CME Group Inc. Q2 2008 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2008, for CME Group Inc., a global leader in financial derivatives trading. The results reflect the full impact of the July 2007 merger with CBOT Holdings and the March 2008 acquisition of Credit Market Analysis Limited (CMA). The company is currently in the process of acquiring NYMEX Holdings, with the transaction expected to close in the third quarter of 2008.
Key Financial Metrics
| Metric | Q2 2008 | Q2 2007 | YTD 2008 | YTD 2007 |
|---|---|---|---|---|
| Total Revenues | $563.2 million | $329.0 million | $1,188.3 million | $661.3 million |
| Net Income | $201.2 million | $125.9 million | $484.7 million | $255.9 million |
| Diluted EPS | $3.67 | $3.57 | $8.91 | $7.26 |
| Operating Margin | 61% | 58% | 62.4% | 59.4% |
| Cash Earnings (Non-GAAP) | N/A | N/A | $505.5 million | $260.5 million |
| Cash & Equivalents | $1.07 billion | N/A | N/A | N/A |
| Short-term Debt | $164.9 million | N/A | N/A | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 71% in Q2 and 80% year-to-date (YTD) compared to 2007. This growth is primarily driven by the inclusion of CBOT products and increased market volatility.
- Trading Volume: Aggregate average daily volume increased 12% in Q2 and 24% YTD. Electronic volume as a percentage of total volume rose to 82% in Q2.
- Expense Increases: Total expenses rose 61% in Q2 and 66% YTD. Significant drivers include amortization of purchased intangibles ($17.9M in Q2 vs. $0.3M in 2007) and higher compensation costs due to increased headcount.
- Non-Operating Items: Non-operating income turned to an expense of $9.9M in Q2 (vs. $17.2M income in 2007) due to a $13.1M unrealized loss on a derivative hedging the company's investment in BM&F and a decline in securities lending income following a program suspension in March 2008.
- Tax Rate: The effective tax rate decreased to 34.6% YTD from 39.8% in 2007, largely due to an Illinois tax law change reducing expenses by $38.6 million.
Guidance, Outlook, and Risks
- NYMEX Merger: CME Group expects to close the acquisition of NYMEX Holdings in Q3 2008. The deal involves approximately $3.4 billion in cash and 12.5 million shares. A $3.2 billion bridge financing commitment was secured in July 2008 to fund the transaction.
- Capital Return: The Board approved a $1.1 billion share repurchase program and intends to declare a special dividend of $5.00 per share following the NYMEX transaction closure. A regular quarterly dividend of $1.15 per share was declared for September 2008.
- Legal Contingencies:
- CBOE Litigation: A settlement in principle was reached regarding Exercise Right Privileges (ERPs). Class members may receive up to 18% of CBOE Holdings equity and $300 million in notes. CME has a guarantee liability of up to $293 million if the recovery is less than $250,000 per ERP.
- NYMEX Litigation: Several putative class actions have been filed challenging the NYMEX merger terms. CME intends to defend vigorously.
- Regulatory Risks: Potential legislation targeting speculative trading in commodity markets could impose limits or increase margins, potentially reducing trading volume and revenue.
Investor Verification Checklist
- Verify the closing timeline and regulatory approval status of the NYMEX Holdings merger.
- Monitor the final terms of the CBOE ERP settlement and the resulting cash outflow or equity receipt.
- Assess the impact of the suspended securities lending program on future non-operating income.
- Review the execution of the $1.1 billion share repurchase program and the timing of the special dividend.
- Track trading volume trends in equity and interest rate products as market volatility normalizes.