| • QUARTERLY REPORT ON FORM 10-Q • SECTION 302 CERTIFICATION • SECTION 302 CERTIFICATION • SECTION 906 CERTIFICATION • SECTION 906 CERTIFICATION • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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)
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):
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:
CBOE HOLDINGS, INC. INDEX
2 CERTAIN DEFINED TERMS Throughout this document, unless otherwise specified or the context so requires:
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:
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
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
See notes to condensed consolidated financial statements 6 CBOE Holdings, Inc. and Subsidiaries Condensed Consolidated Balance Sheets June 30, 2012 and December 31, 2011
See notes to condensed consolidated financial statements 7 CBOE Holdings, Inc. and Subsidiaries Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)
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
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:
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:
NOTE 6 — INVESTMENT IN AFFILIATES At June 30, 2012 and December 31, 2011, the investment in affiliates was composed of the following (in thousands):
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):
(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):
(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:
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.
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.
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.
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.
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.
The following provides the percentage of volume by product category for the three months ended June 30, 2012 and 2011.
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.
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.
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.
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.
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.
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.
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
The following provides the percentage of volume by product category for the six months ended June 30, 2012 and 2011.
Average revenue per contract The average revenue per contract was $0.297 for the six months ended June 30, 2012, an increase of 0.3% compared with $0.296 for the same period in 2011. The following summarizes average revenue per contract by product for the six months ended June 30, 2012 compared to the same period in 2011.
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||