 

 

25.9

 

 

19.5

 

Total revenues

 

 

575.9

 

 

611.4

 

 

2,021.1

 

 

1,608.4

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Liquidity payments

 

 

229.2

 

 

234.3

 

 

803.2

 

 

606.1

 

Routing and clearing

 

 

8.7

 

 

9.4

 

 

28.8

 

 

27.9

 

Section 31 fees

 

 

46.8

 

 

75.9

 

 

236.7

 

 

180.5

 

Royalty fees

 

 

20.7

 

 

22.1

 

 

69.9

 

 

63.9

 

Total cost of revenues

 

 

305.4

 

 

341.7

 

 

1,138.6

 

 

878.4

 

Revenues less cost of revenues

 

 

270.5

 

 

269.7

 

 

882.5

 

 

730.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

51.8

 

 

50.4

 

 

168.1

 

 

148.2

 

Depreciation and amortization

 

 

50.3

 

 

55.4

 

 

154.9

 

 

136.3

 

Technology support services

 

 

10.6

 

 

11.4

 

 

34.5

 

 

30.9

 

Professional fees and outside services

 

 

16.6

 

 

17.6

 

 

51.9

 

 

48.9

 

Travel and promotional expenses

 

 

2.6

 

 

4.5

 

 

9.8

 

 

12.0

 

Facilities costs

 

 

3.3

 

 

2.9

 

 

8.6

 

 

7.7

 

Acquisition-related costs

 

 

5.9

 

 

5.5

 

 

23.3

 

 

75.4

 

Other expenses

 

 

3.3

 

 

2.7

 

 

8.5

 

 

7.4

 

Total operating expenses

 

 

144.4

 

 

150.4

 

 

459.6

 

 

466.8

 

Operating income

 

 

126.1

 

 

119.3

 

 

422.9

 

 

263.2

 

Non-operating (expenses) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(9.6)

 

 

(10.5)

 

 

(28.5)

 

 

(30.9)

 

Other (expense) income

 

 

(0.2)

 

 

(2.9)

 

 

1.1

 

 

(2.0)

 

Income before income tax provision

 

 

116.3

 

 

105.9

 

 

395.5

 

 

230.3

 

Income tax provision

 

 

30.6

 

 

45.6

 

 

108.7

 

 

86.8

 

Net income

 

 

85.7

 

 

60.3

 

 

286.8

 

 

143.5

 

Net loss attributable to redeemable noncontrolling interest

 

 

0.3

 

 

0.2

 

 

0.9

 

 

0.8

 

Net income excluding redeemable noncontrolling interest

 

 

86.0

 

 

60.5

 

 

287.7

 

 

144.3

 

Change in redemption value of redeemable noncontrolling interest

 

 

(0.3)

 

 

(0.2)

 

 

(0.9)

 

 

(0.8)

 

Net income allocated to participating securities

 

 

(0.7)

 

 

(0.6)

 

 

(2.1)

 

 

(1.4)

 

Net income allocated to common stockholders

 

$

85.0

 

$

59.7

 

$

284.7

 

$

142.1

 

Basic earnings per share

 

$

0.76

 

$

0.53

 

$

2.54

 

$

1.35

 

Diluted earnings per share

 

$

0.76

 

$

0.53

 

$

2.53

 

$

1.34

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

111.4

 

 

112.3

 

 

112.0

 

 

105.5

 

Diluted weighted average shares outstanding

 

 

111.8

 

 

112.6

 

 

112.4

 

 

105.8

 

 

See accompanying notes to condensed consolidated financial statements.

 

8


 

Cboe Global Markets, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended  September 30, 

    

Nine Months Ended September 30, 

    

 

    

2018

    

2017

    

2018

    

2017

    

Net income

 

$

85.7

 

$

60.3

 

$

286.8

 

$

143.5

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(9.1)

 

 

20.5

 

 

(23.9)

 

 

50.7

 

Unrealized holding gains on financial investments

 

 

 —

 

 

(0.1)

 

 

 —

 

 

0.1

 

Post-retirement benefit obligations

 

 

 —

 

 

 —

 

 

(1.0)

 

 

 —

 

Comprehensive income

 

 

76.6

 

 

80.7

 

