CME

CME Group Inc. 10-Q Summary: Period Ended June 30, 2009

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 2009, for CME Group Inc., a global derivatives marketplace. The reporting period includes the consolidated results of CME, CBOT, and NYMEX (following the August 2008 merger). The company operates as a large accelerated filer. As of July 22, 2009, there were approximately 66.4 million shares of Class A common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 15% in Q2 and 9% for the six months compared to 2008. This growth was driven primarily by the inclusion of NYMEX products and services, which offset declines in CME and CBOT trading volumes.
• Trading Volume: Aggregate average daily volume decreased 15% in Q2 and 24% year-to-date compared to 2008. Significant declines were observed in interest rate products (down 27% in Q2) due to the global credit crisis and zero interest rate policies. However, NYMEX and CME ClearPort volumes provided incremental growth.
• Expense Increases: Operating expenses rose 13% in Q2 and 15% year-to-date. Key drivers included higher amortization of purchased intangibles ($30.5M in Q2 vs. $17.9M in 2008), increased compensation costs due to NYMEX integration, and higher licensing fees.
• Non-Operating Items: Non-operating expenses increased significantly due to higher interest costs from debt issuances in late 2008 and early 2009. Conversely, the company avoided the derivative losses on BM&F investments recorded in 2008.
• EPS Decline: Diluted EPS decreased 9% in Q2 and 29% year-to-date, primarily due to the increase in the weighted average number of shares outstanding following the NYMEX merger.

Guidance, Outlook, and Risks

• Outlook: Management expects lower interest rate trading volume to persist as long as the zero interest rate policy and credit crisis conditions remain. Fee structure changes announced in June 2009 are expected to harmonize fees but not materially change aggregate revenue.
• Capital Allocation: The company temporarily suspended its $1.1 billion share repurchase program in January 2009 to focus on debt reduction. Capital expenditures for 2009 are expected to range between $150 million and $160 million.
• Legal Proceedings: Two class action lawsuits regarding the NYMEX merger are pending in Delaware Court of Chancery; the company intends to defend vigorously. A settlement regarding CBOE exercise right privileges was approved by the court in July 2009, subject to a 30-day appeal period.
• Risks: Key risks include the ability to realize cost savings from the NYMEX integration, competition from new entrants, regulatory changes, and the impact of economic conditions on trading activity.

Investor Verification Checklist

• Volume Trends: Verify the sustainability of NYMEX volume growth against the continued decline in core CME/CBOT interest rate products.
• Debt Servicing: Confirm the impact of rising interest costs on future operating margins, given the increased debt load from the NYMEX acquisition.
• Intangible Amortization: Monitor the trajectory of amortization expenses related to NYMEX intangible assets, which significantly impacted 2009 earnings.
• Legal Exposure: Track the status of the NYMEX merger class action lawsuits and the final resolution of the CBOE exercise right privilege settlement.
• Share Count: Assess the dilutive impact of the NYMEX merger on future EPS growth relative to revenue expansion.