CME Group Inc. — Q1 2011 Form 10-Q
Reporting period: Quarter ended March 31, 2011. Unaudited consolidated results; comparisons are with Q1 2010 unless otherwise noted. CME Group operates futures and options exchanges and clearing services, including CME, CBOT, NYMEX and COMEX.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $831.6 million | $693.2 million | +20% |
| Operating expenses | $307.5 million | $278.5 million | +10% |
| Operating income | $524.1 million | $414.7 million | +26% |
| Operating margin | 63% | 60% | +3 percentage points |
| Net income attributable to CME Group | $456.6 million | $240.2 million | +90% |
| Diluted EPS | $6.81 | $3.62 | +88% |
| Cash provided by operating activities | $362.1 million | $355.7 million | +2% |
- Clearing and transaction fees rose 20% to $691.3 million; market data and information services revenue increased 22% to $107.0 million.
- Total contract volume increased 21% to 855.2 million contracts, while average daily volume rose 19% to 13.794 million. Average rate per contract declined 2% to $0.808, reflecting customer and product mix and volume-based discounts.
- Expenses increased by $29.0 million. Higher salaries, benefits and employer taxes, bonus expense, litigation settlements and legal fees were partially offset by lower Index Services-related professional fees.
- Non-operating expense was $12.5 million, versus $15.8 million. Investment income increased to $18.8 million; Q1 2010 included a $6.0 million gain on derivative investments related to the Lehman bankruptcy settlement.
Cash, liquidity and debt
- Cash and cash equivalents were $664.7 million at March 31, 2011, down from $855.2 million at year-end 2010. Operating cash flow was $362.1 million; investing activities used $41.6 million and financing activities used $511.0 million, including repayment of a $420.5 million term loan and $93.6 million of dividends.
- Long-term debt was $2.105 billion; short-term debt was zero after repayment of the term loan. Long-term notes mature in 2013, 2014 and 2018.
- The company reported approximately $1.0 billion of excess borrowing capacity for general corporate purposes and said it was in compliance with debt covenants. A separate secured clearing-house credit line was also available.
- Standard & Poor’s placed its ratings on CreditWatch Negative on March 3, 2011; Moody’s outlook was Stable. Management expected to maintain an investment-grade rating.
Material changes, outlook and risks
- The effective tax rate fell to 10.7% from 39.8%. The filing attributes the decrease principally to a $118.1 million tax benefit from a change in state tax apportionment and a $48.8 million reduction in valuation allowances on unrealized capital losses. These items materially boosted reported earnings.
- CME began marking its BM&FBOVESPA investment to market in February 2011 as sale restrictions were due to lapse in February 2012. Its March 31 fair value was $727.6 million; the quarter included an unrealized securities gain and reversal of a previously recorded currency-related unrealized loss in other comprehensive income.
- Management linked higher trading activity to market conditions, including interest-rate expectations, commodity supply and weather events, and geopolitical uncertainty. It provided no specific financial guidance. It cautioned that quarterly results are not necessarily indicative of future periods.
- Key risks include competition, technology and system reliability, regulatory changes including Dodd-Frank implementation, trading-volume and rate-per-contract variability, clearing-member credit risk, market volatility, and legal proceedings.
- The company described several patent disputes as without merit and said it would defend them. Potential damages in the Garber matter were estimated at $1.5–$3.0 million; potential damages in other identified patent matters could not be quantified.
- After quarter-end, the board authorized a share repurchase program of up to $750 million over 12 months, replacing the remaining authorization under the prior program.
Important facts for investors to verify
- How much of earnings growth is attributable to recurring operations versus the unusually low effective tax rate and related tax benefits.
- Whether trading-volume growth and the mix of member, product and venue activity support revenue growth despite a lower average rate per contract.
- Cash generation and capital needs after dividends, debt repayment, planned investment and the newly authorized buyback.
- Developments in the patent litigation, S&P’s CreditWatch status, and any changes to liquidity or debt-facility availability.