 

261.9

 

 

194.3

 

Comprehensive loss attributable to redeemable noncontrolling interest

 

 

0.3

 

 

0.2

 

 

0.9

 

 

0.8

 

Comprehensive income excluding redeemable noncontrolling interest

 

 

76.9

 

 

80.9

 

 

262.8

 

 

195.1

 

Change in redemption value of redeemable noncontrolling interest

 

 

(0.3)

 

 

(0.2)

 

 

(0.9)

 

 

(0.8)

 

Comprehensive income allocated to participating securities

 

 

(0.7)

 

 

(0.3)

 

 

(2.1)

 

 

(1.4)

 

Comprehensive income allocated to common stockholders, net of tax

 

$

75.9

 

$

80.4

 

$

259.8

 

$

192.9

 

 

See accompanying notes to condensed consolidated financial statements.

9


 

Cboe Global Markets, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders’ Equity

Nine months ended September 30, 2018

(unaudited)

(in millions, except per share amount)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

other 

 

Total

 

Redeemable

 

 

 

Preferred

 

Common

 

Treasury

 

paid-in

 

Retained

 

comprehensive

 

stockholders’

 

Noncontrolling

 

 

    

Stock

   

Stock

   

Stock

   

capital

   

earnings

   

income, net

   

equity

   

Interest

 

Balance at December 31, 2017

 

$

 —

 

$

1.2

 

$

(558.3)

 

$

2,623.7

 

$

993.3

 

$

50.7

 

$

3,110.6

 

$

9.4

 

Cash dividends on common stock of $0.85 per share

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(95.6)

 

 

 —

 

 

(95.6)

 

 

 —

 

Stock-based compensation

 

 

 —

 

 

 —

 

 

 —

 

 

29.4

 

 

 —

 

 

 —

 

 

29.4

 

 

 —

 

Common stock repurchased from employee stock plans

 

 

 —

 

 

 —

 

 

(15.8)

 

 

1.4

 

 

 —

 

 

 —

 

 

(14.4)

 

 

 —

 

Purchase of common stock

 

 

 —

 

 

 —

 

 

(140.9)

 

 

 —

 

 

 —

 

 

 —

 

 

(140.9)

 

 

 —

 

Net income excluding noncontrolling interest

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

287.7

 

 

 —

 

 

287.7

 

 

 —

 

Other comprehensive income

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(24.9)

 

 

(24.9)

 

 

 —

 

Net loss attributable to redeemable noncontrolling interest

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

0.9

 

 

 —

 

 

0.9

 

 

(0.9)

 

Redemption value adjustment of redeemable noncontrolling interest

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.9)

 

 

 —

 

 

(0.9)

 

 

0.9

 

Balance at September 30, 2018

 

$

 —

 

$

1.2

 

$

(715.0)

 

$

2,654.5

 

$

1,185.4

 

$

25.8

 

$

3,151.9

 

$

9.4

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

10


 

Cboe Global Markets, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

    

Nine Months Ended September 30, 

 

 

 

2018

    

2017

    

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

286.8

 

$

143.5

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

154.9

 

 

136.3

 

Amortization of debt issuance cost and debt discount

 

 

1.8

 

 

3.1

 

Change in fair value of contingent consideration

 

 

3.0

 

 

1.1

 

Realized gain on financial investments

 

 

(1.2)

 

 

(0.4)

 

Provision for uncollectible convertible notes receivable

 

 

 —

 

 

3.8

 

Provision for deferred income taxes

 

 

(10.3)

 

 

(6.3)

 

Stock-based compensation expense

 

 

29.4

 

 

39.1

 

Loss on disposition of property

 

 

1.0

 

 

 —

 

Impairment of data processing software

 

 

 —

 

 

14.9

 

Equity in investments

 

 

(1.2)

 

 

(0.3)

 

Excess tax benefit from stock-based compensation

 

 

 —

 

 

7.1

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(3.8)

 

 

(2.1)

 

Income taxes receivable

 

 

(42.6)

 

 

24.1

 

Trading financial investments

 

 

 —

 

 

(1.9)

 

Other prepaid expenses

 

 

 —

 

 

(8.7)

 

Other current assets

 

 

(13.1)

