CME Group (Nasdaq: CME) today reported that total fourth-quarter GAAP revenues increased 31 percent to $692 million, and GAAP operating income increased 33 percent to $418 million.
The company has taken a pre-tax, non-cash impairment charge of $275 million on its cross-equity investment in BM&F Bovespa SA, due to the decline in BM&F Bovespa's current share price relative to original investment value. On a relative equity swap exchange basis, the economic value of CME Group's equity stake in BM&F Bovespa has actually increased since the effective date of the agreement. While management of the company has determined that an impairment charge is appropriate under GAAP standards, management believes BM&F Bovespa's stock price reflects current cyclical factors in the public company exchange sector and continues to present attractive long-term financial and strategic opportunities for CME Group. Additionally, CME Group and BM&F Bovespa are on track with the implementation of reciprocal order routing arrangements to facilitate increased customer transaction flow to their respective trading platforms.
As a result of the impairment charge, GAAP net income for the fourth quarter was $62 million and diluted earnings per share on a GAAP basis were $0.93. In conjunction with this charge, stockholders' equity was reduced by $94 million due to unfavorable movements in the Brazilian real compared with the U.S. dollar. Aside from the BM&F Bovespa impairment charge, the fourth- quarter GAAP results also include $17.5 million of merger-related items. The 2008 GAAP results reflect the operations of both Chicago Mercantile Exchange (CME) and Board of Trade of the City of Chicago (CBOT), as well as the results of New York Mercantile Exchange, Inc. (NYMEX) after August 22, 2008 when the acquisition closed.
Pro forma non-GAAP diluted earnings per share in the fourth quarter were $3.58, the same as the prior year period. All pro forma results reflect the operations of both CME Group Inc. and NYMEX, as if they were combined for all periods reported. Additionally, fourth-quarter 2008 pro forma non-GAAP results exclude the impairment charge related to BM&F Bovespa and the merger- related items listed above. Total revenues increased one percent to $692 million, and the combined average rate per contract increased to 86 cents, up from 75 cents in fourth quarter 2007, primarily due to an increased proportion of higher priced contracts. Pro forma total operating expenses decreased three percent to $258 million, compared with the same period last year. A higher rate per contract and continued focus on expense discipline helped the company reach fourth-quarter operating income of $433 million, an increase of three percent from $419 million for the year-ago period, and operating margin of 63 percent, compared with 61 percent for fourth-quarter 2007. Operating margin is defined as operating income as a percentage of total revenues. Pro forma net income increased one percent to $239 million for fourth-quarter 2008. Pro forma measures do not replace and are not a substitute for GAAP financial results. They are provided to improve overall understanding of current financial performance and to provide a meaningful comparison with prior periods. A full reconciliation of these fourth-quarter and full-year 2008 pro forma results is included with the attached financial statements.
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, and Swapstream products.
Full-year 2008 pro forma non-GAAP revenues increased 11 percent to $3.1 billion and operating income increased 20 percent to $2.0 billion compared with 2007. Pro forma operating margin grew to 65 percent in 2008, compared with 60 percent in 2007. Full-year pro forma net income and diluted earnings per share both increased 16 percent, compared with the prior year, to $1.1 billion and $16.17 respectively.
"CME Group's revenue growth at a time of global recession highlights the value of our product diversity -- which includes benchmark contracts in every asset class -- to address customer needs under a variety of market conditions," said CME Group Executive Chairman Terry Duffy. "Given the recent market dislocations, we see opportunities to reach out to non-traditional users of futures products, extend our technology and sales efforts globally and cross-sell our products. While we are aware of the challenges still facing financial markets, we also are confident that our long-term growth prospects are strong and we will continue to execute our strategy to build on the opportunities ahead."
"Despite the very challenging economic and financial market conditions in the fourth quarter, CME Group's overall performance compared favorably with other financial sector leaders," said CME Group Chief Executive Officer Craig Donohue. "We grew revenues, reduced expenses, and increased margins, while making significant progress and remaining on track with synergy achievement in our CBOT and NYMEX integrations. Although dislocations in credit and lending markets have significantly impacted our interest rate complex, our other product lines, especially equity indexes, showed solid volume growth. In addition, the volume of business done on our over-the-counter ClearPort platform increased dramatically as we further expanded the range of products we offer to OTC market participants. Looking forward, we will continue to focus on expense discipline while providing customers with the best ways to manage risk at a time of economic uncertainty."
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