UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported)
July 24, 2007
CME GROUP INC.
(Exact Name of Registrant as Specified in Charter)
| Delaware | 000-33379 | 36-4459170 | ||
| (State or Other Jurisdiction of Incorporation) |
(Commission File No.) | (IRS Employer Identification No.) |
20 South Wacker Drive
Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number, including area code: (312) 930-1000
N/A
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
| Item 2.02. | Results of Operations and Financial Condition. |
The information set forth under “Item 2.02. Results Of Operations And Financial Condition,” including the Exhibit attached hereto, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
Attached and incorporated herein by reference as Exhibit 99.1 is a copy of a press release of CME Group Inc., dated July 24, 2007, reporting the financial results for the second quarter ended June 30, 2007 for Chicago Mercantile Exchange Holdings Inc., which is now named CME Group Inc. The press release also included financial results for the period for CBOT Holdings, Inc., which as of July 12, 2007 was merged with and into Chicago Mercantile Exchange Holdings Inc.
| Item 9.01. | Financial Statements and Exhibits. |
EXHIBIT INDEX
| Exhibit Number |
Description | |
| 99.1 | Press Release, dated July 24, 2007. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| CME GROUP INC. Registrant | ||||||
| Date: July 24, 2007 |
By: | /s/ Kathleen M. Cronin | ||||
| Name: | Kathleen M. Cronin | |||||
| Title: | Managing Director, General Counsel and Corporate Secretary | |||||
 |
Exhibit 99.1 |
| Media Contacts | Investor Contact | |||
| Anita Liskey, 312.466.4613 |
John Peschier, 312.930.8491 | |||
| William Parke, 312.930.3467 |
CME-G | |||
| news@cmegroup.com http://cmegroup.mediaroom.com/ |
CME and CBOT Each Report Strong Second-Quarter Revenues and Profits
CHICAGO, July 24, 2007 – CME Group (NYSE, NASDAQ: CME) today reported Chicago Mercantile Exchange Holdings Inc. (CME) second quarter results. Total revenues increased 17 percent to $329 million and net income increased 15 percent to $126 million for second-quarter 2007 compared with second-quarter 2006. Diluted earnings per share on a GAAP basis rose 14 percent to $3.57 from $3.12. Excluding merger-related expenses of $7.0 million, diluted earnings per share would have been $3.69.
A summary of financial results for CBOT Holdings, Inc. (CBOT) is included later in this release and reflects a full quarter’s activity prior to the company’s merger with CME on July 12, 2007. CME Group results for the third quarter ended September 30, 2007 will include CBOT results from July 13, 2007.
“We are pleased to have completed the historic merger of CME and CBOT which we believe will deliver significant value for the shareholders and customers of CME Group,” said CME Group Executive Chairman Terry Duffy. “Together, CME and CBOT had combined revenues of more than $500 million in second-quarter 2007, which underscores the ability of our combined enterprise to deliver organic growth as well as be positioned to compete better globally for expanded business in regulated and over-the-counter derivatives markets. We look forward to building on our shared legacies of product innovation, technological expertise and superior customer service to capitalize on the tremendous growth opportunities we see in this global marketplace.”
“In addition to delivering another solid quarter and closing the merger, we focused intensely on integration planning and new growth initiatives over the last few months,” said CME Group Chief Executive Officer Craig Donohue. “Our hard work has put us in a position to accelerate many of our merger integration milestones. This includes completing the transition of CME and CBOT products onto a single electronic platform in January 2008, and beginning to combine our trading floors in March 2008, both ahead of our initial schedule. In addition, we continue to execute on our growth strategy — our electronic options volume reached record levels, we delivered record transaction processing services revenue, FXMarketSpace has progressed significantly in a short amount of time, and last week we announced the addition of centralized clearing to our over-the-counter interest rate swaps offering.”
All references to volume and rate per contract information in the text of this document exclude our non-traditional TRAKRS products, for which CME Group receives significantly lower clearing fees than other CME Group products, CME Group Auction Markets products and Swapstream products.
