10-Q 1 ndaq-20130630x10q.htm 10-Q 7f8494d2b9c9475

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June  30, 2013

 

OR

 

¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to           

  

Commission file number: 000-32651

 

The NASDAQ OMX Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Delaware

52-1165937

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

One Liberty Plaza, New York, New York

10006

(Address of Principal Executive Offices)

(Zip Code)

 

+1 212 401 8700

(Registrant’s telephone number, including area code)

 

No changes

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨ 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

 

 

 

 

 

Large accelerated filer

x

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨  (Do not check if a smaller reporting company)

Smaller reporting company

¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

 

Class

 

Outstanding at July 31, 2013

 

Common Stock, $.01 par value per share

167,332,704 shares

 

 

 

 

 

 


 

The NASDAQ OMX Group, Inc.

Form 10-Q

For the Quarterly Period Ended June  30, 2013

INDEX

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

Item 1.

Financial Statements (unaudited)

2

 

 

 

 

Condensed Consolidated Balance Sheets—June  30, 2013 and December 31, 2012

2

 

 

 

 

Condensed Consolidated Statements of Income—Three and Six Months Ended June  30, 2013 and 2012

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)—Three and Six Months Ended June  30, 2013 and 2012

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows—Six Months Ended June  30, 2013 and 2012

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

57

 

 

 

Item 4.

Controls and Procedures

59

 

 

PART II. OTHER INFORMATION 

 

 

 

 

Item 1.

Legal Proceedings

60

 

 

 

Item 1A.

Risk Factors

60

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

 

 

 

Item 3.

Defaults Upon Senior Securities

61

 

 

 

Item 4.

Mine Safety Disclosures

61

 

 

 

Item 5.

Other Information

61

 

 

 

Item 6.

Exhibits

61

 

 

SIGNATURES 

62

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

i

 


 

About This Form 10-Q

Throughout this Form 10-Q, unless otherwise specified:

       “NASDAQ OMX,” “we,” “us” and “our” refer to The NASDAQ OMX Group, Inc.

       “The NASDAQ Stock Market” and “NASDAQ” refer to the registered national securities exchange operated by The NASDAQ Stock Market LLC.

       “OMX AB” refers to OMX AB (publ), as that entity operated prior to the business combination with Nasdaq.

       “Nasdaq” refers to The Nasdaq Stock Market, Inc., as that entity operated prior to the business combination with OMX AB.

       “NASDAQ OMX Nordic” refers to collectively, NASDAQ OMX Stockholm, NASDAQ OMX Copenhagen, NASDAQ OMX Helsinki and NASDAQ OMX Iceland.

       “NASDAQ OMX Nordic Clearing” refers to collectively, the clearing operations conducted through NASDAQ OMX Nordic and NASDAQ OMX Commodities.

       “NASDAQ OMX Baltic” refers to collectively, NASDAQ OMX Tallinn, NASDAQ OMX Riga and NASDAQ OMX Vilnius.

* * * * * *

Aces®, Auto Workup®, Autospeed®, AXE®, BX Venture Market®, CCBN®, Directors Desk®, Dream It. Do It®, E and Design®, eSpeed and Design®, eSpeed®, e-Speed®, eSpeed Elite®, eSpeed Filing®, eSpeedoMeter®,  EVI®, FINQLOUD®, FTEN®, GlobeNewswire®, INET®, ITCH®, Kleos®, Market Intelligence Desk®, Market Mechanics®, MarketSite®, MYCCBN®, NASDAQ®, NASDAQ Biotechnology®, NASDAQ Capital Market®, NASDAQ Competitive VWAP®, NASDAQ Composite®, NASDAQ Composite Index®, NASDAQ Computer Index®, NASDAQ-Financial®, NASDAQ-Financial Index®, NASDAQ Financial-100 Index®, NASDAQ Global Market®, NASDAQ Global Select Market®, NASDAQ Industrial Index®, NASDAQ Interact®, NASDAQ Internet Index®, NASDAQ Market Analytix®, NASDAQ Market Center®, NASDAQ Market Forces®, NASDAQ Market Velocity®, NASDAQ MarketSite®, NASDAQ MAX®, NASDAQ National Market®, NASDAQ OMX®, NASDAQ OMX Advantage®, NASDAQ OMX Alpha Indexes®, NASDAQ OMX BX®, NASDAQ OMX Futures Exchange®, NASDAQ OMX Green Economy Index®, NASDAQ OMX Nordic®, NASDAQ Q-50 Index®, NASDAQ Telecommunications Index®, NASDAQ TotalView®, NASDAQ Trade Up®, NASDAQ Trader®, NASDAQ Transportation®, NASDAQ US ALL Market®, NASDAQ Volatility Guard®, NASDAQ Workstation®, NASDAQ Workstation II®, NASDAQ-100®, NASDAQ-100 European®, NASDAQ-100 Index®, NASDAQ-100 Index Tracking Stock®, NDX®, NFX World Currency®, NFX XL®, PHLX®, PORTAL Alliance®, QQQ®, QView®, R3®, RX®, Shareholder.com®, Sidecar®, SX®, The NASDAQ OMX Group®, The NASDAQ Stock Market®, The Stock Market for the Next 100 Years®, Trade Up® and UltraFeed® are significant registered trademarks of The NASDAQ OMX Group, Inc. and its affiliates in the U.S. and other countries.

