CME Group Inc. — Q2 2020 Form 10-Q
Business context and reporting period. CME Group operates futures and options exchanges, clearing services, market-data services, and cash-market businesses including BrokerTec and EBS. This unaudited filing covers the quarter and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Financial results
- Revenue: Q2 revenue was $1.182 billion, down 7% year over year; six-month revenue was $2.704 billion, up 10%. Q2 clearing and transaction fees fell 11% to $940.2 million, while market data rose 5% to $134.7 million and other revenue rose 16% to $107.4 million.
- Profit and margins: Q2 operating income was $637.5 million, down from $698.6 million; operating margin was 53.9%, versus 54.9%. Net income attributable to CME Group was $503.3 million, down 2%, and diluted EPS was $1.40, versus $1.43. For six months, operating income was $1.597 billion, net income attributable to CME Group was $1.270 billion (up 26%), and diluted EPS was $3.54 (up 26%); operating margin was 59.1%, versus 54.2%.
- Cash flow: Operating cash flow for the six months was $1.744 billion, up from $1.143 billion. Investing activities used $79.5 million and financing activities used $1.811 billion, including $1.502 billion of cash dividends. Management attributed part of the operating cash flow increase to higher first-half contract volume and deferral of an estimated federal tax payment to the third quarter.
- Debt and liquidity: Long-term debt was $3.441 billion at June 30, down from $3.743 billion at year-end; commercial paper was zero at quarter-end. Cash and cash equivalents were $1.405 billion, versus $1.551 billion at year-end. The company reported $2.4 billion of available general-purpose revolving borrowing capacity and no borrowings under its revolving facilities. It reported compliance with debt covenants.
- Clearing collateral: Performance bonds and guaranty fund contributions were $79.441 billion in assets and $79.441 billion in liabilities, up from about $37.1 billion at year-end, primarily due to higher margin requirements. These balances largely reflect clearing-related collateral and should not be read as ordinary corporate liquidity.
Material changes versus the prior period
- Q2 listed futures and options contract volume declined 16% year over year, and average daily volume declined 16%. Management said volatility subsided from Q1 levels, particularly in interest rates, foreign exchange, agriculture, and metals. Equity-index activity was notably stronger: Q2 average daily volume rose 60%.
- For the first six months, contract volume rose 13%; equity-index volume rose 81% and energy volume rose 20%, offsetting declines in interest rates and agriculture. The contrast between strong first-half results and weaker Q2 reflects the exceptionally active first quarter.
- Q2 expenses fell 5% to $544.8 million. Lower compensation, bonuses, travel, marketing, and prior-year impairment charges more than offset higher professional fees and licensing costs. For the six months, expenses declined 1%.
- Investment income fell 77% in Q2 and 60% for the six months, primarily because of lower interest rates on reinvested clearing collateral. Lower other non-operating expenses partly offset this decline. The effective tax rate fell to 23.9% for Q2 and 23.0% for the six months, with management citing the Foreign Derived Intangible Income deduction.
Outlook, risks, and unusual items
- The filing provides no specific earnings, revenue, or volume guidance. Management planned a limited reopening of the Chicago trading floor in Q3 2020; the floor had closed in March, with trading conducted electronically.
- COVID-19’s future effects were described as uncertain and potentially material. Risks include lower trading activity, disruptions to CME Group, clients and suppliers, employee and cyber-security issues, stress or default among clearing members, and delays to strategic initiatives. Management noted that Q2 trading volume had decreased and attributed this in part to pandemic-related effects.
- Q2 revenue and volume trends were sensitive to volatility and market conditions; management noted lower interest-rate volatility after Federal Reserve rate cuts and stabilization in crude oil markets after production cuts.
- The company recognized $30.0 million of impairment charges on certain intangible and fixed assets during the first six months. It accrued $4.0 million for probable and estimable legal and regulatory matters. A CFTC matter involving NYMEX had an agreed settlement approved by the CFTC after quarter-end; the company expected the resulting court order to be immaterial.
- Management reported no material change in market-risk exposure since December 31, 2019, and no material change in internal control over financial reporting. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether lower Q2 trading volumes persist or reverse, and how product mix, customer mix, and incentive pricing affect revenue per contract.
- How COVID-19, interest rates, and market volatility affect trading activity, investment income, clearing members, and future operating results.
- The distinction between corporate cash and the very large, offsetting clearing collateral assets and liabilities; also monitor margin requirements and liquidity resources.
- Revenue concentration: one clearing firm accounted for approximately 10% of first-half clearing and transaction fees; the two largest market-data resellers represented approximately 35% of first-half market-data revenue.
- Future expense trends, including technology and platform integration costs, licensing fees, and the effect of impairments and cost reductions.