CME Group Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results; comparisons are with the same 2010 periods. CME Group operates futures and options exchanges and clearing services, including CME, CBOT, NYMEX and COMEX.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Change | Nine months 2011 | Nine months 2010 | Change |
|---|---|---|---|---|---|---|
| Revenue | $874.2 million | $733.4 million | +19% | $2,544.1 million | $2,240.5 million | +14% |
| Operating income | $572.1 million | $442.9 million | +29% | $1,630.7 million | $1,372.7 million | +19% |
| Operating margin | 65% | 60% | +5 percentage points | 64% | 61% | +3 percentage points |
| Net income attributable to CME Group | $316.1 million | $244.3 million | +29% | $1,066.4 million | $755.2 million | +41% |
| Diluted EPS | $4.74 | $3.66 | +30% | $15.94 | $11.39 | +40% |
| Operating cash flow | Not separately provided | Not separately provided | — | $999.8 million | $963.0 million | +4% |
Revenue growth was led by clearing and transaction fees, which rose 22% in Q3 and 13% for the nine months. Total contract volume grew 27% in Q3 and 15% year to date, while average rate per contract declined 4% and 1%, respectively, reflecting product mix and volume-based pricing. Electronic trading represented 85% of volume in both periods.
Expenses increased 4% in Q3 and 5% for the nine months. Higher compensation, benefits and headcount were partially offset by lower legal/customer settlement costs and the absence of the $20.5 million CMA impairment charge recorded in 2010. Nine-month results also included a $9.8 million gain on sale of Index Services assets.
Cash, debt and liquidity
- Cash and cash equivalents were $829.3 million at September 30, 2011, versus $855.2 million at year-end 2010.
- Operating cash flow was $999.8 million for the first nine months; investing activities used $111.0 million and financing activities used $914.7 million. Cash declined $25.9 million over the period.
- Debt totaled approximately $2.1 billion, all long-term fixed-rate notes; the $420.5 million short-term term loan was repaid in January. No commercial paper was outstanding at quarter-end.
- The company reported approximately $1.0 billion of excess borrowing capacity for general corporate purposes and no borrowings under its $1.0 billion revolving credit facility. A separate secured clearing-house credit line provides up to $1.0 billion, with an option to increase to $2.0 billion.
- Cash performance bonds and guaranty fund contributions increased to $7.7 billion from $4.0 billion. These are matched by corresponding liabilities and are not ordinary corporate liquidity.
Material changes, unusual items and outlook
- Nine-month effective tax rate fell to 31.9% from 41.6%, mainly due to a $118.1 million benefit from revised state tax apportionment and a $48.8 million reduction in valuation allowances. Q3’s rate, by contrast, increased to 42.3% from 41.2%.
- Management attributed higher trading volumes to market volatility, including U.S. credit-rating downgrade concerns, European sovereign-debt uncertainty, interest-rate expectations, weather and commodity supply conditions. These drivers are variable and do not constitute formal guidance.
- No quantified revenue, earnings or volume guidance is provided in the filing. Management cautions that quarterly results are not necessarily indicative of future periods.
- On November 4, 2011, CME Group announced an agreement with McGraw-Hill to form a new index business venture. CME Group expects to contribute certain Index Services assets, retain a 24.4% interest, sell CMA to McGraw-Hill, and enter into a new index licensing arrangement. Closing was expected by June 2012, subject to approvals and other conditions.
- The company disclosed patent litigation involving Fifth Market, Technology Research/Garber and Realtime Data; potential losses could not be reasonably estimated. Management considers the claims without merit and intends to defend them.
- Cybersecurity and intellectual-property risks were highlighted, including a former employee indicted in September 2011 on trade-secret theft charges. CME reported no evidence that customer information, trading data or required regulatory information was compromised.
- Management stated disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether volume growth and trading activity remain strong, and how product mix, customer incentives and venue mix affect average rate per contract.
- The sustainability of earnings growth excluding the significant tax benefits and other unusual items.
- Progress, final terms, regulatory approvals and expected financial effects of the McGraw-Hill index venture and CMA sale.
- Debt maturities, credit ratings and available liquidity, distinguishing corporate cash from clearing-related collateral.
- Developments in the disclosed patent cases, regulatory matters, cybersecurity exposures and trade-secret investigation.