“FINRA®” and “Trade Reporting Facility®” are registered trademarks of the Financial Industry Regulatory Authority, or FINRA.

All other trademarks and servicemarks used herein are the property of their respective owners.

* * * * * *

This Quarterly Report on Form 10-Q includes market share and industry data that we obtained from industry publications and surveys, reports of governmental agencies and internal company surveys. Industry publications and surveys generally state that the information they contain has been obtained from sources believed to be reliable, but we cannot assure you that this information is accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on the most currently available market data. For market comparison purposes, The NASDAQ Stock Market data in this Quarterly Report on Form 10-Q for initial public offerings, or IPOs, is based on data generated internally by us, which includes best efforts underwritings and closed-end funds; therefore, the data may not be comparable to other publicly-available IPO data. Data in this Quarterly Report on Form 10-Q for new listings of equity securities on The NASDAQ Stock Market is based on data generated internally by us, which includes best efforts underwritings, issuers that switched from other listing venues, closed-end funds and exchange traded funds, or ETFs. Data in this Quarterly Report on Form 10-Q for IPOs and new listings of equities securities on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic also is based on data generated internally by us. IPOs and new listings data is presented as of period end. While we are not aware of any misstatements regarding industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors. We refer you to the “Risk Factors” section in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, the “Risk Factors” section in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 that was filed with the U.S. Securities and Exchange Commission, or SEC, on May 7, 2013, and the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 that was filed with the SEC on February 21, 2013.

 

ii

 


 

Forward-Looking Statements

The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains these types of statements. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words or terms of similar substance used in connection with any discussion of future expectations as to industry and regulatory developments or business initiatives and strategies, future operating results or financial performance identify forward-looking statements. These include, among others, statements relating to:

    our 2013 outlook;

    the scope, nature or impact of acquisitions, divestitures, investments or other transactional activities;

    the integration of acquired businesses, including accounting decisions relating thereto;

    the effective dates for, and expected benefits of, ongoing initiatives, including strategic, de-leveraging and capital return initiatives;

    the impact of pricing changes;

    tax matters;

    costs and savings associated with restructuring activities;

    the cost and availability of liquidity; and

    the outcome of any litigation and/or government investigation to which we are a party and other contingencies.

Forward-looking statements involve risks and uncertainties. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include, among others, the following:

    our operating results may be lower than expected;

    loss of significant trading and clearing volume, market share or listed companies;

    economic, political and market conditions and fluctuations, including interest rate and foreign currency risk, inherent in U.S. and international operations;

    government and industry regulation;

    our ability to successfully integrate acquired businesses, including the fact that such integration may be more difficult, time consuming or costly than expected, and our ability to realize synergies from business combinations and acquisitions;

    covenants in our credit facilities, indentures and other agreements governing our indebtedness which may restrict the operation of our business; and

    adverse changes that may occur in the securities markets generally.

