CME Group Inc. Q1 2008 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2008. CME Group Inc. operates as a global derivatives marketplace following its July 2007 merger with CBOT Holdings. The reporting period includes the full impact of the CBOT merger and the acquisition of Credit Market Analysis Limited (CMA) on March 23, 2008. The company is currently pursuing a definitive agreement to acquire NYMEX Holdings, Inc.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Revenues | $625.1 million | $332.3 million |
| Net Income | $283.5 million | $130.0 million |
| Earnings Per Share (Diluted) | $5.25 | $3.69 |
| Operating Income | $398.7 million | $200.6 million |
| Operating Margin | 64% | 60% |
| Cash Earnings (Non-GAAP) | $298.5 million | $137.1 million |
| Cash and Cash Equivalents | $1.07 billion | $1.14 billion |
| Short-term Debt | $165.0 million | $164.4 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 88% year-over-year, driven primarily by the inclusion of CBOT products. Clearing and transaction fees rose 103% to $525.1 million, and quotation data fees increased 127% to $56.8 million.
- Expense Increases: Total operating expenses rose 72% to $226.4 million. Significant increases were seen in amortization of purchased intangibles ($16.2 million vs. $0.3 million) and compensation and benefits ($73.3 million vs. $56.4 million), largely due to the CBOT merger integration.
- Trading Volume: Aggregate average daily volume increased 37% for CME products and saw significant growth from CBOT products. Electronic volume as a percentage of total volume rose to 81% from 75%.
- Tax Rate: The effective tax rate decreased to 30.4% from 39.6%, primarily due to an Illinois tax law change resulting in a $38.6 million expense reduction.
Outlook, Risks, and Management Commentary
- NYMEX Merger: CME Group signed a definitive agreement to acquire NYMEX Holdings for approximately $3.4 billion in cash and 12.5 million shares of CME stock. The deal is expected to close in Q4 2008, subject to regulatory and shareholder approvals. The company anticipates incurring approximately $138 million in transaction costs.
- Legal Proceedings: Several putative class action lawsuits have been filed in Delaware Court of Chancery seeking to enjoin the NYMEX merger, alleging breaches of fiduciary duty. Additionally, ongoing litigation exists regarding CBOE exercise right privileges (ERPs), with a maximum potential aggregate payment guarantee of $293.0 million.
- Market Conditions: Management noted that increased market volatility, driven by sub-prime debt concerns and inflation, contributed to higher trading volumes. However, the average rate per contract decreased slightly (2%) due to a shift toward member trading and automated systems.
- Liquidity: The company maintains a $750 million revolving credit facility and a commercial paper program. Cash earnings of $298.5 million support the company's ability to fund the NYMEX acquisition and ongoing operations.
Investor Verification Checklist
- Verify the status of regulatory approvals for the NYMEX merger and potential delays.
- Monitor the outcome of the CBOE ERP litigation and the associated $293 million liability guarantee.
- Assess the impact of the planned sale of CBOT metals trading products to NYSE Euronext on future revenue streams.
- Review the integration progress of CBOT and CMA to ensure anticipated cost synergies are realized.
- Track the company's debt levels as it prepares to finance the cash portion of the NYMEX acquisition.