XNAS:CBOE CBOE Holdings Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2012
OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No.  001-34774
CBOE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
20-5446972
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
400 South LaSalle Street 
Chicago, Illinois
 
60605
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code
(312) 786-5600

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes S   No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S   No  £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer S
 
Accelerated filer £
 
 
 
Non-accelerated filer £
 
Smaller reporting company £
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes £   No  S
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
Class
 
July 31, 2012
Unrestricted Common Stock, par value $0.01
 
  87,271,635 shares
 




CBOE HOLDINGS, INC.
INDEX

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





2


CERTAIN DEFINED TERMS
 
Throughout this document, unless otherwise specified or the context so requires:
"CBOE Holdings" refers to CBOE Holdings, Inc. and its subsidiaries after the completion of the restructuring transaction, which occurred on June 18, 2010.
"CBOE" or the "Exchange" refers to (1) prior to the completion of the restructuring transaction, Chicago Board Options Exchange, Incorporated, a Delaware non-stock corporation, and (2) after the completion of the restructuring transaction, Chicago Board Options Exchange, Incorporated, a Delaware stock corporation. CBOE became a wholly-owned subsidiary of CBOE Holdings, Inc. on June 18, 2010.
"C2" refers to C2 Options Exchange, Incorporated, which became a wholly-owned subsidiary of CBOE Holdings, Inc. on June 18, 2010.
"CFE" refers to CBOE Futures Exchange, LLC, which became a wholly-owned subsidiary of CBOE Holdings, Inc. on June 18, 2010.
"CFTC" refers to the U.S. Commodity Futures Trading Commission.
"FASB" refers to the Financial Accounting Standards Board.
"GAAP" refers to Generally Accepted Accounting Principles in the United States.
"Member" or "Members" refers to, prior to the completion of the restructuring transaction, any person or organization (or any designee of any organization) that held a membership in the CBOE.
"OPRA" refers to the Options Price Reporting Authority.
"Our exchanges" refers to CBOE, C2 and CFE.
The "restructuring transaction" refers to the transaction on June 18, 2010 in which CBOE converted from a Delaware non-stock corporation owned by its Members to a Delaware stock corporation and a wholly-owned subsidiary of CBOE Holdings.
"SEC" refers to the U.S. Securities and Exchange Commission.
"SPX" refers to our a.m. settled S&P 500 exchange traded option.
"We," "us," "our" or "the Company" refers to (1) prior to the completion of the restructuring transaction, CBOE, and, as the context may require, its wholly-owned subsidiaries including CBOE Holdings, and (2) after the completion of the restructuring transaction, CBOE Holdings and its wholly-owned subsidiaries.
"VIX" refers to the CBOE Volatility Index methodology.
References to "options" or "options contracts" in the text of this document refer to exchange-traded options and references to "futures" refer to futures contracts or options on futures.



3


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and uncertainties. You can identify these statements by forward-looking words such as "may," "might," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," and the negative of these terms and other comparable terminology. All statements that reflect our expectations, assumptions or projections about the future other than statements of historical fact are forward-looking statements, including statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations." These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from that expressed or implied by the forward-looking statements. In particular, you should consider the risks and uncertainties described under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, Part II, Item 1A of this Quarterly Report on Form 10-Q and our other filings with the SEC.
 
While we believe we have identified material risks, these risks and uncertainties are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Some factors that could cause actual results to differ include:
the loss of our right to exclusively list certain premium products;
decreases in the amount of trading volumes or a shift in the mix of products traded on our exchanges;
compliance with legal and regulatory obligations;
increasing competition by foreign and domestic entities, including increased competition from new entrants into our markets and consolidation of existing entities;
increasing price competition;
our ability to maintain access fee revenues;
economic, political and market conditions;
our ability to operate our business without violating the intellectual property rights of others and the costs associated with protecting our intellectual property rights;
our ability to accommodate trading volume and order transaction traffic, including increases in trading volume and order transaction traffic, without failure or degradation of performance of our systems;
our ability to protect our systems and communication networks from security risks, including cyber attacks;
our ability to attract and retain skilled management and other personnel;
our ability to maintain our growth effectively;
our dependence on third party service providers; and
the ability of our compliance and risk management methods to effectively monitor and manage our risks.

For a detailed discussion of these and other factors that might affect our performance, see Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, Part II, Item 1A of this Quarterly Report on Form 10-Q and our other filings with the SEC. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this filing.


4


PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

CBOE Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 2012 and 2011

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands, except per share amounts)
 
2012
 
2011
 
2012
 
2011
 
 
(unaudited)
Operating Revenues:
 
 
 
 
 
 
 
 
Transaction fees
 
$
94,885

 
$
86,240

 
$
179,719

 
$
176,179

Access fees
 
16,162

 
17,041

 
32,142

 
34,646

Exchange services and other fees
 
7,851

 
4,276

 
15,300

 
8,966

Market data fees
 
6,376

 
4,836

 
12,749

 
9,938

Regulatory fees
 
4,080

 
4,770

 
8,776

 
9,728

Other revenue
 
3,195

 
3,127

 
5,255

 
4,875

Total Operating Revenues
 
132,549

 
120,290

 
253,941

 
244,332

Operating Expenses:
 
 
 
 
 
 
 
 
Employee costs
 
25,300

 
24,504

 
50,590

 
50,240

Depreciation and amortization
 
8,320

 
8,996

 
16,640

 
17,692

Data processing
 
4,927

 
4,905

 
9,826

 
9,333

Outside services
 
9,265

 
7,190

 
16,435

 
13,769

Royalty fees
 
12,001

 
10,373

 
23,192

 
21,519

Trading volume incentives
 
1,176

 
2,515

 
3,825

 
8,274

Travel and promotional expenses
 
3,303

 
2,368

 
5,469

 
4,053

Facilities costs
 
1,226

 
1,400

 
2,529

 
2,892

Other expenses
 
962

 
1,587

 
1,950

 
2,573

Total Operating Expenses
 
66,480

 
63,838

 
130,456

 
130,345

Operating Income
 
66,069

 
56,452

 
123,485

 
113,987

Other Income/(Expense):
 
 
 
 
 
 
 
 
Investment income
 
26

 
61

 
48

 
103

Net loss from investment in affiliates
 
(437
)
 

 
(914
)
 
(460
)
Interest and other borrowing costs
 

 
(223
)
 

 
(448
)
Total Other Income/(Expense)
 
(411
)
 
(162
)
 
(866
)
 
(805
)
Income Before Income Taxes
 
65,658

 
56,290

 
122,619

 
113,182

Income tax provision
 
27,162

 
22,889

 
50,706

 
46,910

Net Income
 
38,496

 
33,401

 
71,913

 
66,272

Net income allocated to participating securities
 
(593
)
 
(792
)
 
(1,146
)
 
(1,571
)
Net Income Allocated to Common Stockholders
 
$
37,903

 
$
32,609

 
$
70,767

 
$
64,701

Net Income Per Share Allocated to Common Stockholders (Note 4):
 