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the uncertainty and any risk related to forward-looking statements that we make. These risk factors are discussed under the caption “Part II. Item 1A. Risk Factors,” in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 that was filed with the SEC on May 7, 2013, and more fully described in the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 that was filed with the SEC on February 21, 2013. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should carefully read this entire Quarterly Report on Form 10-Q, including “Part 1. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the condensed consolidated financial statements and the related notes. Except as required by the federal securities laws, we undertake no obligation to update any forward-looking statement, release publicly any revisions to any forward-looking statements or report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

 

 

1


 

PART 1—FINANCIAL INFORMATION

Item 1. Financial Statements.

The NASDAQ OMX Group, Inc.

Condensed Consolidated Balance Sheets

(in millions, except share and par value amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

379 

 

$

497 

Restricted cash

 

 

82 

 

 

85 

Financial investments, at fair value

 

 

170 

 

 

223 

Receivables, net

 

 

362 

 

 

333 

Deferred tax assets

 

 

51 

 

 

33 

Default funds and margin deposits

 

 

1,412 

 

 

209 

Other current assets

 

 

154 

 

 

112 

Total current assets

 

 

2,610 

 

 

1,492 

Non-current restricted cash

 

 

25 

 

 

25 

Property and equipment, net

 

 

227 

 

 

211 

Non-current deferred tax assets

 

 

478 

 

 

294 

Goodwill

 

 

6,048 

 

 

5,335 

Intangible assets, net

 

 

2,383 

 

 

1,650 

Other non-current assets

 

 

182 

 

 

125 

Total assets

 

$

11,953 

 

$

9,132 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

252 

 

$

172 

Sections 31 fees payable to SEC

 

 

145 

 

 

97 

Accrued personnel costs

 

 

84 

 

 

111 

Deferred revenue

 

 

222 

 

 

139 

Other current liabilities

 

 

127 

 

 

119 

Deferred tax liabilities

 

 

36 

 

 

35 

Default funds and margin deposits

 

 

1,412 

 

 

209 

Current portion of debt obligations

 

 

138 

 

 

136 

Total current liabilities

 

 

2,416 

 

 

1,018 

Debt obligations

 

 

2,647 

 

 

1,840 

Non-current deferred tax liabilities

 

 

689 

 

 

713 

Non-current deferred revenue

 

 

146 

 

 

156 

Other non-current liabilities

 

 

192 

 

 

196 

Total liabilities

 

 

6,090 

 

 

3,923 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

Equity

 

 

 

 

 

 

NASDAQ OMX stockholders' equity:

 

 

 

 

 

 

Common stock, $0.01 par value, 300,000,000 shares authorized, shares issued: 213,426,908 at June 30, 2013 and December 31, 2012; shares outstanding: 167,221,434 at June 30, 2013 and 165,605,838 at December 31, 2012

 

 

 

 

Preferred stock, 30,000,000 shares authorized, series A convertible preferred stock: shares issued: 1,600,000 at June 30, 2013 and December 31, 2012; shares outstanding: none at June 30, 2013 and December 31, 2012

 

 

 -

 

 

 -

Additional paid-in capital

 

 

4,261 

 

 

3,771 

Common stock in treasury, at cost: 46,205,474 shares at June 30, 2013 and 47,821,070 shares at December 31, 2012

 

 

(1,027)

 

 

(1,058)

Accumulated other comprehensive loss

 

 

(139)

 

 

(185)

Retained earnings

 

 

2,765 

 

 

2,678 

Total NASDAQ OMX stockholders' equity

 

 

5,862 

 

 

5,208 

Noncontrolling interests

 

 

 

 

Total equity

 

 

5,863 

 

 

5,209 

Total liabilities and equity

 

$

11,953 

 

$

9,132 

See accompanying notes to condensed consolidated financial statements.