CME Holdings Second-Quarter 2007 Results
Financial Highlights:
GAAP
| ($s in millions, except per share) |
Q2 FY07 | Q2 FY06 | Y/Y | YTD FY07 | YTD FY06 | Y/Y | ||||||||||||||||
| Revenues |
$ | 329 | $ | 282 | 17 | % | $ | 661 | $ | 534 | 24 | % | ||||||||||
| Expenses |
$ | 137 | $ | 115 | 19 | % | $ | 269 | $ | 228 | 18 | % | ||||||||||
| Operating Income |
$ | 192 | $ | 167 | 15 | % | $ | 393 | $ | 306 | 29 | % | ||||||||||
| Operating Margin % |
58.4 | % | 59.1 | % | 59.4 | % | 57.2 | % | ||||||||||||||
| Net Income |
$ | 126 | $ | 110 | 15 | % | $ | 256 | $ | 201 | 27 | % | ||||||||||
| Diluted EPS |
$ | 3.57 | $ | 3.12 | 14 | % | $ | 7.26 | $ | 5.73 | 27 | % | ||||||||||
Non-GAAP (excluding merger-related expenses)
| ($s in millions, except per share) |
Q2 FY07 | Q2 FY06 | Y/Y | YTD FY07 | YTD FY06 | Y/Y | ||||||||||||||||
| Revenues |
$ | 329 | $ | 282 | 17 | % | $ | 661 | $ | 534 | 24 | % | ||||||||||
| Expenses |
$ | 130 | $ | 115 | 12 | % | $ | 260 | $ | 228 | 14 | % | ||||||||||
| Operating Income |
$ | 199 | $ | 167 | 19 | % | $ | 401 | $ | 306 | 31 | % | ||||||||||
| Operating Margin % |
60.5 | % | 59.1 | % | 60.7 | % | 57.2 | % | ||||||||||||||
| Net Income |
$ | 130 | $ | 110 | 19 | % | $ | 261 | $ | 201 | 30 | % | ||||||||||
| Diluted EPS |
$ | 3.69 | $ | 3.12 | 18 | % | $ | 7.41 | $ | 5.73 | 29 | % | ||||||||||
NOTE: The non-GAAP financial measures of operating performance exclude merger-related expenses of $7.0 million for the second quarter 2007 and $8.7 million for the six months ended June 30, 2007. Non-GAAP measures do not replace and are not a substitute for GAAP financial results but are provided to improve overall understanding of current financial performance.
After a slow start in April, stronger May and June volumes drove a CME clearing and transaction fee increase of 11 percent to $253 million, up from $229 million for second-quarter 2006. In addition, CME generated record revenue from processing services, increasing 86 percent from the same period a year ago to reach $38 million. CME Clearing handled record CBOT volumes of 4.0 million contracts per day, resulting in revenue of $24 million, up 20 percent from last year’s second quarter. NYMEX volume on CME Globex averaged a record 710,000 contracts per day, resulting in revenue of $14 million. Additionally, quotation data fees were up 18 percent to $24 million.
The average rate per contract was $0.624 for the quarter compared with $0.632 in the second quarter of 2006. The slight rate decrease was primarily driven by a higher proportion of the volume coming from members, who have lower average fees.
Total expenses increased 19 percent to $137 million. The incremental expense in the second quarter for CME-CBOT merger-related expenses was $7.0 million, driven primarily by legal, advertising, and integration consulting costs. Excluding this, expenses would have been $130 million, up 12 percent with the prior year and in line with historical growth rates. Capital expenditures were $26 million in second-quarter 2007, excluding leasehold improvement allowances.
Second-quarter income before income taxes was $209 million, an increase of 16 percent from $180 million for the year-ago period. The company’s operating margin was 58 percent on a GAAP basis, or 61 percent excluding merger-related costs of $7.0 million, compared with 59 percent for the same period last year. Operating margin is defined as operating income as a percentage of total revenues.
CME’s working capital increased by approximately $97 million during the second quarter, to $1.5 billion at June 30, 2007.
2
CME Holdings Six-Month Results
Average daily volume was 6.4 million contracts for the first half of 2007, up 19 percent from 5.3 million contracts in the same period in 2006. Volume on the CME Globex electronic platform increased 28 percent year over year, to an average of 4.8 million contracts per day.
For the first six months of 2007, total revenues increased 24 percent to $661 million from $534 million for the first half of 2006. Clearing and transaction fees improved 19 percent to $511 million from $429 million a year ago, benefiting from higher trading volume. Processing services increased 89 percent to $72 million from $38 million a year ago, driven primarily by increased revenues from our trade-matching services for NYMEX, which began in June 2006.
Total expenses were $269 million for the first half of 2007, an increase of 18 percent from $228 million for the comparable period in 2006. The incremental expense for CME-CBOT merger-related expenses in the first half of 2007 was $8.7 million. Excluding this, expenses would have been $260 million, up 14 percent compared to the prior year.
Capital expenditures were $42 million for the first six months of 2007, excluding leasehold improvement allowances.
Income before taxes was $425 million for the first half of 2007, up 29 percent versus the same period a year ago. The operating margin was 59 percent, on a GAAP basis, for the first six months of 2007, or 61 percent excluding merger-related costs of $8.7 million, compared with 57 percent for the year-earlier period.
The company reported record net income of $256 million, or $7.26 per diluted share, for the first six months of this year, compared with $201 million, or $5.73 per diluted share, for the first half of 2006.
CME Group will hold a conference call to discuss second-quarter results at 8:30 a.m. Eastern Time today. A live audio Webcast of the call will be available on the Investor Relations section of CME Group’s Web site at www.cmegroup.com. An archived recording will be available for up to two months after the call.