 
 
 
 
 
 
 
Basic
 
$
0.44

 
$
0.36

 
$
0.81

 
$
0.72

Diluted
 
0.44

 
0.36

 
0.81

 
0.72

Weighted average shares used in computing income per share:
 
 
 
 
 
 
 
 
Basic
 
87,153

 
90,164

 
87,649

 
90,124

Diluted
 
87,153

 
90,164

 
87,649

 
90,124

 
 
 
 
 
 
 
 
 

See notes to condensed consolidated financial statements

5



CBOE Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
Three and Six Months Ended June 30, 2012 and 2011



 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
2012
 
2011
 
2012
 
2011
 
 
(unaudited)
Net Income
 
$
38,496

 
$
33,401

 
$
71,913

 
$
66,272

 
 
 
 
 
 
 
 
 
Comprehensive Income (Loss) - net of tax:
 
 
 
 
 
 
 
 
Post retirement benefit obligation
 
14

 
13

 
(23
)
 
47

 
 
 
 
 
 
 
 
 
Comprehensive Income
 
38,510

 
33,414

 
71,890

 
66,319

Comprehensive income allocated to participating securities
 
(593
)
 
(792
)
 
(1,146
)
 
(1,571
)
Comprehensive Income allocated to common stockholders
 
$
37,917

 
$
32,622

 
$
70,744

 
$
64,748


See notes to condensed consolidated financial statements




6


CBOE Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2012 and December 31, 2011
(in thousands, except share amounts)
 
June 30,
2012
 
December 31,
2011
 
 
(unaudited)
Assets
 
 

 
 

Current Assets:
 
 

 
 

Cash and cash equivalents
 
$
127,137

 
$
134,936

Accounts receivable—net allowances of $329 and $304
 
48,429

 
37,578

Marketing fee receivable
 
7,527

 
5,195

Income taxes receivable
 
8,987

 
6,756

Other prepaid expenses
 
9,139

 
4,152

Other current assets
 
728

 
1,065

Total Current Assets
 
201,947

 
189,682

Investments in Affiliates
 
14,212

 
14,305

Land
 
4,914

 
4,914

Property and Equipment:
 
 
 
 

Construction in progress
 
7,878

 
1,264

Building
 
60,917

 
60,917

Furniture and equipment
 
256,771

 
252,905

Less accumulated depreciation and amortization
 
(246,310
)
 
(238,288
)
Total Property and Equipment—Net
 
79,256

 
76,798

Other Assets:
 
 

 
 

Software development work in progress
 
10,364

 
6,168

Data processing software and other assets (less accumulated amortization of $127,901 and $121,173)
 
33,113

 
36,001

Total Other Assets—Net
 
43,477

 
42,169

Total
 
$
343,806

 
$
327,868

Liabilities and Stockholders’ Equity
 
 

 
 

Current Liabilities:
 
 

 
 

Accounts payable and accrued expenses
 
$
38,375

 
$
46,071

Marketing fee payable
 
8,117

 
5,765

Deferred revenue and other liabilities
 
17,365

 
351

Post-retirement medical benefits
 
51

 
100

Total Current Liabilities
 
63,908

 
52,287

Long-term Liabilities:
 
 

 
 

Post-retirement medical benefits
 
1,861

 
1,781

Income taxes payable
 
14,335

 
12,185

Other long-term liabilities
 
3,990

 
3,906

Deferred income taxes
 
19,805

 
21,439

Total Long-term Liabilities
 
39,991

 
39,311

Commitments and Contingencies
 


 


Total Liabilities
 
103,899

 
91,598

Stockholders’ Equity:
 
 

 
 

Preferred stock, $0.01 par value: 20,000,000 shares authorized, no shares issued and outstanding at June 30, 2012 and December 31, 2011
 

 

Unrestricted common stock, $0.01 par value: 325,000,000 shares authorized; 91,270,199 issued and 87,271,635 outstanding at June 30, 2012; 90,781,222 issued and 88,768,885 outstanding at December 31, 2011
 
913

 
908

Additional paid-in-capital
 
61,430

 
55,469

Retained earnings
 
282,686

 
232,121

Treasury stock at cost – 3,998,564 shares at June 30, 2012 and 2,012,337 shares at December 31, 2011
 
(104,200
)
 
(51,329
)
Accumulated other comprehensive loss
 
(922
)
 
(899
)
Total Stockholders’ Equity
 
239,907

 
236,270

Total
 
$
343,806

 
$
327,868

 See notes to condensed consolidated financial statements

7


CBOE Holdings, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)

(in thousands)
 
Preferred
Stock
 
Unrestricted
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
Balance—January 1, 2012
 
$

 
$
908

 
$
55,469

 
$
232,121

 
$
(51,329
)
 
$
(899
)
 
$
236,270

Cash dividends on common stock
 
 
 
 
 
 
 
(21,348
)
 
 
 
 
 
(21,348
)
Stock based compensation
 
 
 
 
 
5,966

 
 
 
 
 
 
 
5,966

Issuance of vested restricted stock granted to employees
 
 
 
5

 
(5
)
 
 
 
 
 
 
 

Purchase of unrestricted stock from employees
 
 
 
 
 
 
 
 
 
(3,127
)
 
 
 
(3,127
)
Purchase of unrestricted common stock under announced program
 
 
 
 
 
 
 
 
 
(49,744
)
 
 
 
(49,744
)
Net income
 
 
 
 
 
 
 
71,913

 
 
 
 
 
71,913

Post-retirement benefit obligation adjustment—net of tax expense of $2
 
 
 
 
 
 
 
 
 
 
 
(23
)
 
(23
)
Balance—June 30, 2012
 
$

 
$
913

 
$
61,430

 
$
282,686

 
$
(104,200
)
 
$
(922
)
 
$
239,907

 
See notes to condensed consolidated financial statements
 
 


8


CBOE Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2012 and 2011
 
 
Six Months Ended
(in thousands)
 
June 30, 2012
 
June 30, 2011
 
 
(unaudited)
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
71,913

 
$
66,272

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
16,640

 
17,692

Other amortization
 
44

 
45

Provision for deferred income taxes
 
(1,661
)
 
1,202

Stock-based compensation
 
5,966

 
6,632

Loss on disposition of property
 

 
729

Loss on investment of affiliate
 
914

 

Impairment of investment in affiliate
 

 
460

Change in assets and liabilities:
 
 
 
 
Accounts receivable
 
(10,851
)
 
(8,055
)
Marketing fee receivable
 
(2,332
)
 
564

Income taxes receivable
 
(2,231
)
 
(3,899
)
Prepaid expenses
 
(4,987
)
 
(3,218
)
Other current assets
 
337

 
(21
)
Accounts payable and accrued expenses
 
(8,609
)
 
(5,997
)
Marketing fee payable
 
2,352

 
(584
)
Deferred revenue and other liabilities
 
17,098

 
20,173

Post-retirement benefit obligations
 
(9
)
 