2


 

The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2013

 

2012

 

2013

 

2012

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Market Services

 

$

553 

 

$

587 

 

$

1,060 

 

$

1,167 

Listing Services

 

 

58 

 

 

55 

 

 

113 

 

 

112 

Information Services

 

 

108 

 

 

106 

 

 

215 

 

 

208 

Technology Solutions

 

 

95 

 

 

67 

 

 

169 

 

 

132 

     Total revenues

 

 

814 

 

 

815 

 

 

1,557 

 

 

1,619 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Transaction rebates

 

 

(276)

 

 

(299)

 

 

(518)

 

 

(604)

Brokerage, clearance and exchange fees

 

 

(87)

 

 

(89)

 

 

(170)

 

 

(174)

     Total cost of revenues

 

 

(363)

 

 

(388)

 

 

(688)

 

 

(778)

Revenues less transaction rebates, brokerage, clearance and exchange fees

 

 

451 

 

 

427 

 

 

869 

 

 

841 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

126 

 

 

113 

 

 

243 

 

 

224 

Marketing and advertising

 

 

 

 

 

 

15 

 

 

13 

Depreciation and amortization

 

 

28 

 

 

25 

 

 

55 

 

 

51 

Professional and contract services

 

 

35 

 

 

26 

 

 

64 

 

 

51 

Computer operations and data communications

 

 

20 

 

 

17 

 

 

35 

 

 

33 

Occupancy

 

 

23 

 

 

23 

 

 

46 

 

 

46 

Regulatory

 

 

 

 

 

 

16 

 

 

18 

Merger and strategic initiatives

 

 

25 

 

 

 

 

33 

 

 

Restructuring charges

 

 

 -

 

 

17 

 

 

 

 

26 

General, administrative and other

 

 

19 

 

 

15 

 

 

42 

 

 

30 

Voluntary accommodation program

 

 

 -

 

 

 -

 

 

62 

 

 

 -

     Total operating expenses

 

 

292 

 

 

252 

 

 

620 

 

 

495 

Operating income

 

 

159 

 

 

175 

 

 

249 

 

 

346 

Interest income

 

 

 

 

 

 

 

 

Interest expense

 

 

(26)

 

 

(24)

 

 

(50)

 

 

(48)

Asset impairment charges

 

 

 -

 

 

(28)

 

 

(10)

 

 

(40)

Income before income taxes

 

 

135 

 

 

125 

 

 

194 

 

 

262 

Income tax provision

 

 

47 

 

 

33 

 

 

64 

 

 

86 

Net income

 

 

88 

 

 

92 

 

 

130 

 

 

176 

Net loss attributable to noncontrolling interests

 

 

 -

 

 

 

 

 -

 

 

Net income attributable to NASDAQ OMX

 

$

88 

 

$

93 

 

$

130 

 

$

178 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share information:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.53 

 

$

0.55 

 

$

0.78 

 

$

1.04 

Diluted earnings per share

 

$

0.52 

 

$

0.53 

 

$

0.77 

 

$

1.02 

Cash dividends declared per common share

 

$

0.13 

 

$

0.13 

 

$

0.26 

 

$

0.13 

See accompanying notes to condensed consolidated financial statements.

3


 

 

The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss) 

(Unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

2013

 

2012

 

2013

 

2012

Net income

 

$

88 

 

$

92 

 

$

130 

 

$

176 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized holding gains (losses) on available-for-sale investment securities:

 

 

14 

 

 

(5)

 

 

15 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

Net foreign currency translation losses

 

 

(110)

 

 

(209)

 

 

(152)

 

 

(24)

Income tax benefit

 

 

176 

 

 

64 

 

 

183 

 

 

Total

 

 

66 

 

 

(145)

 

 

31 

 

 

(20)

Total other comprehensive income (loss), net of tax

 

 

80 

 

 

(150)

 

 

46 

 

 

(18)

Comprehensive income (loss)

 

 

168 

 

 

(58)

 

 

176 

 

 

158 

Comprehensive loss attributable to noncontrolling interests

 

 

 -

 

 

 

 

 -

 

 

Comprehensive income (loss) attributable to NASDAQ OMX

 

$

168 

 

$

(57)

 

$

176 

 

$

160 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

2013

 

2012

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

130 

 

$

176 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

55 

 

 

51 

Share-based compensation

 

 

18 

 

 

22 

Excess tax benefits related to share-based compensation

 

 

(13)

 

 

(1)

Provision for bad debts

 

 

 

 

Deferred income taxes

 

 

(28)

 

 

(36)

Non-cash restructuring charges

 

 

 

 

12 

Asset retirements and impairment charges

 

