CME Group Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. The 2018 comparison includes NEX only from November 3, 2018, so year-over-year growth is not fully comparable.
Business context and results
CME Group operates futures and options exchanges, clearing services, cash fixed-income and foreign-exchange trading platforms, optimization services and market-data businesses. Its November 2018 NEX acquisition expanded its cash and OTC offerings.
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $4,868.0 million | $4,309.4 million | +13% |
| Operating income | $2,587.8 million | $2,607.6 million | −1% |
| Operating margin | 53% | 61% | −8 percentage points |
| Net income attributable to CME Group | $2,116.5 million | $1,962.2 million | +8% |
| Diluted EPS | $5.91 | $5.71 | +4% |
| Cash flow from operating activities | $2,672.8 million | $2,440.8 million | +10% |
Revenue, volume and cost drivers
- Clearing and transaction fees were $3,946.1 million, up 8%; market-data revenue was $518.5 million, up 15%; other revenue was $403.4 million, up 109%. NEX contributed materially to cash-markets and other revenue growth.
- Futures and options volume was broadly flat: average daily volume was 19.167 million contracts versus 19.224 million. Clearing and transaction fees for futures and options fell 3% to $3,396.3 million; average rate per contract declined 3% to $0.703, principally from product mix and lower-priced Micro E-mini contracts.
- Expenses rose 34% to $2,280.2 million, including higher compensation, technology, NEX-related intangible amortization, integration costs and impairment losses. The filing cites $61.1 million of losses on assets held for sale and $20.9 million of fixed-asset impairment losses; it also reports $13.0 million of investment impairment charges.
- Lower investment income and higher interest expense contributed to non-operating income falling 40% to $101.8 million. The effective tax rate decreased to 21.3% from 29.3%, partly reflecting the FDII deduction and revised proposed tax guidance.
Liquidity, debt and capital returns
- Cash and cash equivalents were $1,551.4 million at year-end, compared with $1,374.5 million. Total debt was approximately $3.7 billion, including $303.8 million of commercial paper; there was no short-term debt reported on the balance sheet.
- CME Group had no borrowings under its $2.4 billion general-purpose revolving facility and reported approximately $2.1 billion of excess borrowing capacity. A separate $7.0 billion secured facility is intended for clearing-house liquidity needs and is not equivalent to unrestricted corporate cash.
- Operating cash flow was $2,672.8 million; investing activities used $152.6 million and financing activities used $2,340.8 million. Financing cash use included debt repayment and dividends.
- Cash dividends were $5.50 per share for 2019, including a $2.50 annual variable dividend declared in December and paid in January 2020. Management stated a target for regular quarterly dividends of 50%–60% of prior-year cash earnings, subject to board discretion.
Material changes and outlook
- Full-year revenue growth reflects the expanded NEX business, which was consolidated for all of 2019 but only part of 2018. Meanwhile, operating income was slightly lower and operating margin contracted as expenses increased.
- For the fourth quarter, revenue was $1,138.4 million versus $1,236.6 million in fourth-quarter 2018; operating income was $573.0 million versus $649.9 million, while net income attributable to CME Group was $469.5 million versus $385.5 million.
- Management expected 2020 capital expenditures of approximately $180–$200 million, net of leasehold allowances and certain one-time NEX integration costs. The filing provides no numerical earnings or revenue guidance.
- Management planned BrokerTec and EBS platform migrations to CME Globex in 2020 and 2021, respectively, and a phased CME SPAN 2 margin-framework rollout beginning in the first half of 2020, subject to approvals. Bitcoin options and options on SOFR were launched in January 2020.
- Management attributed broadly flat overall volume to mixed market conditions: interest-rate and metals activity benefited from volatility, while FX, energy and some equity-index activity declined. It cited continuing opportunities in international growth, product expansion and NEX integration.
Risks, contingencies and unusual items
- Results depend on trading volumes, market volatility, customer participation and average rate per contract; costs are largely fixed in the short term. Competition, technology failures, cyberattacks, third-party outages and clearing-member defaults could affect operations and revenue.
- Regulatory uncertainty includes implementation of EMIR 2.2, potential position-limit rules, clearing-member capital requirements, possible transaction taxes, benchmark-index licensing restrictions and the transition away from LIBOR. Management noted potential consequences for costs, customer access and product activity.
- The CFTC case alleging disclosure of confidential customer information was scheduled for trial in October 2020; CME said it had strong factual and legal defenses. Eurex appealed the dismissal of its antitrust case. The company recorded no accrual for legal matters because none were considered probable and estimable at year-end.
- Unrecognized tax benefits were $388.5 million, with related interest and penalties disclosed separately. The auditor identified uncertain tax positions as a critical audit matter. The filing also reports no material subsequent events requiring disclosure.
Key facts for investors to verify
- How much of reported revenue growth and future performance reflects NEX versus organic growth, and whether anticipated integration efficiencies are being achieved.
- Whether trading volumes and average rates per contract recover or weaken further, particularly across interest rates, FX, energy and equity indexes.
- Whether expense growth, impairment charges and margin pressure persist, and how planned platform migrations affect customer retention and costs.
- The status and financial effects of EMIR 2.2, LIBOR transition, index-licensing terms and material legal or tax matters.
- Debt repayment capacity and dividend sustainability, while distinguishing corporate liquidity from collateral and facilities dedicated to clearing operations.