(2
)
Income taxes payable
 
2,150

 
571

Net Cash Flows provided by Operating Activities
 
86,734

 
92,564

Cash Flows from Investing Activities:
 
 
 
 
Capital and other assets expenditures
 
(19,492
)
 
(18,334
)
Investment in affiliates
 
(822
)
 

Other
 

 
57

Net Cash Flows used in Investing Activities
 
(20,314
)
 
(18,277
)
Cash Flows from Financing Activities:
 
 
 
 
Payment of quarterly dividends
 
(21,348
)
 
(18,456
)
Purchase of unrestricted stock from employees
 
(3,127
)
 
(3,075
)
Purchase of unrestricted common stock under announced program
 
(49,744
)
 

Net Cash Flows used in Financing Activities
 
(74,219
)
 
(21,531
)
Net Increase in Cash and Cash Equivalents
 
(7,799
)
 
52,756

Cash and Cash Equivalents at Beginning of Period
 
134,936

 
53,789

Cash and Cash Equivalents at End of Period
 
$
127,137

 
$
106,545

Supplemental Disclosure of Cash Flow Information
 
 
 
 
Cash paid for income taxes
 
$
52,473

 
$
49,037

Non-cash activities:
 
 
 
 
Unpaid liability to acquire equipment and software
 
2,451

 
1,114

 
 
 
 
 

See notes to condensed consolidated financial statements

9


CBOE HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three and six months ended June 30, 2012 and 2011
(unaudited)

NOTE 1 —DESCRIPTION OF BUSINESS

CBOE Holdings is the holding company of registered securities exchanges, subject to oversight by the SEC, and of a designated contract market subject to the oversight of the CFTC.
 
The primary business of the Company is the operation of markets for the trading of listed options contracts on three broad product categories: 1) the stocks of individual corporations (equity options), 2) various market indexes (index options) and 3) other exchange-traded products such as exchange-traded funds (ETF options) and exchange-traded notes (ETN options). We also offer futures and options on futures products through a futures market. The Company owns and operates three stand-alone exchanges, but reports the results of its operations in one reporting segment. CBOE is our largest exchange by volume and offers trading for listed options through a single system that integrates electronic trading and traditional open outcry trading on our trading floor in Chicago. This integration of electronic trading and traditional open outcry trading into a single market is known as our Hybrid trading model. C2 our all-electronic exchange also offers trading for listed options, but with a different market model and fee schedule than CBOE. Finally, CFE, our all-electronic futures exchange, offers futures and options on futures on the CBOE Volatility Index (the VIX Index), as well as on other products. All of our exchanges operate on our proprietary technology platform known as CBOE Command.

NOTE 2 — BASIS OF PRESENTATION

These interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of operating revenues and expenses. On an ongoing basis, the Company evaluates its estimates, including those related to matters that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These estimates are based on management’s knowledge and judgments, historical experience and observance of trends in particular matters. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows at the dates and for the periods presented have been included. The results of operations for interim periods are not necessarily indicative of the results of operations for the full year.

NOTE 3 — SHARE REPURCHASE PROGRAM

On August 2, 2011, the Company announced that its Board of Directors had approved a share repurchase program that authorizes the Company to purchase up to $100.0 million of its unrestricted common stock. The program permits the Company to purchase shares through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. It does not obligate the Company to make any repurchases at any specific time or situation.

From August 2011 through June 30, 2012, the Company purchased 3,707,424 shares of unrestricted common stock at an average cost per share of $26.09 totaling $96.7 million in purchases under the program (See Note 14 - Subsequent Events).
  
For the six months ended June 30, 2012, the Company purchased 1,871,424 shares of unrestricted common stock at an average cost per share of $26.58 totaling $49.7 million in purchases under the program.

NOTE 4 — NET INCOME PER COMMON SHARE
The unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and are included in the computation of net income per common share

10


pursuant to the two-class method. Our restricted stock awards granted to officers, directors and employees qualify as participating securities.
The Company computes net income per common share using the two-class method, which is an allocation formula that determines the net income for common shares and participating securities. Under the authoritative guidance, the presentation of basic and diluted earnings per share is required for each class of common stock and not for participating securities. As such, the Company presents basic and diluted net income per share for its one class of common stock.
 The computation of basic net income allocated to common stockholders is calculated by reducing net income for the period by dividends paid or declared and undistributed net income for the period that are allocated to the participating securities to arrive at net income allocated to common stockholders. Net income allocated to common stockholders is divided by the weighted average number of common shares outstanding during the period to determine basic net income per common share.

The dilutive effect of participating securities is calculated using the more dilutive of the treasury stock or the two-class method. Diluted net income per common share is calculated by dividing net income allocated to common stockholders by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.
 
The following table reconciles net income allocated to common stockholders and the number of shares used to calculate the basic and diluted net income per common share for the three and six months ended June 30, 2012 and 2011:

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands, except per share amounts)
 
2012
 
2011
 
2012
 
2011
Basic EPS Numerator:
 
 
 
 
 
 
 
 
Net Income
 
$
38,496

 
$
33,401

 
$
71,913

 
$
66,272

Less: Earnings allocated to participating securities
 
(593
)
 
(792
)
 
(1,146
)
 
(1,571
)
Net Income allocated to common stockholders
 
$
37,903

 
$
32,609

 
$
70,767

 
$
64,701

Basic EPS Denominator:
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
87,153

 
90,164

 
87,649

 
90,124

Basic net income per common share
 
$
0.44

 
$
0.36

 
$
0.81

 
$
0.72

 
 
 
 
 
 
 
 
 
Diluted EPS Numerator:
 
 
 
 
 
 
 
 
Net Income
 
$
38,496

 
$
33,401

 
$
71,913

 
$
66,272

Less: Earnings allocated to participating securities
 
(593
)
 
(792
)
 
(1,146
)
 
(1,571
)
Net Income allocated to common stockholders
 
$
37,903

 
$
32,609

 
$
70,767

 
$
64,701

Diluted EPS Denominator:
 
 
 
 
 
 
 
 
Weighted average shares outstanding
 
87,153

 
90,164

 
87,649

 
90,124

Dilutive common shares issued under restricted stock program
 

 

 

 

Diluted net income per common share
 
$
0.44

 
$
0.36

 
$
0.81

 
$
0.72


NOTE 5 — STOCK-BASED COMPENSATION

Stock-based compensation is based on the fair value of the award on the date of grant, which is recognized over the related service period, net of estimated forfeitures. The service period is the period over which the related service is performed, which is generally the same as the vesting period.
 
On June 14, 2012, the Company granted 38,990 shares of restricted stock to non-employee members of the board of directors at a fair value of $27.33 per share, which is equal to the closing price of the Company's stock on the grant date. The shares have a one year vesting period and vesting accelerates upon the occurrence of a change in control of the Company. Unvested portions of the restricted stock will be forfeited if the member leaves the board prior to the applicable vesting date, except in limited circumstances.

