CME Group Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited consolidated results. CME Group operates futures and options exchanges and clearing services, with revenue primarily from clearing and transaction fees and market data.
Key financial results
Amounts in $ millions except per-share data and percentages.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | 813.9 | 647.8 | 1,507.1 | 1,294.9 |
| Operating income | 515.1 | 398.8 | 929.8 | 785.2 |
| Operating margin | 63% | 62% | 62% | 61% |
| Net income attributable to CME Group | 270.7 | 221.8 | 510.9 | 420.9 |
| Diluted EPS | $4.11 | $3.33 | $7.73 | $6.33 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | 649.1 | 438.4 |
- Q2 revenue rose 26%, operating income 29%, and CME Group net income 22% year over year. First-half revenue rose 16%, operating income 18%, and net income 21%.
- Clearing and transaction fees were $684.2 million in Q2 (+27%) and $1,262.2 million for the first half (+19%). Total volume increased 33% in Q2 and 23% in the first half; average rate per contract declined 4% and 3%, respectively.
- Market data and information services revenue increased 24% in Q2 and 13% for the first half, including Index Services revenue after its March 19 consolidation. Basic device counts declined despite a higher monthly fee.
- Operating expenses increased 20% in Q2 and 13% in the first half. CMA goodwill and trade-name impairment charges totaled $20.5 million; compensation, bonuses, and Index Services formation costs also contributed.
Cash, debt and liquidity
- Cash and cash equivalents were $363.6 million at June 30, up from $260.6 million at year-end. First-half operating cash flow was $649.1 million; investing activities used $7.7 million and financing activities used $538.4 million. Cash increased $103.0 million during the period.
- At June 30, short-term debt was $300.0 million and long-term debt was $2,524.4 million. The $300 million floating-rate notes matured and were repaid on August 6, 2010. The company also issued $612.5 million of 4.40% notes due 2018 through Index Services.
- Management reported approximately $945.5 million of unused general-purpose revolving credit capacity and compliance with debt covenants. Ratings were AA/Aa3 long term and A1+/P1 short term, both with stable outlooks.
- Cash performance bonds and security deposits were $3,758.8 million on both the asset and liability sides of the balance sheet; these largely represent clearing-related balances rather than unrestricted corporate liquidity.
Material developments, outlook and risks
- CBOT acquired a 90% interest in CME Group Index Services LLC with Dow Jones in March. The transaction added $436.5 million of goodwill and $376.4 million of identifiable intangible assets. Dow Jones retained a 10% interest with specified future redemption rights.
- CMA impairment reduced goodwill by $19.8 million and the trade name by $0.7 million. The company established a full valuation allowance for the related tax benefit, contributing to Q2’s 43.5% effective tax rate versus 40.8% a year earlier; the first-half rates were 41.8% and 42.0%.
- After quarter-end, CME Group issued 2.2 million Class A shares to BM&FBOVESPA for approximately $607 million, raising its ownership to about 5%. CME Group also repurchased 1.0 million shares for about $279.1 million from July 1 through August 6 under its authorized buyback program.
- The Dodd-Frank Act was signed July 21, 2010. Management identified potential opportunities in clearing and trading, but cautioned that implementing regulations could affect customer activity, trading volumes, costs, and competition. The filing provides no specific financial guidance.
- Risks include competition, technology and system capacity, regulation, volume and rate-per-contract changes, clearing-member credit exposure, indebtedness, and market conditions. Multiple intellectual-property and antitrust matters remained pending. In July 2010, the court partially granted CME and CBOT summary judgment on predatory-pricing claims in the Eurex matter; remaining claims were unresolved.
Important facts for investors to verify
- How much of revenue and earnings growth reflects higher trading activity versus the Index Services consolidation, and whether the lower average rate per contract persists.
- The final purchase accounting and future performance of Index Services, including the implications of Dow Jones’ redemption rights and the new 2018 debt.
- The effects of the CMA impairment, tax valuation allowances, and continuing impairment or tax assessments.
- Repayment of the August 2010 notes, subsequent share issuance and repurchases, and resulting net debt and share-count changes.
- Final Dodd-Frank rulemaking and outcomes of the outstanding legal proceedings and clearing-related contingencies.