CME Group (http://www.cmegroup.com/) is the world’s largest and most diverse exchange. Formed by the 2007 merger of Chicago Mercantile Exchange Holdings Inc. (CME) and CBOT Holdings, Inc. (CBOT), CME Group serves the risk management needs of customers around the globe. As an international marketplace, CME Group brings buyers and sellers together on the CME Globex electronic trading platform and on its trading floors. CME Group offers the widest range of benchmark products available across all major asset classes, including futures and options based on interest rates, equity indexes, foreign exchange, agricultural commodities and alternative investment products such as weather and real estate. CME Group is traded on the New York Stock Exchange and NASDAQ under the symbol “CME”.
3
The Globe logo, CME, Chicago Mercantile Exchange, CME Group, Globex and E-mini, are trademarks of Chicago Mercantile Exchange Inc. CBOT and Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. TRAKRS and Total Return Asset Contracts are trademarks of Merrill Lynch & Co., Inc. These trademarks are used herein under license. All other trademarks are the property of their respective owners. Further information about CME Group and its products can be found at http://www.cmegroup.com/.
Statements in this news release that are not historical facts are forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any forward-looking statements. Among the factors that might affect our performance are: our ability to successfully integrate the businesses of CME Holdings and CBOT Holdings, including the fact that such integration may be more difficult, time consuming or costly than expected; revenues following the merger may be lower than expected; increasing competition by foreign and domestic competitors, including new entrants into our markets; our ability to keep pace with rapid technological developments, including our ability to complete the development and implementation of the enhanced functionality required by our customers; our ability to continue introducing competitive new products and services on a timely, cost-effective basis, including through our electronic trading capabilities, and our ability to maintain the competitiveness of our existing products and services; our ability to adjust our fixed costs and expenses if our revenues decline; our ability to continue to realize the benefits of our transaction processing services provided to third parties; our ability to maintain existing customers and attract new ones; our ability to expand and offer our products in foreign jurisdictions; changes in domestic and foreign regulations; changes in government policy, including policies relating to common or directed clearing; the costs associated with protecting our intellectual property rights and our ability to operate our business without violating the intellectual property rights of others; our ability to generate revenue from our market data that may be reduced or eliminated by the growth of electronic trading and the redundancies in the market data offerings of Chicago Mercantile Exchange Inc. and Board of Trade of the City of Chicago, Inc.; changes in the rate per contract due to shifts in the mix of the products traded, the trading venue and the mix of customers (whether the customer receives member or non-member fees or participates in one of our various incentive programs) and the impact of tiered pricing; the ability of our financial safeguards package to adequately protect us from the credit risk of clearing firms; changes in price levels and volatility in the derivatives markets and in underlying fixed income, equity, foreign exchange and commodities markets; economic, political and market conditions; our ability to accommodate increases in trading volume without failure or degradation of performance of our systems; our ability to execute our growth strategy and maintain our growth effectively; our ability to manage the risks and control the costs associated with our acquisition, investment and alliance strategy; industry and customer consolidation; decreases in trading and clearing activity; the imposition of a transaction tax on futures and options on futures transactions; and seasonality of the derivatives business. More detailed information about factors that may affect our performance may be found in our filings with the Securities and Exchange Commission, including our most recent Quarterly Report on Form 10-Q, which is available in the Investor Relations section of the CME Group Web site. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