For the three and six months ended June 30, 2012 and 2011, the Company recognized $3.0 million and $3.2 million

11


and $6.0 million and $6.6 million of stock-based compensation expense, respectively. The six months ended June 30, 2012 and 2011 includes accelerated stock-based compensation expense of $0.2 million and $0.5 million, respectively, resulting from departures of members of the board of directors. Stock-based compensation expense is included in employee costs in the condensed consolidated statements of income.

As of June 30, 2012, the Company had unrecognized stock-based compensation of $23.7 million.  The remaining unrecognized stock-based compensation is expected to be recognized over a weighted average period of 23.0 months. The Company is projecting a forfeiture rate of 5%.

The activity in the Company’s restricted stock for the six months ended June 30, 2012 was as follows:

 
 
 
Number of Shares
of Restricted
Stock
 
Weighted Average
Grant-Date Fair
Value
 
Unvested restricted stock at January 1, 2012
 
1,252,239

 
$
29.00

 
Granted
 
38,990

 
27.33

 
Vested
 
(411,279
)
 
29.00

 
Forfeited
 
(44,675
)
 
29.00

 
Unvested restricted stock at June 30, 2012
 
835,275

 
$
28.92


NOTE 6 — INVESTMENT IN AFFILIATES

At June 30, 2012 and December 31, 2011, the investment in affiliates was composed of the following (in thousands):

 
 
 
June 30,
2012
 
December 31,
2011
 
Investment in OCC
 
$
333

 
$
333

 
Investment in Signal Trading Systems, LLC
 
11,379

 
11,472

 
Investment in IPXI Holdings, LLC
 
2,500

 
2,500

 
Investments in Affiliates
 
$
14,212

 
$
14,305


NOTE 7 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES

At June 30, 2012 and December 31, 2011, accounts payable and accrued expenses consisted of the following (in thousands):

 
 
 
June 30,
2012
 
December 31,
2011
 
Compensation and benefit-related liabilities
 
$
10,492

 
$
18,349

 
Royalties
 
10,610

 
10,795

 
Facilities
 
1,919

 
2,229

 
Legal
 
2,170

 
962

 
Accounts payable
 
3,665

 
1,877

 
Purchase of unrestricted common stock (1)
 

 
2,018

 
Linkage
 
1,460

 
1,653

 
Other
 
8,059

 
8,188

 
Total
 
$
38,375

 
$
46,071


(1) Reflects shares purchased at the end of the period that are not settled until three days after the trade occurs.


NOTE 8 — MARKETING FEE

CBOE facilitates the collection and payment of marketing fees assessed on certain trades taking place at CBOE. Funds

12


resulting from the marketing fees are made available to Designated Primary Market Makers and Preferred Market Makers as an economic inducement to route orders to CBOE. Pursuant to ASC 605-45, Revenue Recognition—Principal Agent Considerations, the Company reflects the assessments and payments on a net basis, with no impact on revenues or expenses.

As of June 30, 2012 and December 31, 2011, amounts assessed by the Company on behalf of others included in current assets totaled $7.5 million and $5.2 million, respectively, and payments due to others included in current liabilities totaled $8.1 million and $5.8 million, respectively.

NOTE 9 — DEFERRED REVENUE

The following table summarizes the activity in deferred revenue for the six months ended June 30, 2012 (in thousands):

 
 
Balance at 
December 31, 
2011
 
Cash 
Additions
 
Revenue 
Recognition
 
Balance at 
June 30, 2012
Other – net
 
$
351

 
$
2,639

 
$
(1,927
)
 
$
1,063

Liquidity provider sliding scale (1)
 

 
29,759

 
(13,457
)
 
16,302

Total deferred revenue
 
$
351

 
$
32,398

 
$
(15,384
)
 
$
17,365

(1)  Liquidity providers who prepay transaction fees, at a minimum, for the first two levels of the liquidity provider sliding scale are eligible to participate in reduced fees assessed to contract volume above 800,000 per month. The prepayment of 2012 transaction fees totaled $29.8 million. This amount is amortized and recorded as transaction fees over the respective period.

NOTE 10 — EMPLOYEE BENEFITS

Employees are eligible to participate in the Chicago Board Options Exchange SMART Plan (“SMART Plan”). The SMART Plan is a defined contribution plan, which is qualified under Internal Revenue Code Section 401(k). The Company contributed $2.0 million and $1.9 million for the six months ended June 30, 2012 and 2011, respectively.

Eligible employees may participate in the Supplemental Employee Retirement Plan (“SERP”), Executive Retirement Plan (“ERP”) and Deferred Compensation Plan. The SERP, ERP and Deferred Compensation Plan are defined contribution plans that are nonqualified by Internal Revenue Code regulations. The Company contributed $0.7 million and $0.6 million to the above plans for the six months ended June 30, 2012 and 2011, respectively.

The Company has a postretirement medical plan for certain current and former members of senior management. The Company recorded immaterial postretirement benefits expense for the three and six months ended June 30, 2012 and 2011.

NOTE 11 — INCOME TAXES

For the three and six months ended June 30, 2012 and 2011, the Company recorded income tax provisions of $27.2 million and $22.9 million and $50.7 million and $46.9 million, respectively. The effective tax rate for the six months ended June 30, 2012 and 2011 was 41.4%. Although the effective tax rate is the same for both periods, the effective tax rate for the six months ended June 30, 2012 reflects the impact of an increase of an uncertain tax position partially offset by a reduction in the statutory apportionment rates assigned to the Company by the State of Illinois.

As of June 30, 2012 and December 31, 2011, the Company had $13.3 million and $11.4 million, respectively, of uncertain tax positions excluding interest and penalties, which, if recognized in the future, would affect the annual effective income tax rate. Reductions to uncertain tax positions primarily from the lapse of the applicable statutes of limitations during the next twelve months are estimated to be approximately $1.5 million, not including any potential new additions.

Estimated interest costs and penalties, which are classified as part of the provision for income taxes in the Company’s condensed consolidated statements of income, were $0.2 million for the three months ended June 30, 2012 and 2011 and $0.3 million for the six months ended June 30, 2012 and 2011. Accrued interest and penalties were $1.1 million and $0.8 million as of June 30, 2012 and December 31, 2011.

The Company is subject to U.S. federal tax, Illinois, New Jersey and New York state taxes and Washington D.C. taxes, as well as other local jurisdictions. The Company’s tax returns have been examined by the Internal Revenue Service through

13


2009 and the Illinois Department of Revenue through 2008. For New Jersey and Washington D.C., the open years are 2008 and forward. The Company is currently under audit by the Internal Revenue Service for 2010, the State of New York for the 2007-2009 tax years and the State of Illinois for the 2009 and 2010 tax years.

NOTE 12 — FAIR VALUE MEASUREMENTS

Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the Company’s own credit risk.
 
