CME Group Inc. — Q3 2020 Form 10-Q
Business context and reporting period
CME Group operates futures and options exchanges, clearing services, cash markets, and market-data services. This unaudited filing covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,080.7 million | $1,277.3 million | $3,785.1 million | $3,729.6 million |
| Operating income | $525.0 million | $685.2 million | $2,122.4 million | $2,014.8 million |
| Operating margin | 48.6% | 53.6% | 56.1% | 54.0% |
| Net income attributable to CME Group | $411.7 million | $636.3 million | $1,681.2 million | $1,647.0 million |
| Diluted EPS | $1.15 | $1.78 | $4.69 | $4.60 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2,055.3 million | $1,953.1 million |
- Q3 clearing and transaction fees declined 20% to $835.4 million; total revenue fell 15%. For the first nine months, transaction fees were essentially flat year over year.
- Q3 futures and options volume declined 23% to 998.6 million contracts, while average rate per contract rose 3% to $0.716. Nine-month contract volume increased 1% and average rate rose 1%.
- Market data revenue increased 7% in Q3 and 4% for the nine-month period. Nine-month other revenue increased 10%.
- At September 30, cash and cash equivalents were $1.332 billion, versus $1.551 billion at year-end 2019; marketable securities were $92.4 million. Long-term debt was $3.442 billion, down from $3.743 billion. The company reported $2.4 billion of unused general-purpose revolving credit capacity and no borrowings under that facility.
- Nine-month cash used in investing was $123.4 million; cash used in financing was $2.151 billion, including $1.806 billion of cash dividends. Dividends declared were $2.55 per share for the first nine months.
Changes, outlook, and risks
- Management attributed Q3’s lower trading revenue mainly to reduced market volatility after the unusually volatile first quarter. Interest-rate contract volume fell 51% and energy volume fell 25%; equity-index volume rose 38%.
- Lower interest rates reduced investment income substantially: Q3 investment income was $23.6 million versus $172.3 million a year earlier. Q3 income tax provision was $125.0 million, with an effective tax rate of 23.3%, compared with 12.0% in Q3 2019.
- Expenses declined 6% in Q3 and 3% for the nine months. Savings included lower bonuses, travel, and prior-year impairment charges; higher licensing fees and professional services partly offset the reductions. Nine-month impairment charges were $27.4 million.
- Cash performance bonds and guaranty-fund contributions rose to $88.1 billion from $37.1 billion at year-end, primarily due to higher margin requirements. These clearing-related balances are substantially matched by corresponding liabilities and are not equivalent to general corporate liquidity. CME held $70.6 billion in its Federal Reserve Bank of Chicago account.
- No numerical earnings or revenue guidance is provided. Management cautioned that trading activity depends on volatility, economic and market conditions, customer activity, regulation, competition, technology, and the continuing effects of COVID-19.
- Management reported no material change in market-risk exposure or risk factors from prior filings. The CFTC/NYMEX litigation and the Eurex-related case were concluded during 2020. A $2.1 million accrual was recorded for probable and estimable legal and regulatory matters; management said unresolved matters were not expected to have a material financial impact, while noting outcomes and timing may be uncertain.
Important facts for investors to verify
- Whether trading volumes and revenue recover or remain sensitive to lower volatility, especially in interest-rate and energy products.
- How lower interest rates affect investment income and the distribution of earnings from collateral reinvestment.
- The composition and availability of liquidity: distinguish corporate cash and credit capacity from customer performance-bond and guaranty-fund balances.
- Debt maturities, lease obligations, dividend levels, and compliance with facility covenants.
- Future legal, regulatory, technology, cybersecurity, and COVID-19 developments, and any updates to management’s outlook.