4
Chicago Mercantile Exchange Holdings Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
| June 30, 2007 | December 31, 2006 | |||||
| ASSETS |
||||||
| Current Assets: |
||||||
| Cash and cash equivalents |
$ | 1,174,947 | $ | 969,504 | ||
| Collateral from securities lending |
2,435,851 | 2,130,156 | ||||
| Marketable securities, including pledged securities |
203,159 | 269,516 | ||||
| Accounts receivable, net of allowance |
158,301 | 121,128 | ||||
| Other current assets |
43,064 | 37,566 | ||||
| Cash performance bonds and security deposits |
974,603 | 521,180 | ||||
| Total current assets |
4,989,925 | 4,049,050 | ||||
| Property, net of accumulated depreciation and amortization |
179,453 | 168,755 | ||||
| Other assets |
134,355 | 88,700 | ||||
| Total Assets |
$ | 5,303,733 | $ | 4,306,505 | ||
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||
| Current liabilities: |
||||||
| Accounts payable |
$ | 25,824 | $ | 25,552 | ||
| Payable under securities lending agreements |
2,435,851 | 2,130,156 | ||||
| Other current liabilities |
76,479 | 78,466 | ||||
| Cash performance bonds and security deposits |
974,603 | 521,180 | ||||
| Total current liabilities |
3,512,757 | 2,755,354 | ||||
| Other liabilities |
50,220 | 32,059 | ||||
| Total liabilities |
3,562,977 | 2,787,413 | ||||
| Shareholders’ equity |
1,740,756 | 1,519,092 | ||||
| Total Liabilities and Shareholders’ Equity |
$ | 5,303,733 | $ | 4,306,505 | ||
5
Chicago Mercantile Exchange Holdings Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share amounts)
| Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| Revenues |
||||||||||||||||
| Clearing and transaction fees |
$ | 252,723 | $ | 228,519 | $ | 510,964 | $ | 429,316 | ||||||||
| Processing services |
37,560 | 20,184 | 72,319 | 38,309 | ||||||||||||
| Quotation data fees |
24,326 | 20,579 | 49,342 | 40,679 | ||||||||||||
| Access fees |
5,519 | 4,875 | 10,980 | 9,753 | ||||||||||||
| Communication fees |
2,024 | 2,173 | 4,040 | 4,399 | ||||||||||||
| Other |
6,857 | 5,879 | 13,695 | 11,470 | ||||||||||||
| Total Revenues |
329,009 | 282,209 | 661,340 | 533,926 | ||||||||||||
| Expenses |
||||||||||||||||
| Compensation and benefits |
56,729 | 48,055 | 113,129 | 97,892 | ||||||||||||
| Communications |
8,850 | 7,945 | 17,929 | 15,793 | ||||||||||||
| Technology support services |
8,645 | 7,656 | 17,537 | 14,918 | ||||||||||||
| Professional fees and outside services |
12,110 | 9,622 | 21,282 | 17,753 | ||||||||||||
| Depreciation and amortization |
20,428 | 17,596 | 40,417 | 34,983 | ||||||||||||
| Occupancy |
9,361 | 7,223 | 18,188 | 14,471 | ||||||||||||
| Licensing and other fee agreements |
6,794 | 6,929 | 13,829 | 12,861 | ||||||||||||
| Marketing, advertising and public relations |
7,116 | 3,987 | 13,099 | 7,083 | ||||||||||||
| Other |
6,755 | 6,400 | 13,102 | 12,534 | ||||||||||||
| Total Expenses |
136,788 | 115,413 | 268,512 | 228,288 | ||||||||||||
| Operating Income |
192,221 | 166,796 | 392,828 | 305,638 | ||||||||||||
| Non-Operating Income and Expense |
||||||||||||||||
| Investment income |
19,394 | 12,726 | 36,699 | 24,135 | ||||||||||||
| Securities lending interest income |
35,520 | 23,360 | 68,410 | 51,096 | ||||||||||||
| Securities lending interest expense |
(34,331 | ) | (22,769 | ) | (66,756 | ) | (49,866 | ) | ||||||||
| Equity in losses of unconsolidated subsidiaries |
(3,371 | ) | (219 | ) | (6,391 | ) | (608 | ) | ||||||||
| Total Non-Operating |
17,212 | 13,098 | 31,962 | 24,757 | ||||||||||||
| Income Before Income Taxes |
209,433 | 179,894 | 424,790 | 330,395 | ||||||||||||
| Income tax provision |
(83,558 | ) | (70,361 | ) | (168,887 | ) | (129,449 | ) | ||||||||
| Net Income |
$ | 125,875 | $ | 109,533 | $ | 255,903 | $ | 200,946 | ||||||||
| Earnings per Common Share: |
||||||||||||||||
| Basic |
$ | 3.61 | $ | 3.16 | $ | 7.34 | $ | 5.81 | ||||||||
| Diluted |
3.57 | 3.12 | 7.26 | 5.73 | ||||||||||||
| Weighted Average Number of Common Shares: |
||||||||||||||||
| Basic |
34,882 | 34,639 | 34,867 | 34,610 | ||||||||||||
| Diluted |
35,242 | 35,096 | 35,236 | 35,070 | ||||||||||||
6
CME Holdings