 

10 

 

 

40 

Amortization of debt issuance costs

 

 

 

 

Accretion of debt discounts

 

 

 

 

Other non-cash items included in net income

 

 

(3)

 

 

Net change in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

 

Receivables, net

 

 

(22)

 

 

(35)

Other assets

 

 

(61)

 

 

(18)

Accounts payable and accrued expenses

 

 

83 

 

 

(8)

Section 31 fees payable to SEC

 

 

48 

 

 

50 

Accrued personnel costs

 

 

(30)

 

 

(65)

Deferred revenue

 

 

47 

 

 

80 

Other liabilities

 

 

16 

 

 

39 

Net cash provided by operating activities

 

 

255 

 

 

318 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of trading securities

 

 

(187)

 

 

(164)

Proceeds from sales and redemptions of trading securities

 

 

250 

 

 

248 

Purchase of equity and cost method investments

 

 

(39)

 

 

 -

Acquisitions of businesses, net of cash and cash equivalents acquired

 

 

(1,121)

 

 

(57)

Purchases of property and equipment

 

 

(45)

 

 

(41)

Net cash used in investing activities

 

 

(1,142)

 

 

(14)

Cash flows from financing activities:

 

 

 

 

 

 

Payments of debt obligations

 

 

(23)

 

 

(122)

Proceeds from debt obligations, net of debt issuance costs

 

 

825 

 

 

 -

Cash paid for repurchase of common stock

 

 

(10)

 

 

(175)

Cash dividends

 

 

(43)

 

 

(22)

Issuances of common stock, net of treasury stock purchases

 

 

15 

 

 

Excess tax benefits related to share-based compensation

 

 

13 

 

 

Other financing activities

 

 

 -

 

 

(1)

Net cash provided by (used in) financing activities

 

 

777 

 

 

(317)

Effect of exchange rate changes on cash and cash equivalents

 

 

(8)

 

 

(2)

Net decrease in cash and cash equivalents

 

 

(118)

 

 

(15)

Cash and cash equivalents at beginning of period

 

 

497 

 

 

506 

Cash and cash equivalents at end of period

 

$

379 

 

$

491 

Supplemental Disclosure Cash Flow Information

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

40 

 

$

40 

Income taxes, net of refund

 

$

100 

 

$

79 

Non-cash investing activities:

 

 

 

 

 

 

Acquisition of eSpeed contingent future issuance of NASDAQ OMX common stock

 

$

484 

 

$

 -

See accompanying notes to condensed consolidated financial statements.

 

5


 

The NASDAQ OMX Group, Inc.

Notes to Condensed Consolidated Financial Statements

1. Organization and Nature of Operations

We are a leading global exchange group that delivers trading, clearing, exchange technology, regulatory, securities listing, and public company services across six continents. Our global offerings are diverse and include trading and clearing across multiple asset classes, market data products, financial indexes, capital formation solutions, financial services and market technology products and services. Our technology powers markets across the globe, supporting cash equity trading, derivatives trading, clearing and settlement and many other functions.

In the U.S., we operate The NASDAQ Stock Market, a registered national securities exchange. The NASDAQ Stock Market is the largest single cash equities securities market in the U.S. in terms of listed companies and in the world in terms of share value traded. As of June 30, 2013, The NASDAQ Stock Market was home to 2,581 listed companies with a combined market capitalization of approximately $5.9 trillion. In addition, in the U.S. we operate two additional cash equities trading markets, three options markets, an electronic platform for trading of U.S. Treasuries and a futures market. We also engage in riskless principal trading and clearing of over-the-counter, or OTC, power and gas contracts.

In Europe, we operate exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland as NASDAQ OMX Nordic, and exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as NASDAQ OMX Baltic. Collectively, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic offer trading in cash equities, bonds, structured products and ETFs, as well as trading and clearing of derivatives and clearing of resale and repurchase agreements. Through NASDAQ OMX First North, our Nordic and Baltic operations also offer alternative marketplaces for smaller companies. As of June 30, 2013, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, together with NASDAQ OMX First North, were home to 758 listed companies with a combined market capitalization of approximately $1.0 trillion. We also operate NASDAQ OMX Armenia. 

