CME

CME Group Inc. Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. CME Group Inc. operates a global derivatives marketplace, including the Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), and New York Mercantile Exchange (NYMEX). The reporting period reflects the full integration of NYMEX Holdings, which merged into CME Group on August 22, 2008. Results are significantly impacted by the global credit crisis, which reduced trading volumes in interest rate and equity products, partially offset by the addition of NYMEX commodity products.

Key Financial Metrics

Note: Debt figures include short-term debt ($249.9M) and long-term debt ($2,848.2M) as of March 31, 2009.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 4% to $647.1 million, driven by NYMEX product contributions ($24.8M in data fees alone) and higher average rates per contract. This offset a 24% decline in total trading volume.
• Profit Decline: Net income fell 30% to $199.1 million. Diluted EPS dropped 43% to $3.00, primarily due to the issuance of 12.5 million shares in the NYMEX merger and higher interest expenses.
• Expense Increases: Operating expenses rose 15% to $260.7 million. Key drivers included a 105% increase in amortization of purchased intangibles ($33.3M vs $16.2M) and an 18% rise in compensation costs due to NYMEX integration.
• Non-Operating Items: Non-operating income swung from a $7.3M gain in 2008 to a $35.9M loss in 2009. This was caused by a sharp increase in interest and borrowing costs ($38.5M vs $2.3M) and a collapse in securities lending income due to market volatility.
• Trading Volume: Aggregate average daily volume decreased significantly. Interest rate volume dropped 51% (CME) and 56% (CBOT) due to the credit crisis and low interest rates. Equity volume declined 8% (CME) following the termination of the Russell license. NYMEX volume added 1.187 million contracts daily.

Outlook, Risks, and Management Commentary

• Market Conditions: Management attributes volume declines to the global credit crisis, risk aversion, and the Federal Reserve's zero interest rate policy. They expect lower interest rate volumes to persist in 2009.
• Debt Management: In February 2009, CME issued $750 million in 5.75% fixed-rate notes due in 2014 to repay commercial paper and terminate a revolving bridge facility. The company has temporarily suspended its $1.1 billion share repurchase program to focus on debt reduction.
• Restructuring: Ongoing restructuring related to the NYMEX merger is expected to be substantially complete by August 2009, with total estimated costs of $38.0 million.
• Legal Contingencies: Two class action lawsuits regarding the NYMEX merger are pending in Delaware Court of Chancery; management believes they are without merit. Additionally, a lawsuit regarding Exercise Right Privileges (ERP) with CBOE is awaiting a court ruling on a settlement.
• Equity Investments: The company holds a significant investment in BM&FBOVESPA S.A. (carrying value $262.9M). While unrealized losses exist, management determined they are not other-than-temporarily impaired as of March 31, 2009.

Investor Verification Checklist

• Volume Sustainability: Verify if the 24% decline in total trading volume stabilizes in Q2 2009, particularly in interest rate and equity products.
• Debt Servicing: Monitor the impact of rising interest expenses on future operating margins as the company shifts from commercial paper to fixed-rate long-term debt.
• NYMEX Integration: Assess whether the incremental revenue from NYMEX products continues to offset volume declines in legacy CME/CBOT products.
• Legal Resolution: Track the status of the NYMEX merger class action lawsuits and the CBOE ERP settlement for potential liability impacts.
• Share Repurchase Status: Confirm if the suspended share buyback program will resume once debt reduction targets are met.