| 2Q 2006 |
3Q 2006 |
4Q 2006 |
1Q 2007 |
2Q 2007 | |||||||||||
| Trading Days |
63 | 63 | 63 | 62 | 64 | ||||||||||
|
Average Daily Volume (Round Turns, in Thousands)*
| |||||||||||||||
| 2Q 2006 |
3Q 2006 |
4Q 2006 |
1Q 2007 |
2Q 2007 | |||||||||||
| Interest rates |
3,255 | 3,148 | 2,990 | 3,639 | 3,560 | ||||||||||
| Equity E-mini |
1,748 | 1,564 | 1,596 | 1,977 | 1,988 | ||||||||||
| Equity standard-size |
173 | 154 | 147 | 190 | 173 | ||||||||||
| Foreign exchange |
471 | 423 | 508 | 555 | 527 | ||||||||||
| Commodities |
81 | 78 | 72 | 93 | 75 | ||||||||||
| Subtotal |
5,728 | 5,367 | 5,313 | 6,454 | 6,323 | ||||||||||
| TRAKRS |
419 | 117 | 294 | 143 | 98 | ||||||||||
| Total |
6,147 | 5,484 | 5,607 | 6,597 | 6,421 | ||||||||||
| Open outcry |
1,657 | 1,517 | 1,293 | 1,578 | 1,562 | ||||||||||
| Electronic (including TRAKRS) |
4,441 | 3,917 | 4,261 | 4,958 | 4,802 | ||||||||||
| Privately negotiated |
49 | 50 | 53 | 61 | 57 | ||||||||||
| Total |
6,147 | 5,484 | 5,607 | 6,597 | 6,421 | ||||||||||
|
Transaction Fees (in Thousands)*
| |||||||||||||||
| 2Q 2006 |
3Q 2006 |
4Q 2006 |
1Q 2007 |
2Q 2007 | |||||||||||
| Interest rates |
$ | 97,768 | $ | 98,306 | $ | 95,741 | $ | 110,950 | $ | 107,464 | |||||
| Equity E-mini |
76,889 | 70,194 | 71,111 | 86,571 | 88,247 | ||||||||||
| Equity standard-size |
15,493 | 12,947 | 13,271 | 16,631 | 15,014 | ||||||||||
| Foreign exchange |
33,212 | 30,576 | 34,752 | 38,176 | 36,768 | ||||||||||
| Commodities |
4,673 | 4,597 | 4,257 | 5,417 | 4,895 | ||||||||||
| Subtotal |
228,035 | 216,620 | 219,132 | 257,745 | 252,388 | ||||||||||
| TRAKRS |
384 | 244 | 344 | 180 | 176 | ||||||||||
| Total |
$ | 228,419 | $ | 216,864 | $ | 219,476 | $ | 257,925 | $ | 252,564 | |||||
| Open outcry |
$ | 50,067 | $ | 45,429 | $ | 41,710 | $ | 47,841 | $ | 47,271 | |||||
| Electronic (including TRAKRS) |
166,741 | 160,295 | 165,399 | 196,377 | 192,067 | ||||||||||
| Privately negotiated |
11,611 | 11,140 | 12,367 | 13,707 | 13,226 | ||||||||||
| Total |
$ | 228,419 | $ | 216,864 | $ | 219,476 | $ | 257,925 | $ | 252,564 | |||||
|
Average Rate Per Contract (RPC)*
| |||||||||||||||
| 2Q 2006 |
3Q 2006 |
4Q 2006 |
1Q 2007 |
2Q 2007 | |||||||||||
| Interest rates |
$ | 0.477 | $ | 0.496 | $ | 0.508 | $ | 0.492 | $ | 0.472 | |||||
| Equity E-mini |
0.698 | 0.712 | 0.707 | 0.706 | 0.693 | ||||||||||
| Equity standard-size |
1.421 | 1.338 | 1.430 | 1.414 | 1.356 | ||||||||||
| Foreign exchange |
1.119 | 1.146 | 1.085 | 1.109 | 1.090 | ||||||||||
| Commodities |
0.921 | 0.939 | 0.942 | 0.944 | 1.021 | ||||||||||
| Average (excluding TRAKRS) |
$ | 0.632 | $ | 0.641 | $ | 0.655 | $ | 0.644 | $ | 0.624 | |||||
| TRAKRS |
0.015 | 0.033 | 0.019 | 0.020 | 0.028 | ||||||||||
| Open outcry |
$ | 0.480 | $ | 0.475 | $ | 0.512 | $ | 0.489 | $ | 0.473 | |||||
| Electronic (excluding TRAKRS) |
0.657 | 0.668 | 0.660 | 0.657 | 0.637 | ||||||||||
| Privately negotiated |
3.785 | 3.545 | 3.713 | 3.650 | 3.625 | ||||||||||
| * | Note: All volume, transaction fee data, and rate per contract information exclude CME Group Auction Markets products and Swapstream products. |
7
CBOT Holdings Second-Quarter 2007 Results
For the second quarter ended June 30, 2007, CBOT reported a 33 percent increase in revenue reaching a record $204 million, which reflects growth in trading volume and a higher average rate per contract. Net income for the quarter also hit record levels increasing 34 percent to $58 million, or $1.10 per diluted share, for the second quarter. Excluding merger-related expenses, net income would have been $72 million, or $1.35 per diluted share, a 65 percent increase from second-quarter 2006. In last year’s second quarter, CBOT reported net income of $43 million, or $0.82 per diluted share.
Revenue growth combined with curtailed spending in advance of the merger resulted in higher operating margins in the second quarter for CBOT. The operating margin for the quarter expanded to 46 percent from 45 percent in the same period last year. Excluding merger-related expenses, the operating margin for the quarter would have been 56 percent.
Included in second-quarter 2007 results are $20.1 million in merger-related expenses. These expenses consist primarily of legal and advisory fees incurred in connection with CBOT’s merger with CME and the unsolicited proposal from IntercontinentalExchange, Inc.
