Due largely to significant growth in demand for its interest rate and equity index products, Chicago Mercantile Exchange Inc. (CME) reported strong growth in revenues and earnings for the third quarter and first nine months of 2001.
For the quarter ended Sept. 30, 2001, revenues increased 106 percent to $101.9 million, compared with $49.5 million for the third quarter of 2000. Revenues, reduced by securities lending interest expense, improved 93 percent to $95.3 million. This interest expense was incurred to generate additional interest income through a securities lending program which began in June 2001.
Net income for the third quarter of this year was $17.6 million, or 60 cents per diluted Class A equivalent share, versus a loss of $3.7 million, or a loss of 13 cents per diluted Class A share, for the year-earlier period.
"During the third quarter, average daily trading volume rose 145 percent in our interest rate products and 78 percent in our equity index products compared to the third quarter of 2000 - with increases in our other product areas as well," said Chairman Scott Gordon. "CME's volume growth is related to the uncertainty that market participants feel about the economy, interest rates and the performance of U.S. stocks. In this environment, we are seeing greater demand for our risk management products and services."
As of the end of August, CME already had exceeded its previous annual trading volume record set in 2000. CME reported its highest volume month ever in September, with more than 40 million contracts changing hands. Through the end of September 2001, CME traded 295.5 million contracts, up 73 percent from the number traded in the first nine months of 2000.
"Our average daily electronic trading volume climbed 142 percent during the third quarter, to more than 322,000 contracts a day, due in part to expanded direct electronic access to products traded on our GLOBEX ® 2 electronic trading system and enhanced GLOBEX2 capabilities," said President and Chief Executive Officer Jim McNulty. "By executing our business plan, we have delivered top-line revenue growth with small increases in expenses. Our third quarter operating margin was 31 percent, compared with a negative 12 percent for the third quarter of last year."
For the third quarter of 2001, clearing and transaction fees increased 125 percent to $72.7 million, compared with $32.3 million for the third quarter of 2000. Quotation fees from the sale of market data rose 33 percent to $12.0 million for the third quarter of 2001, versus $9.0 million for the same quarter a year ago.
Third quarter 2001 expenses were $65.7 million, an increase of $10.1 million from $55.6 million for the year-earlier period. Salaries and benefits had the largest dollar impact on the increase. The category totaled $28.1 million for the third quarter of 2001, versus $22.3 million for the third quarter of 2000, primarily due to increased compensation, a discretionary annual bonus accrual and pension expenses. In addition, CME incurred a one-time expense of $1.0 million by establishing the Chicago Mercantile Exchange Foundation in response to the terrorist attacks on Sept. 11. The foundation is distributing donations from CME, its shareholders and employees to various agencies and charities offering relief and support to the victims and their families.
CME had an income tax provision of $12.1 million for the third quarter of 2001, compared with a tax benefit (due to operating losses) of $2.4 million for the same period of 2000.
Nine-Month Results
For the first nine months of this year, revenues increased 81 percent to $289.3 million from $159.4 million for the same period last year. When reduced for securities lending interest expense, revenues for the first nine months of 2001 rose 77 percent to $282.2 million. Clearing and transaction fees improved 96 percent to $211.9 million for the first nine months of 2001 from $108.0 million a year ago, benefiting from a 73 percent increase in total trading volume and a new fee structure introduced in early 2001. Quotation data fees climbed 30 percent to $35.8 million for the first three quarters of 2001.
Total operating expenses were $195.7 million for the first nine months of 2001, up $19.8 million from $175.9 million for the year-earlier period. Much of the increase was due to the improving value of CME's Class B shares, which affected a noncash charge for stock-based compensation expense. Stock-based compensation expense increased to $11.1 million for the first nine months of 2001 from $2.1 million for the same period a year ago. Excluding this category, expenses for the first nine months of 2001 would have been $184.6 million, an increase of 6 percent from $173.8 million. CME's largest expense category, salaries and benefits, increased 10 percent to $78.3 million for the first ninemonths of 2001. The company reported an income tax provision of $34.7 million for 2001 to date, versus a tax benefit of $7.1 million for the same period of 2000. The effective tax rate was about 40 percent for both periods.
CME reported net income of $51.8 million, or $1.78 per diluted Class A equivalent share, for the first nine months of 2001, compared with a net loss of $10.6 million, or a loss of 37 cents per diluted Class A equivalent share, for the first nine months of 2000.* Excluding the impact of noncash stock-based compensation expense, CME's net income for the first three quarters of 2001 would have been $58.5 million, versus a loss of $9.3 million for the same period a year ago.
CME's working capital position increased to $127.4 million at Sept. 30, 2001, compared with $69.1 million at Dec. 31, 2000.
Chicago Mercantile Exchange Inc. (www.cme.com) is an international marketplace that brings together buyers and sellers on its trading floors and GLOBEX2 around-the-clock electronic trading system. CME offers futures contracts and options on futures primarily in four product areas: interest rates, stock indexes, foreign exchange and commodities. On Nov. 13, 2000, CME finalized its transformation into a for-profit, shareholder-owned corporation as it became the first U.S. financial exchange to demutualize by converting its membership interests into shares of common stock that can trade separately from exchange trading privileges. The exchange moves about $1.5 billion per day in settlement payments and manages $28.4 billion in collateral deposits.
