CME Group Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2009. Unaudited results. CME Group operates the CME, CBOT and NYMEX exchanges. Comparisons are affected by the August 2008 NYMEX merger: 2008 results include NYMEX only from August 23, so periods are not fully comparable.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue | $650.4 million | $680.9 million | $1,945.3 million | $1,869.2 million |
| Operating income | $401.4 million | $420.7 million | $1,186.6 million | $1,164.3 million |
| Operating margin | 62% | 62% | 61% | 62% |
| Net income | $202.3 million | $168.7 million | $623.2 million | $653.4 million |
| Diluted EPS | $3.04 | $2.81 | $9.37 | $11.61 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $737.8 million | $862.7 million |
- Q3 revenue declined 4%, primarily from lower trading volumes; net income rose 20%, helped by a lower effective tax rate (43% versus 57%). Q3 operating expenses fell 4%, partly because 2008 included a Swapstream goodwill impairment.
- Nine-month revenue increased 4%, with NYMEX products and higher average rates per contract offsetting weaker CME and CBOT volumes. Net income declined 5% and diluted EPS fell 19%; the filing attributes the EPS decline in part to shares issued in the NYMEX merger.
- Nine-month clearing and transaction fees rose 4% to $1,605.2 million, while quotation data fees rose 29% to $249.0 million. Processing services revenue fell to $0.3 million from $53.9 million, mainly because the NYMEX service agreement ended upon the merger.
- Average daily volume fell 16% in Q3 and 17% year to date. CME and CBOT volumes weakened broadly, especially in interest-rate products; NYMEX energy volumes were comparatively resilient. Average rate per contract increased 16% in Q3 and 25% year to date, partly due to product mix and NYMEX/ClearPort contributions.
Cash, liquidity and debt
- At September 30, cash and cash equivalents were $204.1 million, versus $297.9 million at year-end 2008. Nine-month operating cash flow was $737.8 million; investing activities provided $539.4 million and financing activities used $1.371 billion. Cash declined $93.8 million during the period.
- Total debt was approximately $2.539 billion: $299.7 million short-term and $2.239 billion long-term. This compares with approximately $3.216 billion at December 31, 2008. Debt reduction and repayment of commercial paper were significant uses of financing cash.
- The company reported $620.5 million of excess borrowing capacity for general corporate purposes under its senior credit facility, which expires in August 2011. A separate clearing-house credit line provides up to $600 million, subject to collateral; its termination date was extended to December 9, 2009.
- Management said CME Group was in compliance with debt covenants and reported stable investment-grade ratings. The company suspended its share repurchase program in January 2009 to focus on debt reduction. Expected 2009 capital expenditures were approximately $140 million.
- Cash performance bonds and security deposits were $6.825 billion on both the asset and liability sides of the balance sheet. These are clearing-related funds with matching obligations, not ordinary corporate liquidity. Their decline from $17.654 billion at year-end largely explains the reduction in total assets.
Outlook, commentary and material risks
- Management expected interest-rate product volumes to remain below 2008 levels while the Federal Reserve maintained its near-zero short-term interest-rate policy, absent offsetting developments. It noted that interest-rate volumes had increased from first-quarter 2009 levels as the macroeconomic climate stabilized.
- Management cited the credit crisis, lower market volatility, reduced hedging demand and customer cost-cutting as factors weighing on trading volumes and market-data screens. No broad earnings or revenue guidance is provided in the filing.
- Non-operating expense increased to $45.6 million in Q3 and $105.4 million year to date, driven primarily by higher borrowing costs and a $22.4 million other-than-temporary impairment of the IMAREX investment. Its post-impairment carrying value was $19.0 million.
- Integration of NYMEX remained underway. Merger-related restructuring payments were substantially complete by August 2009; the recorded restructuring liability was $3.0 million at quarter-end. Purchased-intangible amortization was $94.5 million year to date, up 50% from 2008.
- The securities-lending program remained suspended amid credit-market volatility; the NYMEX program closed in June 2009. Other principal risks include trading-volume and rate-per-contract fluctuations, competition, technology and system reliability, regulation, integration execution, indebtedness, clearing-member defaults, litigation and market conditions.
- The CBOE exercise-right settlement had been approved but was under appeal. CME Group’s maximum potential guarantee was $293.0 million; the recorded fair-value liability was $1.2 million. Two NYMEX-merger class actions were dismissed on September 30, subject to appeal. Other antitrust and patent litigation remained pending; management said it considered the claims without merit.
- Management concluded disclosure controls were effective. Integration of NYMEX internal controls continued. A new accounting standard concerning variable-interest-entity consolidation was still under assessment.
Important facts for investors to verify
- Whether trading volumes and average rates per contract recover, and whether lower interest rates and volatility continue to pressure activity.
- How much of revenue growth and expense growth reflects the NYMEX merger rather than underlying trends; 2008 comparisons include only partial-period NYMEX results.
- Debt repayment capacity, commercial-paper and credit-facility availability, covenant compliance, and the use of cash after the buyback suspension.
- The potential effects of the appealed CBOE settlement, pending litigation and other contingencies beyond amounts currently recorded.
- Whether IMAREX or other investments face further impairment, and whether integration, restructuring and purchased-intangible costs change materially.