CME Group Inc. — Q1 2023 Form 10-Q
Reporting period: Quarter ended March 31, 2023. Unaudited consolidated results compared with the quarter ended March 31, 2022, unless otherwise noted. CME Group operates futures and options exchanges, clearing services, cash markets, and market data businesses.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $1,441.6 million | $1,346.6 million | +7% |
| Operating expenses | $527.9 million | $487.5 million | +8% |
| Operating income | $913.7 million | $859.1 million | +6% |
| Operating margin | 63.4% | 63.8% | Down 0.4 percentage points |
| Net income | $883.8 million | $711.0 million | +24% |
| Net income attributable to common shareholders | $872.7 million | $702.0 million | +24% |
| Diluted EPS | $2.43 | $1.95 | +25% |
| Cash provided by operating activities | $902.4 million | $799.1 million | +13% |
Clearing and transaction fees were $1,200.2 million (+5%); market data and information services were $165.8 million (+9%); and other revenue was $75.6 million (+33%). Futures and options contract volume increased 4% to 1,666.1 million, while average rate per contract rose 3% to $0.664. Management attributed the rate increase primarily to fee changes effective February 1, 2023.
Cash, debt, and liquidity
- Cash and cash equivalents were $1.565 billion at March 31, 2023, down from $2.720 billion at December 31, 2022. Marketable securities were $105.0 million.
- Total debt was approximately $3.439 billion, including €15 million of notes due May 2023 and $3.423 billion of long-term debt. The largest disclosed long-term maturities are $750 million in 2025 and $2.7 billion thereafter.
- The company reported no borrowings under its $2.3 billion general-purpose revolving facility or its $7.0 billion clearing-house secured facility; it had approximately $2.3 billion of general-purpose borrowing capacity. It was in compliance with debt covenants.
- Cash dividends paid were $2.036 billion. Financing cash flow also reflected a $7.159 billion decrease in performance bond and guaranty fund contributions.
- Performance bond and guaranty fund balances were $128.091 billion on both the asset and liability sides of the balance sheet. These clearing-related balances are not equivalent to unrestricted corporate liquidity.
Material changes and management commentary
- Interest rates and foreign exchange were more volatile than in Q1 2022, which management linked to higher interest-rate and FX trading volumes. Overall average daily volume increased 4% to 26.873 million contracts. Interest-rate volume rose 16%; equity index volume fell 8%, agricultural commodities fell 6%, and energy fell 17%.
- SOFR futures and options activity increased as market participants transitioned from Eurodollar contracts ahead of the end of LIBOR. Eurodollar activity declined sharply.
- Operating expenses increased $40.4 million, led by non-qualified deferred compensation, salaries and benefits, professional services, technology support, and currency effects. Professional and technology costs included work on the Google Cloud transformation.
- Net income growth substantially exceeded revenue growth in part because of changes in collateral reinvestment income and related distributions. Investment income included $1,256.3 million earned on cash performance bonds and guaranty fund contributions, versus $73.6 million a year earlier; related interest distributions to clearing firms, recorded in other non-operating expense, were $1,163.5 million versus $48.4 million. These large offsetting items make headline net-income comparisons less reflective of underlying operating growth.
- The effective tax rate was 23.6%, compared with 22.4%; the prior-year period included a benefit from settlement of tax audits.
Outlook, risks, and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management expects to maintain an investment-grade credit rating, citing cash generation, debt repayment capacity, and refinancing ability.
- Key stated risks include trading-volume and market-volatility changes, competition, technology reliability and cybersecurity, regulation, third-party dependencies, clearing-member and counterparty credit/liquidity risks, and execution of strategic initiatives. Management reported no material change in market-risk exposure or risk factors from the 2022 Form 10-K.
- A putative class action involving Class B shareholder rights remains unresolved; no trial date had been set, and the company said it could not estimate a reasonably possible loss range. Management stated it believes it has strong defenses. No accrual was recorded for legal or regulatory matters because none was considered both probable and estimable.
- Under the mutual offset agreement with Singapore Exchange, CME had $360 million of letters of credit outstanding and a separate $350 million line of credit. The agreement was scheduled to renew for one year after May 2023 unless either party gave notice of termination.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported earnings growth reflects core exchange operations versus the unusually large, largely offsetting collateral reinvestment income and distribution expense?
- Whether higher trading volumes and fee changes persist, particularly amid shifts among interest-rate products and declines in equity, agriculture, and energy volumes.
- The timing and funding of the €15 million note due in May 2023, subsequent debt maturities, and the company’s actual unrestricted liquidity after dividends.
- Developments in the Class B shareholder litigation and the SGX mutual offset agreement, including any changes to contingent exposures.