CME Group Inc. — Q1 2010 Form 10-Q
Business context and reporting period. Unaudited results for the quarter ended March 31, 2010, compared with Q1 2009; balance-sheet comparisons are with December 31, 2009. CME Group operates futures and options exchanges and clearing, market-data, and related services. Index Services results are included beginning March 19, 2010, following CBOT’s acquisition of a 90% interest in the joint venture with Dow Jones.
Key financial results
Amounts in millions of dollars except per-share data, percentages, and volume metrics.
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $693.2 | $647.1 | +7% |
| Clearing and transaction fees | $578.0 | $527.8 | +10% |
| Operating income | $414.7 | $386.4 | +7% |
| Operating margin | 60% | 60% | Flat |
| Net income attributable to CME Group | $240.2 | $199.1 | +21% |
| Diluted EPS | $3.62 | $3.00 | +21% |
| Cash from operations | $355.7 | $254.7 | +40% |
- Total expenses were $278.5 million, up 7%. Net margin was approximately 34.6%, versus 30.8% in Q1 2009.
- Average daily volume increased 12% to 11.544 million contracts; electronic volume rose 16% and was 83% of total volume.
- Clearing and transaction fees benefited from 12% higher total contract volume, partly offset by a 2% decline in average rate per contract ($0.821 versus $0.839).
- Non-operating expense was $15.8 million, versus $35.9 million. Q1 2010 included $11.1 million investment income and a $6.0 million Lehman-related derivative settlement gain; interest and borrowing costs were $31.4 million.
Financial position, cash flow, and debt
- At March 31, cash and cash equivalents were $444.2 million and marketable securities were $46.3 million. Cash performance bonds and security deposits of $4.510 billion were matched by an equal liability and are not freely available corporate liquidity.
- Total reported debt was approximately $3.124 billion: $299.9 million short-term and $2.824 billion long-term. This includes $612.5 million of Index Services notes issued in March, due 2018 at 4.40%; CME Group guarantees the notes. Cash less reported debt was approximately negative $2.680 billion.
- Operating cash flow of $355.7 million exceeded net income, supported in part by a $146.9 million increase in income taxes payable; accounts receivable growth of $48.3 million was a cash use. Investing activities used $19.8 million and financing activities used $152.3 million.
- The company reported approximately $645.5 million of excess borrowing capacity under its senior credit facility and said it was in compliance with debt covenants. Credit ratings were S&P AA / A1+ and Moody’s Aa3 / P1, both with stable outlooks.
Material changes and unusual items
- CBOT formed Index Services with Dow Jones on March 18. Preliminary purchase accounting recorded $432.6 million of goodwill and $376.4 million of identifiable intangible assets. Index Services issued $612.5 million of notes, distributing $607.5 million to Dow Jones; Dow Jones retained a 10% interest classified as redeemable non-controlling interest.
- Operating expenses rose $17.8 million. Index Services transaction-related professional fees added $10.3 million; salaries, benefits, and bonus expense also increased. Lower restructuring and purchased-intangible amortization partly offset increases.
- Market-data revenue increased 2%, but basic-device counts fell to 387,000 from 432,000; higher monthly fees largely offset the decline. Other revenue fell 25%, mainly due to lower GFX trading revenue.
- The effective tax rate was 39.8%, down from 43.2%, including a $6.4 million reduction in uncertain-tax-position liabilities in 2010; the 2009 comparison included a $6.3 million tax liability.
- The company repurchased approximately 935,000 Class A shares for $281.8 million during the quarter. The repurchase authorization was up to 2.35 million shares and was intended to offset potential dilution from a proposed share issuance to BM&FBOVESPA.
Outlook, risks, and contingencies
- Management expected a full-year 2010 effective tax rate of 41%–42%. It expected operating expenses to increase for the rest of 2010 relative to 2009 due to Index Services, including additional intangible amortization. It also anticipated lower volume-based licensing fees if equity-product volume remained at Q1 levels; Dow Jones licensing fees ceased after the acquisition.
- Management attributed stronger interest-rate, FX, commodity, energy, and metals activity to changing macroeconomic conditions and market use; equity volume declined amid lower volatility. Outlook is not a guarantee of future results.
- Principal stated risks include competition, technology and system capacity, trading-volume and rate-per-contract changes, regulation and potential derivatives-market reforms, customer concentration, clearing-member credit risk, acquisitions and integration, leverage/refinancing, litigation, and economic or market volatility.
- Two identified lawsuits (Eurex U.S. antitrust/interference claims and Fifth Market patent claims) were described as without merit by the company, which intends to defend them. Management said resolution of other proceedings was not expected to materially adversely affect results or financial position. Clearing-settlement guarantees and an $83 million SGX letter of credit are contingent exposures; the company considered its recorded clearing guarantee liability immaterial.
- Management reported no material change in market-risk exposure, no material update to previously disclosed risk factors, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- How Index Services performs after being consolidated for only the final days of Q1, and the eventual purchase-accounting allocation and amortization impact.
- Whether higher trading volumes persist and how product/customer mix, member activity, and pricing incentives affect realized average rate per contract.
- The funding, maturity, and covenant implications of total debt, including the Index Services notes and commercial paper backed by the revolving facility.
- Whether the expected 41%–42% full-year tax rate and expense outlook remain appropriate as acquisition costs and amortization develop.
- Developments in the disclosed litigation, clearing guarantees, SGX exposure, and the proposed BM&FBOVESPA share issuance and related repurchase program.