 

 

 —

 

Accounts payable and accrued liabilities

 

 

(3.8)

 

 

(1.1)

 

Section 31 fees payable

 

 

(90.5)

 

 

(122.7)

 

Deferred revenue

 

 

(2.0)

 

 

3.9

 

Income taxes payable

 

 

(3.7)

 

 

(50.2)

 

Income tax liability

 

 

2.9

 

 

(5.3)

 

Other liabilities

 

 

0.5

 

 

1.0

 

Net Cash Flows provided by Operating Activities

 

 

308.1

 

 

178.9

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

 —

 

 

(1,405.4)

 

Purchases of financial investments

 

 

(131.2)

 

 

(89.2)

 

Proceeds from maturities of financial investments

 

 

178.7

 

 

155.1

 

Investments

 

 

 —

 

 

(4.0)

 

Other

 

 

(1.8)

 

 

 —

 

Purchases of property and equipment

 

 

(27.8)

 

 

(26.1)

 

Net Cash Flows provided by (used in) Investing Activities

 

 

17.9

 

 

(1,369.6)

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

Proceeds from long-term debt

 

 

300.0

 

 

1,944.2

 

Principal payments of long term debt

 

 

(325.0)

 

 

(625.0)

 

Proceeds from credit facility

 

 

39.0

 

 

 —

 

Payments of credit facility

 

 

(39.0)

 

 

 —

 

Debt issuance costs

 

 

 —

 

 

(1.3)

 

Dividends paid

 

 

(95.6)

 

 

(87.4)

 

Purchase of unrestricted stock from employees

 

 

(15.8)

 

 

(18.0)

 

Proceeds from exercise of stock-based compensation

 

 

1.6

 

 

1.8

 

Payment of contingent consideration from acquisition

 

 

(56.6)

 

 

 —

 

Purchase of common stock under announced program

 

 

(140.9)

 

 

 —

 

Net Cash Flows (used in) provided by  Financing Activities

 

 

(332.3)

 

 

1,214.3

 

Effect of Foreign Currency Exchange Rate Changes on Cash and Cash equivalents

 

 

(0.4)

 

 

3.9

 

(Decrease) Increase in Cash and Cash Equivalents

 

 

(6.7)

 

 

27.5

 

Cash and Cash Equivalents:

 

 

 

 

 

 

 

Beginning of Period

 

 

143.5

 

 

97.3

 

End of Period

 

$

136.8

 

$

124.8

 

Supplemental disclosure of cash transactions:

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

161.7

 

$

69.6

 

Interest paid

 

 

33.2

 

 

24.7

 

Supplemental disclosure of noncash transactions:

 

 

 

 

 

 

 

Forfeiture of common stock for payment of exercise of stock options

 

 

 —

 

 

2.3

 

Supplemental disclosure of noncash investing activities:

 

 

 

 

 

 

 

Accounts receivable acquired

 

 

 —

 

 

117.8

 

Financial investments acquired

 

 

 —

 

 

66.0

 

Property and equipment acquired

 

 

 —

 

 

21.8

 

Goodwill acquired

 

 

 —

 

 

2,651.0

 

Intangible assets acquired

 

 

 —

 

 

2,000.0

 

Other assets acquired

 

 

 —

 

 

32.8

 

Accounts payable and accrued expenses assumed

 

 

 —

 

 

(59.9)

 

Section 31 fees payable acquired

 

 

 —

 

 

(143.6)

 

Deferred tax liability acquired

 

 

 —

 

 

(720.3)

 

Other liabilities assumed

 

 

 —

 

 

(135.5)

 

Issuance of common stock related to acquisition

 

 

 —

 

 

(2,424.7)

 

 

See accompanying notes to condensed consolidated financial statements.

 

11


 

Cboe Global Markets, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

1.   ORGANIZATION AND BASIS OF PRESENTATION

Cboe Global Markets, Inc. is one of the world’s largest exchange holding companies, offering cutting-edge trading and investment solutions to investors around the world. The Company is committed to relentless innovation, connecting global markets with world-class technology, and providing seamless solutions that enhance the customer experience.