The Company applied FASB ASC 820, Fair Value Measurement and Disclosure (formerly, FASB Statement No. 157, Fair Value Measurements), which provides guidance for using fair value to measure assets and liabilities by defining fair value and establishing the framework for measuring fair value. ASC 820 applies to financial and nonfinancial instruments that are measured and reported on a fair value basis. The three-level hierarchy of fair value measurements is based on whether the inputs to those measurements are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The fair-value hierarchy requires the use of observable market data when available and consists of the following levels:
 
Level 1—Unadjusted inputs based on quoted markets for identical assets or liabilities.
 
Level 2—Observable inputs, either direct or indirect, not including Level 1, corroborated by market data or based upon quoted prices in non-active markets.

Level 3—Unobservable inputs that reflect management’s best assumptions of what market participants would use in valuing the asset or liability.
 
The Company has included a tabular disclosure for financial assets that are measured at fair value on a recurring basis in the condensed consolidated balance sheet as of June 30, 2012 and December 31, 2011. The Company holds no financial liabilities that are measured at fair value on a recurring basis.
(amounts in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets at fair value:
 
 

 
 

 
 

 
 

Money market funds
 
$
120,000

 
$

 
$

 
$
120,000

Total assets at fair value at June 30, 2012
 
$
120,000

 
$

 
$

 
$
120,000

 
(amounts in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets at fair value:
 
 

 
 

 
 

 
 

Money market funds
 
$
126,000

 
$

 
$

 
$
126,000

Total assets at fair value at December 31, 2011
 
$
126,000

 
$

 
$

 
$
126,000


In March 2011, the Company revalued its investment in NSX Holdings, Inc. as a result of an other-than-temporary impairment resulting in a full impairment totaling $0.5 million, which represented the carrying value of the investment. The investment was classified as level 3 as the fair value was based on both observable and unobservable inputs.

In December 2011, the Company, through DerivaTech Corporation, a wholly-owned subsidiary, acquired a 6.25% interest in IPXI Holdings, LLC ("IPXI") for $2.5 million. The Company contributed cash of $1.3 million and has accrued a liability of $1.2 million, which based on the achievement of certain deliverables, will become due in December 2012 and will increase the Company's share of IPXI to 10.0%. The investment, measured at fair value on a non-recurring basis, is classified as level 3 as the fair value was based on both observable and unobservable inputs.






14



NOTE 13 — LEGAL PROCEEDINGS

As of June 30, 2012, the end of the period covered by this report, the Company was subject to the various legal proceedings and claims discussed below, as well as certain other legal proceedings and claims that have not been fully resolved and that have arisen in the ordinary course of business.

The Company reviews its legal proceedings and claims, regulatory reviews and inspections and other legal proceedings on an ongoing basis and follows appropriate accounting guidance when making accrual and disclosure decisions. The Company establishes accruals for those contingencies where the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for our financial statements to not be misleading. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. The Company's assessment of whether a loss is reasonably possible or probable is based on its assessment of the ultimate outcome of the matter following all appeals.

Estimates of probable losses resulting from patent litigation involving the Company are inherently difficult to make, particularly when the Company's view of the case is significantly different than that expressed by the plaintiff. The Company has not recorded a liability related to damages in connection with these matters.

As of June 30, 2012, the Company does not think that there is a reasonable possibility that any material loss exceeding the amounts already recognized for these reviews, inspections or other legal proceedings, if any, has been incurred. While the consequences of certain unresolved proceedings are not presently determinable, the outcome of any litigation is inherently uncertain and an adverse outcome from certain matters could have a material effect on our earnings in any given reporting period. However, in the opinion of management, the ultimate liability is not expected to have a material effect on our financial position, liquidity or capital resources.

Index Options Litigation
On May 25, 2012, the Illinois Appellate Court (the "Appellate Court") affirmed the ruling of the Circuit Court of Cook County, Illinois granting CBOE, The McGraw-Hill Companies, Inc and CME Group Index Services, LLC summary judgment against International Securities Exchange ("ISE") and its parent company. The summary judgment motion enjoined ISE from listing or providing an exchange trading market for options on the S&P 500 Index or the Dow Jones Industrial Average and OCC from listing and clearing options on such ISE options. ISE has asked for leave to appeal this decision.
Patent Litigation
ISE
On May 7, 2012, the U.S. Court of Appeals for the Federal Circuit (the “Federal Circuit”) issued a decision on the appeal by ISE of the U.S. District Court in the Northern District of Illinois's (the “District Court”) ruling granting summary judgment to CBOE based on non-infringement of ISE's U.S. Patent No. 6,618,707. In its decision, the Federal Circuit affirmed-in-part and vacated-in-part the ruling of the District Court and remanded the case to the District Court for further proceedings based on the Federal Circuit's construction of terms found in the asserted patent claims.
Realtime
On August 6, 2012, the Company and Realtime Data, LLC entered into a settlement agreement, the terms of which are confidential, under which the parties agreed to file a stipulation of dismissal of the matter and in connection with which the Company recorded an immaterial charge. Based on the terms of the settlement agreement, the Company has determined that this litigation is not currently a material legal proceeding. Accordingly, the Company does not intend to make disclosures about this proceeding in its future periodic filings.

NOTE 14 — SUBSEQUENT EVENTS

On July 31, 2012, CBOE Holdings' Board of Directors authorized the Company to repurchase an additional $100.0 million of its outstanding unrestricted common stock. This program will be in addition to any unused amount remaining under the August 2011 authorization.

Additionally, the Company announced that its board of directors declared a quarterly cash dividend of $0.15 per share. The dividend is payable September 21, 2012 to stockholders of record at the close of business on August 31, 2012.

15


CBOE HOLDINGS, INC. AND SUBSIDIARIES

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, included in Item 1 in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, and as contained in that report, the information under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This discussion contains forward-looking information.  Please see “Forward-Looking Statements” and Part II, Item 1A, “Risk Factors” for a discussion of the uncertainties, risks and assumptions associated with these statements.

RESULTS OF OPERATIONS

Three months ended June 30, 2012 compared to the three months ended June 30, 2011

Overview

The following summarizes changes in financial performance for the three months ended June 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
(in millions, except per share amounts)
 
 
Total operating revenues
 
$
132.6

 
$
120.3

 
$
12.3

 
10.2
%
Total operating expenses
 
66.5

 
63.8

 
2.7

 
4.2
%
Operating income
 
66.1

 
56.5

 
9.6

 
17.0
%
Total other income/(expense)
 
(0.4
)
 
(0.2
)
 
(0.2
)
 
100.0
%
Income before income taxes
 
65.7

 
56.3

 
9.4

 
16.7
%
Income tax provision
 
27.2

 
22.9

 
4.3

 
18.8
%
Net income
 
$
38.5

 
$
33.4

 
$
5.1

 
15.3
%
Net income allocated to common stockholders
 
$
37.9

 
$
32.6

 
$
5.3

 
16.3
%
Operating income percentage
 
49.8
%
 
46.9
%
 
 
 
 
Net income percentage
 
29.0
%
 
27.8
%
 
 
 
 
Diluted net income per share allocated to common stockholders
 
$
0.44

 
$
0.36

 
 
 
 

The Company’s market share of total exchange traded options contracts was 29.0% for the three months ended June 30, 2012 compared with 26.0% for the same period in 2011.

