CME Group Inc. — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the quarter ended March 31, 2021, compared with Q1 2020. CME Group operates futures and options exchanges, a clearing house, cash markets, and market-data services.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $1,253.3 million | $1,522.1 million | Down 18% |
| Clearing and transaction fees | $1,007.0 million | $1,278.8 million | Down 21% |
| Market data and information services | $144.2 million | $131.5 million | Up 10% |
| Operating expenses | $528.2 million | $562.2 million | Down 6% |
| Operating income | $725.1 million | $959.9 million | Down 24% |
| Operating margin | 57.9% | 63.1% | Down 5.2 percentage points |
| Net income attributable to CME Group | $574.4 million | $766.2 million | Down 25% |
| Diluted EPS | $1.60 | $2.14 | Down 25% |
| Operating cash flow | $602.7 million | $757.1 million | Down 20% |
Average daily contract volume fell 19% to 21.827 million contracts, following unusually high volatility in Q1 2020. Futures and options average rate per contract decreased 3% to $0.658. Management estimates the lower volume reduced clearing and transaction fees by $225.9 million, while the lower average rate reduced them by $31.5 million.
Investment income declined to $30.9 million from $95.9 million, primarily reflecting lower interest rates earned on reinvested performance-bond and guaranty-fund cash. Interest and borrowing costs were $41.5 million; equity earnings from unconsolidated subsidiaries were $56.2 million. The effective tax rate was 23.6%, versus 22.5%.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $936.4 million at March 31, 2021, versus $1,633.2 million at year-end 2020. Cash, cash equivalents, and restricted cash totaled $974.0 million.
- Long-term debt was $3,443.6 million, essentially unchanged from year-end. The notes are fixed-rate, with maturities from 2022 through 2048.
- CME reported $2.4 billion of unused capacity under its general-purpose revolving facility and no borrowings under it. A separate $7.0 billion secured facility is available for specified clearing-house liquidity needs; there were no borrowings under that facility. The company reported compliance with debt covenants.
- Reported total assets and liabilities include matching performance-bond and guaranty-fund balances of $123.4 billion. These clearing-related balances should not be read as unrestricted corporate liquidity.
- Cash used in financing was $1,233.2 million, including $1,217.5 million of cash dividends. Operating cash flow was $602.7 million. The filing does not separately explain in this cash-flow line the composition of the dividend payment.
Material changes and management commentary
- Lower market volatility versus Q1 2020 reduced activity across major product groups, notably interest rates, energy, foreign exchange, and metals. Average daily volume was down 25% in interest rates and 27% in energy; agricultural volume was broadly flat.
- Expense reductions included lower impairment charges than in Q1 2020, lower intangible amortization, and lower licensing and bonus expense. Compensation increased, including higher deferred-compensation expense and severance costs.
- Market-data revenue increased mainly because of price increases. Other revenue declined, principally due to lower processing-services revenue and custody fees.
- On January 12, 2021, CME announced an agreement with IHS Markit to combine post-trade services in a joint venture. CME’s optimization businesses, including Traiana, TriOptima, and Reset, were classified as held for sale; related assets of $1,447.5 million and liabilities of $278.8 million were reported at quarter-end. Closing was expected in mid-2021, subject to regulatory and other approvals. The reclassification did not affect earnings; amortization of the held-for-sale intangibles ceased.
- After quarter-end, CME announced that only the Eurodollar options pit would remain open and the other trading-floor pits would not reopen. The board declared a regular $0.90-per-share quarterly dividend on May 4, payable June 25, 2021.
Outlook, risks, and contingencies
The filing provides no numerical earnings or revenue guidance. Management noted that results depend on trading activity, volatility, product and customer mix, and average rates per contract; quarterly results are not necessarily indicative of future periods. It expects to maintain an investment-grade credit rating, citing cash generation and access to borrowing and refinancing.
Key disclosed risks include competition, technology and cybersecurity reliability, regulatory changes, dependence on third parties, market volatility and lower trading activity, COVID-19 effects, clearing-member and counterparty credit or liquidity risks, and execution of acquisitions and strategic relationships. CME reported no material changes to the risk factors in its 2020 Form 10-K and no material changes in market-risk exposure since December 31, 2020.
Management stated that legal and regulatory matters were not probable and estimable at quarter-end and that no accrual was required; it did not expect their resolution to materially affect financial position or results. Potential intellectual-property indemnification claims could not be estimated, and no liability was recorded. CME disclosed a $310.0 million contingent letter-of-credit obligation under its SGX mutual-offset agreement and a $350.0 million related line of credit; management estimated the guarantee liability to be nominal.
Important facts for investors to verify
- Whether trading volumes and rates per contract recover or remain below the unusually strong Q1 2020 comparison.
- The status, closing conditions, and financial effects of the IHS Markit post-trade joint venture and assets held for sale.
- The source and sustainability of dividend payments, given Q1 operating cash flow and cash used for dividends.
- Debt maturities, facility availability, and the distinction between corporate cash and clearing-related performance-bond balances.
- Any developments in regulatory, legal, cybersecurity, clearing, or counterparty risks.