Cboe offers trading across a diverse range of products in multiple asset classes and geographies, including options, futures, U.S. and European equities, exchange-traded products (ETPs), global foreign exchange (FX) and multi-asset volatility products based on the VIX, the world’s barometer for equity market volatility.

Cboe’s trading venues include the largest options exchange in the U.S. by volume and the largest stock exchange by value traded in Europe. In addition, the Company is the second-largest stock exchange operator by volume in the U.S. and a leading market globally for ETP trading.

The Company is headquartered in Chicago with offices in Kansas City, New York, London, San Francisco, Singapore, Hong Kong, and Ecuador.

Basis of Presentation

These interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10‑Q and should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2017.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities, valuation of redeemable noncontrolling interest and reported amounts of revenues and expenses. On an ongoing basis, management evaluates its estimates based upon historical experience, observance of trends, information available from outside sources and various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different conditions or assumptions.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included.

The results of operations for interim periods are not necessarily indicative of the results of operations for the full year.

For those consolidated subsidiaries in which the Company’s ownership is less than 100% and for which the Company has control over the assets and liabilities and the management of the entity, the outside stockholders’ interest are shown as noncontrolling interest.

Segment information

The Company reports five business segments: Options, U.S. Equities, Futures, European Equities, and Global FX, which is reflective of how the Company’s chief operating decision-maker reviews and operates the business (Note 15).

12


 

Recent Accounting Pronouncements - Adopted

In the first quarter of 2018, the Company adopted ASU 2017‑09, Compensation - Stock Compensation (Topic 718). This ASU provides additional guidance around which changes to a share-based payment award require an entity to apply modification accounting. The Company’s application of the pronouncement, on a prospective basis, did not result in a material impact to the consolidated financial statements.

In the first quarter of 2018, the Company adopted ASU 2017‑07, Compensation - Retirement Benefits (Topic 715). This ASU requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The Company applied the full retrospective application of the pronouncement, which did not result in a material impact to the consolidated financial statements.

In the first quarter of 2018, the Company adopted ASU 2016‑15, Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force). ASU No. 2016‑15 addresses eight specific cash flow issues in an effort to reduce diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The Company’s application of the pronouncement did not result in a material impact to the consolidated financial statements.

In the first quarter of 2018, the Company adopted ASU 2017‑01, Business Combinations (Topic 805) - Clarifying the Definition of a Business. ASU No. 2017‑01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. There are three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities (collectively, a “set”) that is a business usually has outputs, outputs are not required to be present. Additionally, all of the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. ASU No. 2017‑01 provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If, however, the screen is not met, then the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. Finally, the amendments in this ASU narrow the definition of the term “output” so that it is consistent with the manner in which outputs are described in Topic 606 - Revenue from Contracts with Customers. The Company will apply the pronouncement, on a prospective basis, for any business combination.

In the first quarter of 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The changes primarily relate to equity investments, financial liabilities measured using the fair value option, and updated disclosure requirements. The Company applied the full retrospective application of the pronouncement, which did not result in a material impact to the consolidated financial statements.

In the first quarter of 2018, the Company adopted ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This update addresses the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the tax reform legislation commonly referred to as the Tax Cuts and Jobs Act (“Jobs Act”). The guidance eliminates the stranded tax effects resulting from the Jobs Act as well as improves the usefulness of information reported to financial statement users by requiring certain disclosures about stranded tax effects. As the

13


 

amendment only relates to reclassification of the income tax effects of the Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The Company’s application of the pronouncement did not result in a material impact to the consolidated financial statements.

Recent Accounting Pronouncements - Issued, not yet Adopted

In January 2017, the FASB issued ASU 2017‑04, Intangibles-Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. This ASU simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU No. 2017‑04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under this ASU, an entity should (1) perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU No. 2017‑04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. For public entities, the update is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is in the process of evaluating this guidance and assessing the impact the ASU could have on the consolidated financial statements.

In February 2016, the FASB issued ASU 2016‑02, Leases. This update requires a lessee to recognize on the balance sheet a liability to make lease payments and a corresponding right-of-use asset (“ROU”). The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases. This update is effective for annual and interim periods beginning after December 15, 2018. The Company will adopt the new ASU on January 1, 2019. Based on the Company’s preliminary evaluation of the guidance, the ASU is expected to have a material impact on the consolidated balance sheets, but is not expected to have a material impact on the consolidated income statements. The most significant impact is expected to be the recognition of ROU assets and lease liabilities for operating leases. The Company is in the process of analyzing its lease portfolio, and finalizing processes and accounting policies to comply with the ASU's adoption requirements.