Financial Highlights:
GAAP
| ($s in millions, except per share) |
Q2 FY07 | Q2 FY06 | Y/Y | YTD FY07 | YTD FY06 | Y/Y | ||||||||||||||||
| Revenues |
$ | 204 | $ | 154 | 33 | % | $ | 392 | $ | 294 | 33 | % | ||||||||||
| Expenses |
$ | 110 | $ | 85 | 29 | % | $ | 208 | $ | 170 | 23 | % | ||||||||||
| Operating Income |
$ | 95 | $ | 69 | 37 | % | $ | 184 | $ | 124 | 48 | % | ||||||||||
| Operating Margin % |
46.3 | % | 44.7 | % | 47.0 | % | 42.3 | % | ||||||||||||||
| Net Income |
$ | 58 | $ | 43 | 34 | % | $ | 114 | $ | 79 | 45 | % | ||||||||||
| Diluted EPS |
$ | 1.10 | $ | 0.82 | 34 | % | $ | 2.15 | $ | 1.49 | 44 | % | ||||||||||
Non-GAAP (excluding merger-related expenses)
| ($s in millions, except per share) |
Q2 FY07 | Q2 FY06 | Y/Y | YTD FY07 | YTD FY06 | Y/Y | ||||||||||||||||
| Revenues |
$ | 204 | $ | 154 | 33 | % | $ | 392 | $ | 294 | 33 | % | ||||||||||
| Expenses |
$ | 90 | $ | 85 | 5 | % | $ | 175 | $ | 170 | 3 | % | ||||||||||
| Operating Income |
$ | 115 | $ | 69 | 67 | % | $ | 217 | $ | 124 | 75 | % | ||||||||||
| Operating Margin % |
56.1 | % | 44.7 | % | 55.4 | % | 42.3 | % | ||||||||||||||
| Net Income |
$ | 72 | $ | 43 | 65 | % | $ | 140 | $ | 79 | 78 | % | ||||||||||
| Diluted EPS |
$ | 1.35 | $ | 0.82 | 65 | % | $ | 2.64 | $ | 1.49 | 77 | % | ||||||||||
NOTE: The non-GAAP financial measures of operating performance exclude merger-related expenses of $20.1 million for the second quarter 2007 and $33.1 million for the six months ended June 30, 2007. The CME merger-related expenses have been treated as non-deductible for tax purposes. Non-GAAP measures do not replace and are not a substitute for GAAP financial results but are provided to improve overall understanding of current financial performance.
Revenue growth for the quarter was primarily driven by higher exchange and clearing fees, which increased $52 million, or 45 percent. This growth was fueled by a 23 percent increase in total trading volume and a 17 percent increase in the average rate per contract in second-quarter 2007 compared with 2006.
8
CBOT achieved record trading volume for the second quarter with 256 million contracts traded, a 23 percent increase from the comparable prior year period. Average daily volume for the quarter reached a record 4.0 million contracts, up 21 percent compared with the same period last year. Additionally, electronic trading grew 41 percent to 3.1 million contracts per day in the second quarter of 2007 from 2.2 million contracts per day in the prior year’s second quarter.
The average rate per contract was $0.662 for the quarter compared with $0.564 in the second quarter of 2006. The rate increase resulted primarily from changes in trading fees implemented in 2006. The average rate per contract also benefited from increased electronic trading of agricultural contracts following the August 1, 2006, introduction of electronic trading of agricultural futures during daytime trading hours.
Total operating expenses for the second quarter were $110 million, up 29 percent over the prior year’s second quarter. Excluding merger-related expenses of $20.1 million for the quarter, operating expenses increased 5 percent compared with the prior-year period. Volume-based expenses were $26 million, up 20 percent, which is in line with the growth in trading volume. Baseline and other costs, or non-volume based expenses, were $84 million this quarter compared with $64 million in second-quarter 2006, a 32 percent increase. Excluding second-quarter 2007 merger-related expenses, non-volume based expenses were relatively flat compared with last year’s second quarter.