In addition, NASDAQ OMX Commodities operates the world’s largest power derivatives exchange for trading and clearing of futures in the Nordics, Germany and the U.K., one of Europe’s largest carbon exchanges and together with Nord Pool Spot, N2EX, a marketplace for physical U.K. power contracts. We also operate NOS Clearing, a leading Norway-based clearinghouse primarily for OTC traded derivatives for the freight market and seafood derivatives market and NASDAQ OMX NLX, a new London-based market for trading of listed short-term and long-term European (Euro and Sterling denominated) interest rate derivative products.

In some of the countries where we operate exchanges, we also provide clearing, settlement and depository services.

2. Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The condensed consolidated financial statements include the accounts of NASDAQ OMX, its wholly-owned subsidiaries and other entities in which NASDAQ OMX has a controlling financial interest. The accompanying unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal recurring nature. All significant intercompany accounts and transactions have been eliminated in consolidation.

As permitted under U.S. GAAP, certain footnotes or other financial information can be condensed or omitted in the interim condensed consolidated financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in NASDAQ OMX’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

We have evaluated subsequent events through the issuance date of this Quarterly Report on Form 10-Q.

Changes in Reportable Segments

As announced in January 2013, we realigned our reportable segments as a result of changes to the organizational structure of our businesses. Our reportable segments now consist of Market Services, Listing Services, Information Services and Technology Solutions. See Note 16, “Business Segments,” for further discussion. All prior period segment disclosures have been recast to reflect our change in reportable segments. Certain other prior year amounts have been reclassified to conform to the current year presentation.

6


 

Income Taxes

We use the asset and liability method to determine income taxes on all transactions recorded in the condensed consolidated financial statements. Deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences are realized. If necessary, a valuation allowance is established to reduce deferred tax assets to the amount that is more likely than not to be realized.

In order to recognize and measure our unrecognized tax benefits, management determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the recognition thresholds, the position is measured to determine the amount of benefit to be recognized in the condensed consolidated financial statements. Interest and/or penalties related to income tax matters are recognized in income tax expense.

As shown in the Condensed Consolidated Statements of Comprehensive Income (Loss), the income tax benefit increased $112 million to $176 million, in the second quarter of 2013, compared with $64 million in the same period of 2012, due to an assertion made by NASDAQ OMX to permanently reinvest the earnings of certain foreign subsidiaries. As a result of this assertion, adjustments were made to our deferred tax balances relating to cumulative translation adjustments pertaining to these subsidiaries.

 In the fourth quarter of 2010, we received an appeal from the Finnish Tax Authority challenging certain interest expense deductions claimed by NASDAQ OMX in Finland for the year 2008. The appeal also demanded certain penalties be paid with regard to the company’s tax return filing position. In October 2012, the Finnish Appeals Board disagreed with the company’s tax return filing position, even though the tax return position with respect to this deduction was previously reviewed and approved by the Finnish Tax Authority. NASDAQ OMX has appealed the ruling by the Finnish Appeals Board to the Finnish Administrative Court. In the second quarter of 2013, we paid $19 million to the Finnish Tax Authority. We expect the Finnish Administrative Court to agree with our position and, if  so, NASDAQ OMX will receive a refund of the amount paid in the second quarter of 2013. Through June 30, 2013, we have recorded the tax benefits associated with the filing position.

From 2009 through 2012, we recorded tax benefits associated with certain interest expense incurred in Sweden. Our position is supported by a 2011 ruling we received from the Swedish Supreme Administrative Court. However, under new legislation, effective January 1, 2013, limitations are imposed on certain forms of interest expense. Since the new legislation is unclear with regards to our ability to continue to claim such interest deductions, NASDAQ OMX has filed an application for an advance tax ruling with the Swedish Tax Council for Advanced Tax Rulings. We expect to receive a favorable response from the Swedish Tax Council for Advance Tax Rulings. In the second quarter of 2013, we recorded a tax benefit of $4 million, or $.02 per diluted share, with respect to this issue in the condensed consolidated financial statements. Since January 1, 2013, we have recorded a tax benefit of $8 million, or $0.05 per diluted share, related to this matter. We expect to record recurring quarterly tax benefits of $4 million to $5 million with respect to this issue for the foreseeable future.

