CME Group Inc. — 2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010; filed February 28, 2011. The filing is an annual report, with unaudited quarterly results also provided. CME Group operates futures exchanges and clearing services, with revenue primarily driven by trading and clearing activity; it also earns market-data, access and other fees. The 2010 results include CME Group Index Services from March 19, 2010.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Total revenue | $3,003.7 million | $2,612.8 million | +15% |
| Clearing and transaction fees | $2,486.3 million | $2,161.9 million | +15% |
| Market data and information services | $395.1 million | $331.1 million | +19% |
| Operating income | $1,831.1 million | $1,589.1 million | +15% |
| Operating margin | 61% | 61% | Flat |
| Net income attributable to CME Group | $951.4 million | $825.8 million | +15% |
| Diluted EPS | $14.31 | $12.41 | +15% |
| Operating cash flow | $1,356.4 million | $1,083.1 million | +25% |
| Average daily contract volume | 12.167 million | 10.258 million | +19% |
| Average rate per contract | $0.808 | $0.836 | -3% |
Fourth quarter: Revenue was $763.2 million versus $667.5 million in Q4 2009; operating income was $458.4 million versus $402.5 million. Net income attributable to CME Group was $196.2 million versus $202.6 million, and diluted EPS was $2.93 versus $3.04. The filing does not provide quarterly cash-flow figures.
Balance sheet and funding: At year-end, cash and cash equivalents were $855.2 million, marketable securities were $50.2 million, total assets were $35.0 billion and shareholders’ equity was $20.1 billion. Short- and long-term debt totaled approximately $2.53 billion. Cash increased from $260.6 million a year earlier. CME reported investment-grade ratings with stable outlooks from S&P and Moody’s and was in compliance with debt covenants.
Margins and taxes: The effective tax rate rose to 44.7% from 42.6%. Net income margin was approximately 31.7%, broadly in line with 2009. Total cash dividends were $4.60 per share for 2010.
Material changes versus 2009
- Trading recovery lifted total volume 19%; higher volume added an estimated $398.5 million to clearing and transaction fees. Lower average rate per contract, reflecting customer and product mix, reduced those fees by an estimated $73.9 million.
- Trading strengthened in interest rates, foreign exchange, agriculture, energy and metals; equity volume was essentially flat. Electronic trading represented 83% of volume, up from 81%.
- Market-data revenue grew partly due to Index Services, while average basic-device counts fell to 384,000 from 411,000. The increase in the basic monthly device fee also supported revenue.
- Operating expenses rose 15% to $1,172.6 million, notably from higher compensation and bonuses, professional fees, marketing and the CMA impairment. Operating margin remained 61%.
- Operating cash flow increased to $1,356.4 million. Investing activities used $108.4 million, while financing activities used $653.4 million, including a $607.5 million distribution to Dow Jones and $575.3 million of share repurchases.
- Year-end cash performance bonds and guaranty fund contributions recorded on the balance sheet declined to $4.04 billion from $5.98 billion; these balances fluctuate with clearing firms’ requirements and choices.
Outlook, commentary, risks and unusual items
- Management said existing cash, securities and operating cash generation were expected to cover working capital, capital expenditure and other commitments. Planned 2011 capital expenditures were approximately $180 million. The filing gives no specific revenue or earnings guidance.
- The board raised the dividend-policy target in January 2011 from approximately 30% to 35% of prior-year cash earnings. A $1.40-per-share quarterly dividend was declared in February 2011, payable in March.
- CME Clearing Europe received UK regulatory approval in December 2010; management expected its launch in the first half of 2011. The company also acquired electronic-trading technology provider Elysian Systems in December 2010.
- Dodd-Frank implementation and related U.S. and European rulemaking could create clearing opportunities but also raise compliance costs, alter product structures or trading activity, and intensify competition. Other material risks include volume and volatility dependence, exchange and clearing competition, technology outages or cyber incidents, and clearing-member defaults.
- Two clearing firms accounted for 13% and 12% of 2010 clearing and transaction-fee revenue; members generated 79% of trading volume. Management considered customer activity likely to migrate if a clearing firm withdrew, but that outcome is not assured.
- Unusual items included a $19.8 million CMA goodwill impairment and a $0.7 million trade-name impairment; a $2.2 million impairment of the OneChicago investment; and an $8.6 million loss from interest-rate-hedge ineffectiveness following the planned loan refinancing. A $6.0 million gain from a Lehman bankruptcy settlement partly offset derivative losses. A $51.2 million tax charge reflected revised state and local tax rates on deferred tax liabilities.
- The company disclosed pending antitrust and intellectual-property litigation, including matters with trials scheduled in 2011 and 2012. Management believed the cases were without merit and did not expect other proceedings to materially affect financial position or results; outcomes remain uncertain.
- A 2010 employee error caused errant trades and approximately $4.7 million of company liability. Management also cited seasonality, a largely fixed cost base and possible impairment of goodwill, intangible assets or investments as risks.
Important facts for investors to verify
- Whether volume growth and the mix-driven decline in average rate per contract persist, and how they affect fee revenue and margins.
- Progress and economics of CME Clearing Europe, Index Services and other OTC and international initiatives, including the effects of Dodd-Frank rulemaking.
- Clearing-member concentration and the adequacy of default resources: disclosed available resources included $8.50 billion for futures, options and cleared credit-default swaps and $650 million for interest-rate swaps, after use of the defaulting firm’s assets.
- The company’s debt and liquidity after the January 2011 refinancing, as well as its ability to fund planned investment and dividends.
- Exposure to CMA and other asset impairments, the carrying value and restrictions on the BM&FBOVESPA investment, and resolution of pending litigation.