CME Group Inc. — Q1 2022 Form 10-Q
Business context and period. Unaudited results cover the quarter ended March 31, 2022, compared with Q1 2021. CME Group operates futures and options exchanges, clearing services, cash markets and market-data businesses. The quarter’s trading activity benefited from higher market volatility amid changing Federal Reserve rate expectations and geopolitical tensions related to Russia and Ukraine.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $1,346.6 million | $1,253.3 million | +7% |
| Operating expenses | $487.5 million | $528.2 million | -8% |
| Operating income | $859.1 million | $725.1 million | +18% |
| Operating margin | 63.8% | 57.9% | +5.9 percentage points |
| Net income attributable to CME Group | $711.0 million | $574.4 million | +24% |
| Net income attributable to common shareholders | $702.0 million | $574.4 million | |
| Diluted EPS attributable to common shareholders | $1.95 | $1.60 | +22% |
| Cash flow from operating activities | $799.1 million | $602.7 million | +33% |
Clearing and transaction fees rose 13% to $1,138.1 million; market data and information services rose 5% to $151.7 million. Other revenue fell 44% to $56.8 million, mainly reflecting the 2021 contribution of the optimization business to OSTTRA and lower custody fees on non-cash collateral. Futures and options contract volume increased 21% to 1,607.1 million contracts, while average rate per contract declined 2% to $0.644, reflecting product mix and higher volume incentives and discounts.
Investment income increased to $73.1 million from $30.9 million, and equity earnings from unconsolidated subsidiaries rose to $73.3 million from $56.2 million, including earnings from OSTTRA and S&P/Dow Jones Indices. The effective tax rate declined to 22.4% from 23.6%, partly due to a benefit from settlement of tax audits.
Cash, debt and liquidity
Cash and cash equivalents were $2.05 billion at March 31, 2022, down from $2.83 billion at year-end 2021. Cash flow from operations was $799.1 million. Total cash, cash equivalents and restricted cash was $169.8 billion, but $167.7 billion represented performance bonds and guaranty fund contributions; these funds are restricted and unavailable for CME Group’s operations. The company reported $158.2 billion held in its Federal Reserve Bank of Chicago cash account.
At quarter-end, long-term debt carrying value was $3.44 billion and short-term debt was zero. CME issued $750 million of 2.65% notes due 2032 and used proceeds plus cash to redeem $750 million of 3.00% notes due September 2022; the redemption included a $6.2 million call premium. The company reported $2.3 billion of unused general-purpose revolving credit capacity and no borrowings under that facility, and was in compliance with debt covenants. It also maintained a separate $7.0 billion secured facility for clearing-house liquidity, with no borrowings outstanding.
Cash dividends paid were $1.54 billion during the quarter. On May 4, 2022, the board declared a regular $1.00-per-share quarterly dividend, expected to total approximately $363 million.
Material changes, outlook and risks
- Average daily volume rose 19% to 25.9 million contracts. Interest-rate volume increased 21% and equity-index volume 30%; metals volume declined 12%. Management attributed market activity changes primarily to volatility, Federal Reserve policy expectations and Russia-Ukraine uncertainty.
- Expenses decreased by $40.7 million, including lower salaries, separation and retention costs, deferred compensation and professional fees. Licensing and other fee-agreement expense rose $16.2 million, principally with higher volumes in certain equity products.
- Optimization transaction fees of $24.3 million reported in Q1 2021 did not recur after the business was contributed to OSTTRA in 2021. CME recognized equity earnings from the joint venture in Q1 2022.
- The filing provides no quantitative earnings or revenue guidance. Management expects to maintain an investment-grade rating, citing cash generation and ability to manage or refinance debt; this is not a guarantee.
- Key risks include market and trading-volume changes, competition, technology reliability and cybersecurity, regulatory change, clearing-member and counterparty credit or liquidity events, third-party dependencies, LIBOR transition, and execution of strategic investments and partnerships. Management reported no material change in market-risk exposure since year-end 2021 and no material change in risk factors.
- A putative class action involving Class B shareholder and CBOT member rights was certified as a damages-only class in December 2021; no trial date was set. CME said it could not estimate a reasonably possible loss and believes it has strong defenses. No accrual was recorded for legal or regulatory matters because none was probable and estimable.
- Management assessed the clearing settlement guarantee liability as nominal and recorded no liability. CME also disclosed a $330 million contingent letter-of-credit obligation under its SGX mutual offset agreement, backed by a $350 million line of credit; the agreement term runs through May 2023, subject to automatic renewal unless terminated.
Most important facts for investors to verify
- Whether elevated trading volumes and volatility persist, and how product mix, customer incentives and pricing affect average revenue per contract.
- How much of reported cash and cash-flow movement relates to restricted clearing collateral rather than corporate liquidity.
- The sustainability of expense reductions and the continuing effects of the OSTTRA contribution on revenue, costs and equity-method earnings.
- Dividend and capital-allocation capacity alongside the debt maturity schedule and refinancing needs.
- Developments in the Class B shareholder litigation, regulatory matters, and clearing-house or SGX-related contingent exposures.