CME Group Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. Figures are unaudited and in U.S. dollars; financial amounts are in millions unless noted. CME Group operates futures and options exchanges and clearing, market-data and related services.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $733.4 | $650.4 | $2,240.5 | $1,945.3 |
| Operating income | $442.9 | $401.4 | $1,372.7 | $1,186.6 |
| Operating margin | 60% | 62% | 61% | 61% |
| Net income attributable to CME Group | $244.3 | $202.3 | $755.2 | $623.2 |
| Diluted earnings per share | $3.66 | $3.04 | $11.39 | $9.37 |
| Operating cash flow | Not presented separately for the quarter | $963.0 | $737.8 |
- Q3 revenue rose 13% and nine-month revenue 15%; net income attributable to CME Group increased 21% in both comparisons. Diluted EPS increased 20% for Q3 and 22% for nine months.
- Clearing and transaction fees were $598.7 in Q3 (+11%) and $1,860.9 for nine months (+16%). Market data revenue was $101.4 in Q3 (+25%) and $291.0 for nine months (+17%).
- Aggregate average daily volume increased 14% in Q3 and 19% for nine months. The average rate per contract fell 3% in both periods, to 0.810 and 0.806, respectively.
- Expenses rose 17% in Q3 and 14% for nine months, faster than revenue in Q3; operating margin declined two percentage points in that quarter.
- For nine months, operating cash flow was $963.0; investing activities used $68.7 and financing activities used $586.7. Cash and cash equivalents were $568.2 at September 30, versus $260.6 at December 31, 2009.
Balance sheet, debt and liquidity
- At September 30, total assets were $33,686.5, total liabilities $13,717.9 and shareholders’ equity $19,900.8. Current assets and liabilities included matching cash performance bonds and security deposits of $2,996.4; these balances should not be treated as ordinary available liquidity.
- Reported short- and long-term debt totaled approximately $2,524.9. This included a $420.5 term loan due 2011 and notes due 2013, 2014 and 2018. The 2018 notes, issued by Index Services and guaranteed by CME Group, had $612.5 par value and a 4.40% coupon.
- CME Group reported $945.5 of excess borrowing capacity under its senior credit facility and stated it was in compliance with debt covenants. Its ratings were AA/Aa3 long-term and A-1+/P1 short-term, with stable outlooks.
- Management said it expected to maintain an investment-grade rating. The company’s $1.0 billion clearing-house credit line is collateralized and usable only to the extent collateral is available.
Material changes and unusual items
- CBOT formed CME Group Index Services with Dow Jones in March 2010, with CME Group holding 90%. The transaction added $433.6 of goodwill and $376.4 of identifiable intangible assets. Index Services issued $612.5 of notes; $607.5 was distributed to Dow Jones, whose remaining interest is redeemable under specified terms.
- CME Group issued 2,206,478 Class A shares to BM&FBOVESPA for approximately $607 million and repurchased shares under a program intended to offset most of the resulting dilution. Nine-month cash dividends were $228.3, or $3.45 per share.
- Nine-month expenses included a $19.8 CMA goodwill impairment and a $0.7 CMA trade-name impairment. The company also recorded a $2.2 impairment of its OneChicago investment in Q3. The 2009 comparison included a $22.4 impairment of the IMAREX investment.
- Higher trading volumes supported revenue and operating cash flow. Compensation and benefits, bonuses, Index Services-related costs, marketing and travel, and legal/customer accruals contributed to expense growth. Market-data revenue benefited from Index Services and higher device fees, partly offset by fewer device screens.
- The board declared a regular $1.15-per-share dividend on November 3, 2010, payable December 27 to holders of record December 10. The filing provided no quantitative earnings or revenue guidance.
Outlook, risks and contingencies
- Management attributed activity to market conditions including interest-rate expectations, currency movements and commodity-market volatility. It cautioned that quarterly results are not necessarily indicative of future periods.
- Risks identified include competition, technology and system capacity, trading-volume and rate-per-contract changes, regulation including Dodd-Frank implementation, market-data subscriptions, clearing-member credit exposure, indebtedness, acquisitions, and market and economic conditions.
- Several antitrust and patent-related lawsuits remained pending; CME Group said it believed the claims were without merit and intended to defend itself. A judge partially granted summary judgment on predatory-pricing claims in one case in July 2010. The company stated it did not expect other proceedings to materially adversely affect its consolidated financial position or results.
- CME guarantees settlement of cleared contracts and had $83.0 of contingent liability under irrevocable letters of credit for its SGX mutual-offset arrangement; it also guaranteed a $5.0 standby letter of credit for GFX. Management considered the recorded liability for the clearing guarantee immaterial. Certain intellectual-property indemnification exposures could not be estimated, and no liability was recorded.
- The filing reported no material change in market-risk exposure since year-end 2009, no material update to previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether trading-volume growth continues and offsets lower average rates per contract and product/customer mix shifts.
- How Index Services performs and how its debt guarantee, redeemable Dow Jones interest and purchase-accounting estimates affect results and obligations.
- The nature and future effect of impairment charges, particularly CMA and OneChicago, and the timing of any further valuation changes.
- Debt maturities, covenant compliance, borrowing capacity and the availability of collateral for clearing-related credit lines and guarantees.
- Developments in pending litigation, customer and legal accruals, and clearing-member or indemnification exposures.
- Whether the share repurchase program, dividend and BM&FBOVESPA relationship evolve as described, including the effect on share count and cash use.