10-QPeriod: Q3 FY2007

CME GROUP INC. Quarterly Report for Q3 Ended Sep 30, 2007

Filed November 8, 2007For Securities:CME

Summary

CME Group Inc. reported strong financial performance for the third quarter and the first nine months of 2007, largely driven by the significant merger with CBOT Holdings completed in July 2007. Total revenues more than doubled in the third quarter and increased by 52% year-to-date, primarily due to a substantial rise in clearing and transaction fees, boosted by the combined entity's trading volumes and increased market volatility. While total expenses also increased significantly due to integration costs, employee compensation, and amortization of acquired intangibles, the company managed to improve its operating margin. Key financial highlights include a substantial increase in net income and earnings per share, reflecting the successful integration and operational synergies expected from the merger.

Key Highlights

  • 1Total revenues surged by 106% in Q3 2007 and 52% year-to-date, driven by the merger with CBOT Holdings and increased market volatility.
  • 2Clearing and transaction fees saw a significant increase, more than doubling in Q3 and rising 53% year-to-date, reflecting higher trading volumes from the combined entity.
  • 3Operating income grew substantially, with the operating margin improving to 61% in Q3 2007 from 57% in the prior year's quarter.
  • 4Net income for the nine months ended September 30, 2007, increased by approximately 57% to $457.5 million from $304.7 million in the prior year.
  • 5The company repurchased approximately 1.7 million shares of Class A common stock for about $950.6 million as part of a tender offer.
  • 6Significant intangible assets were recognized as a result of the CBOT merger, totaling $9.7 billion, primarily related to trading products and clearing firm relationships.
  • 7Cash earnings, a key performance metric for the company, increased by 53% to $468.9 million for the first nine months of 2007.

Frequently Asked Questions

The primary driver was the successful completion and integration of the merger with CBOT Holdings on July 12, 2007. This merger significantly expanded CME Group's product offerings and market reach, leading to substantial increases in revenue and trading volume.

The merger significantly boosted total revenues, particularly clearing and transaction fees, due to the combined trading volumes. However, it also led to a notable increase in expenses, driven by merger-related costs, integration efforts (including compensation and benefits), and the amortization of newly acquired intangible assets.

These represent the accounting treatment of the CBOT acquisition. 'Intangible assets' include items like trading products, customer relationships, and trade names acquired from CBOT, valued at $9.7 billion. 'Goodwill' of $5.0 billion represents the excess of the purchase price over the fair value of the identifiable net assets acquired, reflecting the strategic value of the acquisition.

This relates to a potential liability arising from the merger. Eligible CBOT members holding CBOE exercise right privileges had options related to a lawsuit involving CBOE. The company provided a guarantee, resulting in a recorded liability of $25.3 million as of September 30, 2007, which is subject to future adjustments based on the resolution of the CBOE lawsuit. This led to a non-operating expense of $28.5 million in the quarter.