Total operating revenues increased due to higher transaction fees, exchange services and other fees and market data fees, partially offset by lower access fees and regulatory fees.

Total operating expenses increased primarily due to higher employee costs, outside services, royalty fees and travel and promotional expenses, partially offset by decreases in depreciation and amortization and trading volume incentives.
    
    
 







16


Operating Revenues

Total operating revenues for the three months ended June 30, 2012 were $132.6 million, an increase of $12.3 million, or 10.2%, compared with the same period in 2011. The following summarizes changes in total operating revenues for the three months ended June 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
 
 
(in millions)
 
 
 
 
Transaction fees
 
$
94.9

 
$
86.3

 
$
8.6

 
10.0
 %
Access fees
 
16.1

 
17.0

 
(0.9
)
 
(5.3
)%
Exchange services and other fees
 
7.9

 
4.3

 
3.6

 
83.7
 %
Market data fees
 
6.4

 
4.8

 
1.6

 
33.3
 %
Regulatory fees
 
4.1

 
4.8

 
(0.7
)
 
(14.6
)%
Other revenue
 
3.2

 
3.1

 
0.1

 
3.2
 %
Total operating revenues
 
$
132.6

 
$
120.3

 
$
12.3

 
10.2
 %

Transaction Fees

Transaction fees increased 10.0% to $94.9 million for the three months ended June 30, 2012, compared with $86.3 million for the same period in 2011. This increase was due to increases of 8.0% and 1.9% in total trading volume and average revenue per contract, respectively. Transaction fees accounted for 71.6% and 71.7% of total operating revenues for the first three months of 2012 and 2011, respectively.
 
Our share of total exchange traded options contracts increased to 29.0% from 26.0% in the prior year period, while overall trading volume in the industry decreased. We believe the market share increase is primarily attributable to the fee changes implemented at the beginning of 2012.

Overall trading volume is impacted by many factors which may or may not be in our control. These factors include: political and world events, market volatility, regulatory actions or considerations, availability of capital, competition, trading patterns or strategies, number of trading days in the period and seasonality.
 
Average revenue per contract, discussed in detail below, is impacted by our fee structure which includes volume based incentive programs, mix of products traded and the percentage of trading volume executed by customers as compared to professionals, market-makers, clearing trading permit holders and broker-dealers. The implementation of fee changes, which may increase or decrease our average revenue per contract, is primarily to ensure that we are competitive in the options marketplace and to ultimately improve and continue to drive order flow to our exchanges. We cannot predict the trading patterns of exchange participants but we can continue to price our products at levels that are competitive in our markets.

The following summarizes transaction fees by product for the three months ended June 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
 
 
(in millions)
 
 
 
 
Equities
 
$
15.6

 
$
20.6

 
$
(5.0
)
 
(24.3
)%
Indexes
 
53.4

 
44.1

 
9.3

 
21.1
 %
Exchange-traded funds
 
16.4

 
17.1

 
(0.7
)
 
(4.1
)%
Total options transaction fees
 
85.4

 
81.8

 
3.6

 
4.4
 %
Futures
 
9.5

 
4.5

 
5.0

 
111.1
 %
Total transaction fees
 
$
94.9

 
$
86.3

 
$
8.6

 
10.0
 %



17


Trading Volume

Our average daily trading volume for the three months ended June 30, 2012 was 4.80 million contracts, up 8.0% compared with 4.45 million for the same period in 2011. The Company experienced volume increases among all product categories. The 12.4% increase in indexes was primarily driven by higher volume in SPX and VIX options. The 3.7% and 7.6% increases in equities and exchange-traded funds were primarily driven by the fee changes implemented in 2012. The Company continued to experience significant growth in futures primarily driven by futures contracts on the VIX Index. Total trading days for the three months ended June 30, 2012 and 2011 were sixty-three.

The following summarizes changes in total trading volume and average daily trading volume ("ADV") by product for the three months ended June 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Volume
Percent Change
 
ADV 
Percent Change
 
 
Volume
 
ADV
 
Volume
 
ADV
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
Equities
 
126.5

 
2.01

 
122.0
 
1.94

 
3.7
%
 
3.7
%
Indexes
 
78.9

 
1.25

 
70.2
 
1.11

 
12.4
%
 
12.4
%
Exchange-traded funds
 
91.4

 
1.45

 
84.9
 
1.35

 
7.6
%
 
7.6
%
Total options contracts
 
296.8

 
4.71

 
277.1
 
4.40

 
7.1
%
 
7.1
%
Futures contracts
 
5.9

 
0.09

 
3.1
 
0.05

 
92.7
%
 
92.7
%
Total contracts
 
302.7

 
4.80

 
280.2
 
4.45

 
8.0
%
 
8.0
%

The following provides the percentage of volume by product category for the three months ended June 30, 2012 and 2011.

 
 
2012
 
2011
 
Equities
 
41.8
%
 
43.5
%
 
Indexes
 
26.1
%
 
25.1
%
 
Exchange-traded funds
 
30.2
%
 
30.3
%
 
Futures
 
1.9
%
 
1.1
%
 
Total
 
100.0
%
 
100.0
%
 

Average revenue per contract

The average revenue per contract was $0.314 for the three months ended June 30, 2012, an increase of 1.9% compared with $0.308 for the same period in 2011. Average revenue per contract represents transaction fees divided by total contracts cleared.

The following summarizes average revenue per contract by product for the three months ended June 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Percent
Change
Equities
 
$
0.123

 
$
0.169

 
(27.2
)%
Indexes
 
0.677

 
0.627

 
8.0
 %
Exchange-traded funds
 
0.180

 
0.202

 
(10.9
)%
Total options average revenue per contract
 
0.288

 
0.295

 
(2.4
)%
Futures
 
1.607

 
1.477

 
8.8
 %
Total average revenue per contract
 
$
0.314

 
$
0.308

 
1.9
 %


18


There were a number of factors that contributed to the increase in total average revenue per contract for the three months ended June 30, 2012 compared to the same period in 2011, including our rate structure and product mix.
Rate structure - Our rate structure includes sliding scales, volume discounts and limits on fees as part of our effort to increase liquidity and market share in both multiply-listed options products and, to a lesser extent, on our proprietary products. In general, the transaction fee changes implemented in 2012 increased the average revenue per contract on index options and futures and decreased the average revenue per contract on multiply-listed options products (equities and exchange-traded funds). We expect this trend to continue for the remainder of 2012. One of the fee changes implemented in 2012 contributing to the decrease in multiply-listed products average revenue per contract was the Volume Incentive Program ("VIP"). The VIP provides credits to firms for qualifying customer contracts in multiply-listed options in excess of certain thresholds.

Product mix - The increase in the percentage of trades executed in index options and futures in the current year quarter compared to the year ago quarter had a positive impact on average revenue per contract.