3. Restructuring Charges

During the first quarter of 2012, we performed a comprehensive review of our processes, organizations and systems in a company-wide effort to improve performance, cut costs, and reduce spending. Through this initiative, we expect an annualized savings of $60 million in 2013. This restructuring program was completed in the first quarter of 2013.

The following table presents a summary of restructuring charges in the Condensed Consolidated Statements of Income for the six months ended June 30, 2013 and 2012:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

2013

 

2012

 

 

 

 

 

 

 

 

 

(in millions)

Severance

 

$

 

$

14 

Facilities-related

 

 

 

 

Asset impairments

 

 

 

 

Other

 

 

 

 

Total restructuring charges

 

$

 

$

26 

7


 

 

During the first six months of 2013, we recognized restructuring charges totaling $9 million, including severance costs of $6 million related to workforce reductions of 31 positions across our organization, $1 million for facilities-related charges, discussed below, $1 million for asset impairments, primarily consisting of fixed assets and capitalized software that have been retired, and $1 million of other charges. During the first six months of 2012, we recognized restructuring charges totaling $26 million, including severance cost of $14 million related to workforce reductions of 162 positions across our organization, $5 million for facility-related charges, discussed below, $6 million for asset impairments, primarily consisting of fixed assets and capitalized software which have been retired, and $1 million of other charges.

The following table presents a summary of restructuring charges in the Condensed Consolidated Statements of Income for the three months ended June 30, 2012:

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

2012

 

 

 

 

 

 

(in millions)

Severance

 

$

Facilities-related

 

 

Asset impairments

 

 

Other

 

 

Total restructuring charges

 

$

17 

 

During the second quarter of 2012, we recognized restructuring charges totaling $17 million, including severance costs of $9 million related to workforce reductions of 124 positions across our organization, $5 million for facility-related charges, discussed below, $2 million for asset impairments, primarily consisting of fixed assets and capitalized software which have been retired, and $1 million of other charges.

Restructuring Reserve

Severance

The accrued severance balance totaled $5 million at June 30, 2013 and $8 million at December 31, 2012 and is included in other current liabilities in the Condensed Consolidated Balance Sheets. The majority of the remaining accrued severance balance will be paid during the remaining six months of 2013. During the first six months of 2013, $9 million of severance was paid.

Facilities-related

The facilities-related charges of $1 million for the first six months of 2013 and $5 million for the second quarter and first six months of 2012 relate to lease rent accruals for facilities we no longer occupy due to facilities consolidation. The facilities-related charges for the second quarter and first six months of 2012 also include the write-off and disposal of leasehold improvements and other assets. The lease rent costs included in the facilities-related charges are equal to the future costs associated with the facility, net of estimated proceeds from any future sublease agreements that could be reasonably obtained, based on management’s estimate. We will continue to evaluate these estimates in future periods, and thus, there may be additional charges or reversals relating to these facilities. The facilities-related restructuring reserve will be paid over several years until the leases expire. The facilities-related reserve balance, which totaled $2 million at June  30, 2013 and $3 million at December 31, 2012, is included in other current liabilities and other non-current liabilities in the Condensed Consolidated Balance Sheets.

 

4. Acquisitions

We completed the following acquisitions in 2013 and 2012. Financial results of each transaction are included in our Condensed Consolidated Statements of Income from the dates of each acquisition.

2013 Acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Consideration

 

Total Net Assets (Liabilities) Acquired

 

Purchased Intangible Assets

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

eSpeed

 

$

1,239 

 

$

 

$

715 

 

$

519 

TR Corporate Solutions businesses

 

 

366 

 

 

(37)

 

 

91 

 

 

312 

8


 

 

The amounts in the table above represent the preliminary allocation of the purchase price and are subject to revision during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments to the provisional values during the measurement period will be recorded as of the date of acquisition. Comparative information for periods after acquisition but before the period in which the adjustments are identified will be adjusted to reflect the effects of the adjustments as if they were taken into account as of the acquisition date. Changes to amounts recorded as assets and liabilities may result in a corresponding adjustment to goodwill. There were no adjustments to the provisional values for the above acquisitions during the three and six months ended June 30, 2013. 