9
CBOT Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands)
| June 30, 2007 |
December 31, 2006 |
|||||||
| ASSETS |
||||||||
| Current Assets: |
||||||||
| Cash and cash equivalents: |
||||||||
| Unrestricted |
$ | 200,609 | $ | 177,664 | ||||
| Held under deposit and membership transfers |
11,219 | 1,503 | ||||||
| Total cash and cash equivalents |
211,828 | 179,167 | ||||||
| Restricted cash |
— | 975 | ||||||
| Short term investments |
372,615 | 312,411 | ||||||
| Accounts receivable, net of allowance |
90,922 | 62,451 | ||||||
| Deferred income taxes |
6,019 | — | ||||||
| Prepaid expenses |
12,160 | 9,492 | ||||||
| Total current assets |
693,544 | 564,496 | ||||||
| Property and Equipment: |
||||||||
| Land |
34,234 | 34,234 | ||||||
| Buildings and equipment |
329,560 | 343,271 | ||||||
| Furnishings and fixtures |
161,313 | 184,913 | ||||||
| Computer software and systems |
89,541 | 93,942 | ||||||
| Construction in progress |
2,158 | 1,906 | ||||||
| Total property and equipment |
616,806 | 658,266 | ||||||
| Less accumulated depreciation and amortization |
410,127 | 433,989 | ||||||
| Property and equipment, net |
206,679 | 224,277 | ||||||
| Other assets |
21,629 | 22,557 | ||||||
| Total Assets |
$ | 921,852 | $ | 811,330 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
| Current Liabilities: |
||||||||
| Accounts payable |
$ | 21,486 | $ | 11,149 | ||||
| Accrued clearing services |
20,459 | 16,226 | ||||||
| Accrued liabilities |
25,278 | 29,638 | ||||||
| Funds held for deposit and membership transfers |
11,219 | 1,562 | ||||||
| Current portion of long-term debt |
— | 10,716 | ||||||
| Income tax payable |
466 | 10,428 | ||||||
| Other current liabilities |
148 | 562 | ||||||
| Total current liabilities |
79,056 | 80,281 | ||||||
| Long-term Liabilities: |
||||||||
| Deferred income tax liabilities |
— | 2,984 | ||||||
| Other liabilities |
16,830 | 19,645 | ||||||
| Total long-term liabilities |
16,830 | 22,629 | ||||||
| Total Liabilities |
$ | 95,886 | $ | 102,910 | ||||
| Stockholders’ Equity: |
||||||||
| Common stock |
53 | 53 | ||||||
| Additional paid-in capital |
494,125 | 489,817 | ||||||
| Retained earnings |
339,085 | 226,961 | ||||||
| Accumulated other comprehensive income (loss) |
(7,297 | ) | (8,411 | ) | ||||
| Total stockholders’ equity |
825,966 | 708,420 | ||||||
| Total Liabilities and Stockholders’ Equity |
$ | 921,852 | $ | 811,330 | ||||
10
CBOT Holdings, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share amounts)
| Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
| Revenues |
||||||||||||||||
| Exchange fees |
$ | 132,800 | $ | 91,855 | $ | 250,480 | $ | 174,975 | ||||||||
| Clearing fees |
36,754 | 25,366 | 70,727 | 48,597 | ||||||||||||
| Market data |
24,176 | 26,286 | 49,258 | 49,929 | ||||||||||||
| Building |
6,188 | 5,910 | 12,103 | 11,415 | ||||||||||||
| Services |
3,869 | 4,299 | 8,103 | 8,535 | ||||||||||||
| Other |
638 | 407 | 1,491 | 758 | ||||||||||||
| Total Revenues |
204,425 | 154,123 | 392,162 | 294,209 | ||||||||||||
| Expenses |
||||||||||||||||
| Clearing services |
23,460 | 19,490 | 45,256 | 37,513 | ||||||||||||
| Contracted license fees |
2,214 | 1,914 | 4,333 | 3,652 | ||||||||||||
| Salaries and benefits |
18,450 | 19,028 | 38,937 | 38,130 | ||||||||||||
| Depreciation and amortization |
11,851 | 14,789 | 23,371 | 28,875 | ||||||||||||
| Professional services |
26,025 | 4,558 | 42,679 | 8,497 | ||||||||||||
| General and administrative expenses |
4,056 | 4,546 | 8,533 | 9,622 | ||||||||||||
| Building operating costs |
5,940 | 6,002 | 12,360 | 12,605 | ||||||||||||
| Information technology services |
11,357 | 11,885 | 23,129 | 24,115 | ||||||||||||
| Programs |
2,759 | 3,086 | 5,750 | 5,713 | ||||||||||||
| Severance and related costs |
3,718 | (22 | ) | 3,700 | 1,014 | |||||||||||
| Total Operating Expenses |
109,830 | 85,276 | 208,048 | 169,736 | ||||||||||||
| Income From Operations |
94,595 | 68,847 | 184,114 | 124,473 | ||||||||||||
| Non-Operating Income and Expense |
||||||||||||||||
| Interest income |
7,002 | 4,363 | 13,378 | 7,846 | ||||||||||||
| Interest expense |
(23 | ) | (388 | ) | (239 | ) | (973 | ) | ||||||||
| Total Non-Operating |
6,979 | 3,975 | 13,139 | 6,873 | ||||||||||||
| Income Before Income Taxes |
101,574 | 72,822 | 197,253 | 131,346 | ||||||||||||
| Income tax provision |
43,031 | 29,126 | 82,901 | 52,301 | ||||||||||||
| Income Before Equity in Unconsolidated Subsidiary |
58,543 | 43,696 | 114,352 | 79,045 | ||||||||||||
| Equity in loss of unconsolidated subsidiary, net of tax |
(267 | ) | (237 | ) | (685 | ) | (483 | ) | ||||||||
| Net Income |
$ | 58,276 | $ | 43,459 | $ | 113,667 | $ | 78,562 | ||||||||
| Earnings per Common Share: |
||||||||||||||||
| Basic |
$ | 1.10 | $ | 0.82 | $ | 2.15 | $ | 1.49 | ||||||||
| Diluted |
1.10 | 0.82 | 2.15 | 1.49 | ||||||||||||
| Weighted Average Number of Common Shares: |
||||||||||||||||
| Basic |
52,803 | 52,792 | 52,801 | 52,789 | ||||||||||||
| Diluted |
52,923 | 52,848 | 52,911 | 52,844 | ||||||||||||
Note: At December 31, 2006, the company changed the format of its income statement. The company reclassified interest income and interest expense from revenue and operating expense, respectively, to a non-operating income and expense section in the consolidated statements of income. Accordingly, prior period amounts have been reclassified to conform to current period presentation.