At June 30, 2012, there were approximately one hundred five clearing firms, two of which cleared a combined 45% of our billings collected through the OCC for the three months ended June 30, 2012. The next largest clearing firm accounted for approximately 5% of our billings collected through the OCC. No one customer affiliated with either of the top two clearing firms represented more than 18% of the billings collected for the three months ended June 30, 2012 or 2011. Should a clearing firm withdraw, we believe the affiliated customer portion of that firm’s trading activity would likely transfer to another clearing firm.
 
The two largest clearing firms mentioned above clear the majority of the market-maker sides of transactions at CBOE, C2 and at all of the U.S. options exchanges. If either of these firms were to withdraw from the business of market-maker clearing, and market-makers were unable to make new clearing arrangements, this could create significant disruption to the U.S. options markets, including ours.

Access Fees

Access fees for the three months ended June 30, 2012 and 2011 were $16.1 million and $17.0 million, respectively, representing 12.2% and 14.2% of total operating revenues, respectively. The decrease in access fees was primarily due to fee adjustments for market-maker trading permits, which lowered the fee for both monthly trading permits and pricing under the market-maker trading permit sliding scale in the current year period. Market-makers that commit to a minimum number of trading permits for the calendar year qualify for a discounted monthly rate.

The demand for trading permits could be impacted by seasonality and market fluctuations that affect trading volume.

Exchange Services and Other Fees

Exchange services and other fees for the three months ended June 30, 2012 increased 83.7% to $7.9 million from $4.3 million for the same period in 2011. The increase was primarily due to pricing increases for services such as connectivity to CBOE Command through network access ports and client application services.

Market Data Fees

Market data fees increased 33.3% for the three months ended June 30, 2012 to $6.4 million from $4.8 million for the same period in 2011. Market data fees represent income derived from OPRA as well as the Company’s market data services. OPRA and Company market data services for the three months ended June 30, 2012 and 2011, were $4.0 million and $2.4 million and $3.1 million and $1.7 million, respectively. OPRA income is allocated through OPRA based on each exchange's share of total options transactions cleared. The Company’s share of OPRA income for the three months ended June 30, 2012 increased to 24.4% from 21.7% for the same period in 2011. The increase in the Company's share of total options transactions resulted primarily from higher volume driven by the fee changes implemented in 2012.

Regulatory Fees

Regulatory fees decreased 14.6% for the three months ended June 30, 2012 to $4.1 million from $4.8 million for the same period in 2011. The Company's regulatory fees are primarily based on the number of customer contracts traded throughout the listed United States options industry. The decrease in regulatory fees was primarily due to lower customer volume industry wide as compared to the same period in 2011.

19



CBOE increased its, and C2 implemented an, options regulatory fee rate effective August 1, 2012. Accordingly, if volume in customer contracts remains at the current year levels, the Company expects regulatory fees to increase for the balance of 2012. Under the rules of each of our options exchanges, as required by the SEC, any revenue derived from the regulatory fees and fines cannot be used for non-regulatory purposes.

Operating Expenses

Total operating expenses increased $2.7 million, or 4.2%, to $66.5 million for the three months ended June 30, 2012 from $63.8 million for the same period in 2011. This increase was primarily due to higher employee costs, outside services, royalty fees and travel and promotional expenses, partially offset by lower depreciation and amortization and trading volume incentives. As a percentage of operating revenues for the three months ended June 30, 2012 and 2011, operating expenses were 50.2% and 53.2%, respectively.

The following summarizes changes in operating expenses for the three months ended June 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
 
 
(in millions)
 
 
 
 
Employee costs
 
$
25.3

 
$
24.5

 
$
0.8

 
3.3
 %
Depreciation and amortization
 
8.3

 
9.0

 
(0.7
)
 
(7.8
)%
Data processing
 
4.9

 
4.9

 

 
 %
Outside services
 
9.3

 
7.2

 
2.1

 
29.2
 %
Royalty fees
 
12.0

 
10.4

 
1.6

 
15.4
 %
Trading volume incentives
 
1.2

 
2.5

 
(1.3
)
 
(52.0
)%
Travel and promotional expenses
 
3.3

 
2.3

 
1.0

 
43.5
 %
Facilities costs
 
1.2

 
1.4

 
(0.2
)
 
(14.3
)%
Other expenses
 
1.0

 
1.6

 
(0.6
)
 
(37.5
)%
Total operating expenses
 
$
66.5

 
$
63.8

 
$
2.7

 
4.2
 %

Employee Costs

For the three months ended June 30, 2012, employee costs were $25.3 million, or 19.1% of total operating revenues, compared with $24.5 million, or 20.4% of total operating revenues, for the same period in 2011. This represented an increase of $0.8 million, or 3.3%. The increase was primarily attributed to higher salary expenses of $0.4 million due to an increase in headcount and an increase in self-insurance medical expenses of $0.6 million. The Company expects salary expenses to continue trending higher for the remainder of 2012 resulting from the hiring of additional staff, primarily for regulatory functions.

Depreciation and Amortization

Depreciation and amortization decreased by $0.7 million to $8.3 million for the three months ended June 30, 2012 compared with $9.0 million for the same period in 2011. Depreciation and amortization charges represented 6.3% and 7.5% of total operating revenues for the three months ended June 30, 2012 and 2011, respectively.

Outside Services

Expenses related to outside services increased to $9.3 million for the three months ended June 30, 2012 from $7.2 million in the prior-year period and represented 7.0% and 6.0% of total operating revenues for the three months ended June 30, 2012 and 2011, respectively. The $2.1 million increase primarily resulted from higher expenses for contract programmers, patent litigation and the Company's review of regulatory compliance.




20


Royalty Fees

Royalty fees for the three months ended June 30, 2012 were $12.0 million compared with $10.4 million for the same period in 2011, an increase of $1.6 million resulting from higher trading volume in licensed index products. Royalty fees represented 9.1% and 8.6% of total operating revenues for the three months ended June 30, 2012 and 2011, respectively.

Trading Volume Incentives

Trading volume incentives decreased by $1.3 million to $1.2 million for the three months ended June 30, 2012 compared to $2.5 million for the same period in 2011. The decrease was primarily due to a modification in the criteria for contracts qualifying for certain quantity-based fee waivers and an adjustment to the fees paid by the Company for transactions linked to away exchanges.

Travel and Promotional Expenses

Travel and promotional expenses for the three months ended June 30, 2012 and 2011 were $3.3 million and $2.3 million, respectively. The increase was primarily due to higher advertising expenses.

Operating Income

As a result of the items above, operating income for the three months ended June 30, 2012 was $66.1 million compared to $56.5 million for the same period in 2011, an increase of $9.6 million.

Income before Income Taxes

Income before income taxes for the three months ended June 30, 2012 was $65.7 million compared to $56.3 million for the same period in 2011, an increase of $9.4 million.

Income Tax Provision

For the three months ended June 30, 2012, the income tax provision was $27.2 million compared to $22.9 million for the same period in 2011. The effective tax rate was 41.4% and 40.7% for the three months ended June 30, 2012 and 2011, respectively. The higher effective rate reflects the impact of an increase of an uncertain tax position partially offset by a reduction in the statutory apportionment rates assigned to the Company by the State of Illinois.