In July 2018, the FASB issued ASU No. 2018-10,  Codification Improvements to Topic 842, Leases to clarify the implementation guidance and ASU No. 2018-11,  Leases (Topic 842) Targeted Improvements. This updated guidance provides an optional transition method, which allows for the initial application of the new accounting standard at the adoption date and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the period of adoption. The Company will adopt the new ASUs on January 1, 2019. The Company is in the process of finalizing its assessment of the impact of these ASUs on its consolidated financial statements and is evaluating its processes and internal controls to identify any necessary changes.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes certain disclosure requirements related to the fair value hierarchy, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements. The new disclosure requirements include disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For public entities, the update is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. Certain disclosures in the new guidance will need to be applied on a retrospective basis and others on a prospective basis. The Company is in the process of evaluating this guidance and assessing the impact the ASU could have on the consolidated financial statements.

14


 

 

2.   REVENUE RECOGNITION

As of January 1, 2017, the Company adopted ASU 2014‑09 Revenue from Contracts with Customers - Topic 606 and all subsequent ASUs that modified ASC 606.

The main types of revenue contracts are:

·

Transaction fees - Transaction fees represent fees charged by the Company for the performance obligation of executing a trade on its markets. These fees can be variable based on trade volume tiered discounts, however, as all tiered discounts are calculated monthly, the actual discount is recorded on a monthly basis. Transaction fees, as well as any tiered volume discounts, are calculated and billed monthly in accordance with the Company’s published fee schedules. Transaction fees are recognized across all segments. The Company also pays liquidity payments to customers based on its published fee schedules. The Company uses these payments to improve the liquidity on its markets and therefore recognizes those payments as a cost of revenue.

·

Access fees - Access fees represent fees assessed for the opportunity to trade, including fees for trading-related functionality across all segments. These fees are billed monthly in accordance with the Company’s published fee schedules and recognized on a monthly basis when the performance obligation is met. There is no remaining performance obligation after revenue is recognized.

·

Exchange services and other fees - To facilitate trading, the Company offers technology services, terminal and other equipment rights, maintenance services, trading floor space and telecommunications services. Trading floor and equipment rights are generally on a month-to-month basis. Facilities, systems services and other fees are generally monthly fee-based, although certain services are influenced by trading volume or other defined metrics, while others are based solely on demand. All fees associated with the trading floor are recognized in the Options segment.

·

Market data fees - Market data fees represent the fees received by the Company from the U.S. tape plans and fees charged to customers for proprietary market data. Fees from the U.S. tape plans are collected monthly based on published fee schedules and distributed quarterly to the U.S. exchanges based on a known formula. A contract for proprietary market data is entered into and charged on a monthly basis in accordance with the Company’s published fee schedules as the service is provided. Both types of market data are satisfied over time, and revenue is recognized on a monthly basis as the customer receives and consumes the benefit as the Company provides the data. U.S. tape plan market data is recognized in the U.S. Equities and Options segments. Proprietary market data fees are recognized across all segments.

·

Regulatory fees - There are two types of regulatory fees that the Company recognizes. The first type represents fees collected by the Company to cover the Section 31 fees charged to the Exchanges by the SEC. The fees charged to customers are based on the fee set by the SEC per notional value of the transaction executed on the Company’s U.S. securities markets. These fees are calculated and billed monthly and are recognized in the U.S. Equities and Options segments. As the Exchanges are responsible for the ultimate payment to the SEC, the exchanges are considered the principal in these transactions. Regulatory fees also includes the options regulatory fee (ORF) which supports the Company’s regulatory oversight function in the Options segment and other miscellaneous regulatory fees.

·

Other revenue - Other revenue primarily includes revenue from various licensing agreements, all fees related to the trade reporting facility operated in the European Equities segment, and revenue associated with advertisements through the Company’s website.

15


 

All revenue recognized in the income statement is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to product line and segment (in millions):