11
CBOT Holdings
| 2Q 2006 |
3Q 2006 |
4Q 2006 |
1Q 2007 |
2Q 2007 | |||||||||||
| Trading Days |
63 | 63 | 63 | 62 | 64 | ||||||||||
|
Average Daily Volume (Round Turns, in Thousands)
| |||||||||||||||
| 2Q 2006 |
3Q 2006 |
4Q 2006 |
1Q 2007 |
2Q 2007 | |||||||||||
| Interest Rates |
2,588 | 2,507 | 2,480 | 3,032 | 3,110 | ||||||||||
| Agriculture |
529 | 490 | 611 | 631 | 701 | ||||||||||
| Equity Index |
131 | 110 | 112 | 138 | 146 | ||||||||||
| Metals, Energy & Other |
54 | 56 | 65 | 65 | 42 | ||||||||||
| Total |
3,302 | 3,163 | 3,269 | 3,866 | 3,999 | ||||||||||
| Open-Auction |
990 | 850 | 813 | 733 | 734 | ||||||||||
| Electronic |
2,220 | 2,232 | 2,375 | 3,031 | 3,133 | ||||||||||
| Off-Exchange |
91 | 81 | 81 | 102 | 132 | ||||||||||
| Total |
3,302 | 3,163 | 3,269 | 3,866 | 3,999 | ||||||||||
|
Transaction Fees (in Thousands)
| |||||||||||||||
| 2Q 2006 |
3Q 2006 |
4Q 2006 |
1Q 2007 |
2Q 2007 | |||||||||||
| Interest Rates |
$ | 85,339 | $ | 89,673 | $ | 88,894 | $ | 103,697 | $ | 112,952 | |||||
| Agriculture |
22,664 | 24,378 | 35,821 | 37,818 | 47,192 | ||||||||||
| Equity Index |
5,859 | 5,416 | 5,677 | 6,815 | 7,385 | ||||||||||
| Metals, Energy & Other |
3,360 | 3,699 | 4,116 | 3,323 | 2,025 | ||||||||||
| Total |
$ | 117,221 | $ | 123,166 | $ | 134,509 | $ | 151,653 | $ | 169,554 | |||||
| Open-Auction |
$ | 32,136 | $ | 28,060 | $ | 26,730 | $ | 23,468 | $ | 25,053 | |||||
| Electronic |
70,341 | 79,000 | 91,570 | 110,345 | 122,108 | ||||||||||
| Off-Exchange |
14,745 | 16,106 | 16,209 | 17,840 | 22,393 | ||||||||||
| Total |
$ | 117,221 | $ | 123,166 | $ | 134,509 | $ | 151,653 | $ | 169,554 | |||||
|
Average Rate Per Contract (RPC)
| |||||||||||||||
| 2Q 2006 |
3Q 2006 |
4Q 2006 |
1Q 2007 |
2Q 2007 | |||||||||||
| Interest Rates |
$ | 0.523 | $ | 0.568 | $ | 0.569 | $ | 0.552 | $ | 0.567 | |||||
| Agriculture |
0.680 | 0.790 | 0.931 | 0.966 | 1.051 | ||||||||||
| Equity Index |
0.712 | 0.779 | 0.803 | 0.799 | 0.792 | ||||||||||
| Metals, Energy & Other |
0.986 | 1.048 | 1.001 | 0.822 | 0.758 | ||||||||||
| Total |
$ | 0.564 | $ | 0.618 | $ | 0.653 | $ | 0.633 | $ | 0.662 | |||||
| Open-Auction |
$ | 0.515 | $ | 0.524 | $ | 0.522 | $ | 0.516 | $ | 0.533 | |||||
| Electronic |
0.503 | 0.562 | 0.612 | 0.587 | 0.609 | ||||||||||
| Off-Exchange |
2.564 | 3.172 | 3.179 | 2.821 | 2.655 | ||||||||||
| Total |
$ | 0.564 | $ | 0.618 | $ | 0.653 | $ | 0.633 | $ | 0.662 | |||||
12