CME Group Inc. — FY 2009 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2009, with quarterly data including fourth-quarter results. CME Group operates CME, CBOT, NYMEX and COMEX, providing futures and options trading, clearing, market data and related services. Results include NYMEX from August 23, 2008; therefore, year-over-year comparisons are affected by acquisition timing. Amounts are in U.S. dollars.
Financial performance and key metrics
| Metric | FY 2009 | FY 2008 | Change / context |
|---|---|---|---|
| Total revenue | $2.613 billion | $2.561 billion | Up 2% |
| Clearing and transaction fees | $2.162 billion | $2.115 billion | Up 2%; 83% of 2009 revenue |
| Quotation data fees | $331.1 million | $279.5 million | Up 18% |
| Operating income | $1.589 billion | $1.582 billion | Up less than 1% |
| Operating margin | 61% | 62% | Down 1 percentage point |
| Net income | $825.8 million | $715.5 million | Up 15% |
| Diluted EPS | $12.41 | $12.13 | Up 2% |
| Cash flow from operations | $1.083 billion | $1.197 billion | Down 10% |
| Capital expenditures / property additions | $157.9 million | $200.1 million | Down 21%; 2010 estimate: $180–$200 million |
- Trading activity: Total reported contract volume was 2.585 billion, down 13%; average daily volume fell 20% to 10.258 million contracts. Management’s pro forma comparison, including NYMEX for all of 2008, also showed a 20% volume decline. Year-end open interest increased 24% to 78.0 million contracts.
- Rate and product mix: Average rate per contract rose 18% to $0.836, offsetting much of the volume pressure. Interest-rate average daily volume fell 30%, equity fell 20%, and commodity fell 13%; foreign-exchange volume was essentially flat. Energy volume rose 11%.
- Fourth quarter: Revenue was $667.5 million, operating income $402.5 million and net income $202.6 million; diluted EPS was $3.04. In Q4 2008, revenue was $691.8 million, operating income $417.9 million, net income $62.1 million and diluted EPS $0.93. The 2008 quarter included substantial non-operating impairment expense.
- Balance sheet and debt: Total assets were $35.651 billion and shareholders’ equity $19.301 billion at year-end. Debt totaled approximately $2.315 billion: $299.8 million short-term and $2.015 billion long-term, down from approximately $3.216 billion in 2008. Cash and cash equivalents were $260.6 million; unused general-purpose capacity under the senior facility was approximately $845.5 million. The filing reports compliance with debt covenants.
- Liquidity context: CME held $5.982 billion of cash performance bonds and security deposits on its balance sheet, matched by an equal liability; substantial additional securities and letters of credit were also posted by clearing firms. These customer/clearing collateral balances are not ordinary corporate liquidity. The clearing house’s disclosed default resources totaled approximately $9.264 billion.
- Margins and dividends: Effective tax rate was 42.6%, versus 42.7%. Quarterly dividends were $1.15 per share throughout 2009; management expected the target to remain at that level in 2010, subject to board discretion.
Material changes versus the prior comparable period
- Despite lower trading volume, revenue increased modestly, principally because the average rate per contract and market-data revenue rose. Higher rate per contract was associated with product mix and NYMEX/ClearPort contributions.
- Operating expenses rose 5% to $1.024 billion. Higher compensation, purchased-intangible amortization and licensing costs were partly offset by lower technology support, communications and other expenses.
- Net income benefited from non-operating expense improving to $151.6 million from $334.2 million in 2008, when a $274.5 million BM&FBOVESPA impairment was recorded. 2009 still included $46.0 million of investment impairments: $23.6 million for DME and $22.4 million for IMAREX.
- Interest and other borrowing costs rose to $133.9 million from $56.5 million, reflecting debt associated with the NYMEX acquisition. Operating cash flow decreased even as net income increased.
- Market-data revenue grew, but management reported lower CME/CBOT device counts amid customer cost-cutting; NYMEX services contributed incremental revenue. The basic data-device fee was scheduled to increase from $55 to $61 monthly effective January 1, 2010.
Outlook, management commentary, risks and contingencies
- Management described the financial crisis, reduced customer risk-taking, low short-term interest rates and limited capital as contributors to lower trading activity. It cited improving open interest and growth in clearing services as positives, but gave no quantified revenue or earnings guidance.
- Growth priorities include core product development, international expansion and OTC clearing. CME began clearing credit default swaps in December 2009 under a temporary SEC exemption through March 31, 2010; continuation depended on extension of that exemption and regulatory developments.
- For 2010, management expected capital spending of $180–$200 million and targeted a $1.15 quarterly dividend, while emphasizing that dividends remain subject to board approval and financial considerations.
- Subsequent announcements included a definitive agreement for a 90%-owned Dow Jones Indexes joint venture, expected to close in Q1 2010 subject to approvals and conditions; a non-binding BM&FBOVESPA platform-development letter of intent; and authorization to repurchase up to 2.35 million Class A shares.
- Key risks include dependence on trading volumes and customer mix; competition; regulatory reform, position limits and potential tax changes; technology outages or security breaches; clearing-member defaults and OTC risk-management uncertainty; and execution, integration and impairment risks. Two clearing firms represented 11% and 10% of clearing and transaction-fee revenue.
- Legal matters included an unresolved Eurex antitrust action seeking treble damages and several patent cases that CME Group said it would defend. The NYMEX merger class-action appeals were withdrawn after an agreement to pay $1.8 million in court-approved attorneys’ fees; the CBOE exercise-right litigation was concluded through settlement. Management stated it knew of no proceeding expected to have a material adverse effect.
- Auditor Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Reconcile the reported 13% volume decline with the 20% pro forma decline and assess whether higher average rates can persist as trading activity and product mix change.
- Review debt maturities, refinancing capacity, interest costs and cash available for corporate use separately from clearing-firm collateral.
- Assess the assumptions and potential further impairments behind the $7.549 billion goodwill balance, $16.982 billion trading-products intangibles and strategic investments.
- Confirm the extension and terms of regulatory permission for credit-default-swap clearing, and monitor final OTC derivatives rules and their effect on volumes and economics.
- Track the Dow Jones and BM&FBOVESPA transactions, share repurchase execution, capital spending and dividend decisions against stated plans.
- Review the status and potential exposure of the Eurex and patent litigation, and monitor concentration among major clearing firms and market-data resellers.