Net Income

As a result of the items above, net income allocated to common stockholders for the three months ended June 30, 2012 was $37.9 million compared to $32.6 million for the same period in 2011, an increase of $5.3 million. Basic and diluted net income per share allocated to common stockholders were $0.44 and $0.36 for the three months ended June 30, 2012 and 2011, respectively.



















21



Six months ended June 30, 2012 compared to the six months ended June 30, 2011

Overview

The following summarizes changes in financial performance for the six months ended June 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
(in millions, except per share amounts)
 
 
Total operating revenues
 
$
253.9

 
$
244.3

 
$
9.6

 
3.9
%
Total operating expenses
 
130.4

 
130.3

 
0.1

 
0.1
%
Operating income
 
123.5

 
114.0

 
9.5

 
8.3
%
Total other income/(expense)
 
(0.9
)
 
(0.8
)
 
(0.1
)
 
12.5
%
Income before income taxes
 
122.6

 
113.2

 
9.4

 
8.3
%
Income tax provision
 
50.7

 
46.9

 
3.8

 
8.1
%
Net income
 
$
71.9

 
$
66.3

 
$
5.6

 
8.4
%
Net income allocated to common stockholders
 
$
70.8

 
$
64.7

 
$
6.1

 
9.4
%
Operating income percentage
 
48.6
%
 
46.7
%
 
 
 
 
Net income percentage
 
28.3
%
 
27.1
%
 
 
 
 
Diluted net income per share allocated to common stockholders
 
$
0.81

 
$
0.72

 
 
 
 


The Company’s market share of total exchange traded options contracts was 28.6% for the six months ended June 30, 2012 compared with 26.6% for the same period in 2011. We believe the market share increase is primarily attributable to the fees changes implemented at the beginning of 2012.

Total operating revenues increased due to higher transaction fees, exchange services and other fees and market data fees, partially offset by lower access fees and regulatory fees.

Total operating expenses increased primarily due to higher outside services, royalty fees and travel and promotional expenses, substantially offset by decreases in depreciation and amortization and trading volume incentives.

Significant events in the six months ended June 30, 2012
    
In 2012, the Company implemented several changes to its fee schedule to promote trading in various products. Adjustments were made to liquidity provider sliding scales, effectively decreasing per contract fees on multiply-listed options products and increasing per contract fees on proprietary products. For Clearing Trading Permit Holders that are proprietary firms, a single, fixed transaction fee for non-paired orders in products other than our proprietary option products was established. And, in an effort to increase our market share, we implemented VIP to reward firms who execute qualifying electronic, public customer, multiply-listed volume at CBOE in excess of certain thresholds, with a graduated schedule for higher tiers.

In addition to transaction fee changes, we also adjusted our access fees and our exchange services and other fees for Trading Permit Holders that utilize our telecommunications networks and communications services, including co-location in our data center.






22


Operating Revenues

Total operating revenues for the six months ended June 30, 2012 were $253.9 million, an increase of $9.6 million, or 3.9%, compared with the same period in 2011. The following summarizes changes in total operating revenues for the six months ended June 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
 
 
(in millions)
 
 
 
 
Transaction fees
 
$
179.7

 
$
176.2

 
$
3.5

 
2.0
 %
Access fees
 
32.1

 
34.6

 
(2.5
)
 
(7.2
)%
Exchange services and other fees
 
15.3

 
9.0

 
6.3

 
70.0
 %
Market data fees
 
12.7

 
9.9

 
2.8

 
28.3
 %
Regulatory fees
 
8.8

 
9.7

 
(0.9
)
 
(9.3
)%
Other revenue
 
5.3

 
4.9

 
0.4

 
8.2
 %
Total operating revenues
 
$
253.9

 
$
244.3

 
$
9.6

 
3.9
 %
 
 
 
 
 
 
 
 
 

Transaction Fees

Transaction fees increased 2.0% to $179.7 million for the six months ended June 30, 2012, compared with $176.2 million for the same period in 2011. This increase was largely due to a 1.7% increase in total trading volume coupled with a 0.3% increase in average revenue per contract. Transaction fees accounted for 70.8% and 72.1% of total operating revenues for the first six months of 2012 and 2011, respectively.
  
The following summarizes transaction fees by product for the six months ended June 30, 2012 compared to the same period in 2011.

 
 
2012
 
2011
 
Inc./(Dec.)
 
Percent
Change
 
 
 
 
(in millions)
 
 
 
 
Equities
 
$
31.5

 
$
46.4

 
$
(14.9
)
 
(32.1
)%
Indexes
 
101.3

 
88.0

 
13.3

 
15.1
 %
Exchange-traded funds
 
30.4

 
33.3

 
(2.9
)
 
(8.7
)%
Total options transaction fees
 
163.2

 
167.7

 
(4.5
)
 
(2.7
)%
Futures
 
16.5

 
8.5

 
8.0

 
94.1
 %
Total transaction fees
 
$
179.7

 
$
176.2

 
$
3.5

 
2.0
 %
 
 
 
 
 
 
 
 
 

Trading Volume

Our average daily trading volume for the six months ended June 30, 2012 was 4.84 million contracts, up 1.7% compared with 4.76 million for the same period in 2011. The Company continued to experience significant growth in index and options futures primarily driven by futures contracts on the VIX Index. Total trading days for the six months ended June 30, 2012 and 2011 were one hundred twenty-five.

The following summarizes changes in total trading volume and ADV by product for the six months ended June 30, 2012 compared to the same period in 2011.


23


 
 
2012
 
2011
 
Volume
Percent Change
 
ADV
Percent Change
 
 
Volume
 
ADV
 
Volume
 
ADV
 
 
 
 
 
 
(in millions)
 
 
 
 
 
 
Equities
 
270.3

 
2.16

 
283.4

 
2.27

 
(4.6
)%
 
(4.6
)%
Indexes
 
151.7

 
1.21

 
142.9

 
1.14

 
6.1
 %
 
6.1
 %
Exchange-traded funds
 
173.3

 
1.39

 
163.2

 
1.31

 
6.2
 %
 
6.2
 %
Total options contracts
 
595.3

 
4.76

 
589.5

 
4.72

 
1.0
 %
 
1.0
 %
Futures contracts
 
10.0

 
0.08

 
5.7

 
0.04

 
76.0
 %
 
76.0
 %
Total contracts
 
605.3

 
4.84

 
595.2

 
4.76

 
1.7
 %
 
1.7
 %
 
 
 
 
 
 
 
 
 
 
 
 
 

The following provides the percentage of volume by product category for the six months ended June 30, 2012 and 2011.

 
 
2012
 
2011
 
Equities
 
44.7
%
 
47.6
%
 
Indexes
 
25.1
%
 
24.0
%
 
Exchange-traded funds
 
28.6
%
 
27.4
%
 
Futures