Acquisition of eSpeed for Trading of U.S. Treasuries

On  June 28, 2013, we acquired from BGC Partners, Inc. and certain of its affiliates, or BGC, certain assets and assumed certain liabilities, including 100% of the equity interests in eSpeed Technology Services, L.P., eSpeed Technology Services Holdings, LLC, Kleos Managed Services, L.P. and Kleos Managed Services Holdings, LLC; the eSpeed brand name; various assets comprising the fully electronic portion of BGC’s benchmark U.S. Treasury brokerage, market data and co-location service businesses, or eSpeed, for $1.2 billion.  We acquired net assets, at fair value, totaling $5 million and purchased intangible assets of $715 million which consisted of $578 million for the eSpeed trade name, $121 million in customer relationships and $16 million in technology. The eSpeed businesses are part of our Market Services and Information Services segments.

The purchase price consisted of $755 million in cash, subject to adjustment for certain pre-paid amounts and accrued costs and expenses, and contingent future annual issuances of 992,247 shares of NASDAQ OMX common stock approximating certain tax benefits associated with the transaction of $484 million. Such contingent future issuances of NASDAQ OMX common stock will be paid ratably over 15 years if NASDAQ OMX achieves a designated revenue target in each such year.  The contingent future issuances of NASDAQ OMX common stock are subject to anti-dilution protections and acceleration upon certain events.

NASDAQ OMX used the majority of the net proceeds from the issuance of 600 million aggregate principal amount of 3.875% senior unsecured notes due June 2021, or the 2021 Notes, to fund the cash consideration payable by us for the acquisition of eSpeed. See “3.875% Senior Unsecured Notes,” of Note 8, “Debt Obligations,” for further discussion.

Intangible Assets

The following table presents the details of the purchased intangible assets acquired in the acquisition of eSpeed. All purchased intangible assets with finite lives are amortized using the straight-line method. See Note 5, “Goodwill and Purchased Intangible Assets,” for further discussion.

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

Average Remaining

 

 

Value

 

Useful Life

Intangible assets:

 

(in millions)

 

(in years)

Trade name:

 

 

 

 

  Market Services

$

528 

 

Indefinite

  Information Services

 

50 

 

Indefinite

Total trade name

 

578 

 

 

 

 

 

 

 

Customer relationships

 

 

 

 

  Market Services

 

105 

 

13 years

  Information Services

 

16 

 

13 years

Total customer relationships

 

121 

 

 

 

 

 

 

 

Technology

 

 

 

 

  Market Services

 

14 

 

5 years

  Information Services

 

 

5 years

Total technology

 

16 

 

 

 

 

 

 

 

Total intangible assets

$

715 

 

 

 

 

9


 

Below is a discussion of the methods used to determine the fair value of eSpeed’s intangible assets, as well as a discussion of the estimated average remaining useful life of each intangible asset. The carrying amounts of all other assets and liabilities were deemed to approximate their estimated fair values.

Trade Name

NASDAQ OMX has incorporated eSpeed into two reporting segments—Market Services and Information Services. The eSpeed trade name was valued as used in each of these reporting segments. The trade name is recognized in the industry and carries a reputation for quality. As such, eSpeed and related brands’ reputation and positive recognition embodied in the trade name are valuable assets to NASDAQ OMX. The trade name was considered the primary asset acquired in this transaction. In valuing the acquired trade name, we used the income approach, specifically the excess earnings method. The excess earnings method examines the economic returns contributed by the identified tangible and intangible assets of a company, and then isolates the excess return that is attributable to the intangible asset being valued.

A discount rate of 10% was utilized, which reflects the amount of risk associated with the hypothetical cash flows generated by the eSpeed trade name in the future. In developing a discount rate for the trade name, we estimated a weighted average cost of capital for the overall business and we employed this rate when discounting the cash flows. The resulting discounted cash flows were then tax-effected at a rate of 40.0%, and a discounted tax amortization benefit was added to the fair value of the asset under the assumption that the trade name would be amortized for tax purposes over a period of 15 years for both Market Services and Information Services.

We have estimated the remaining useful life of the trade name to be indefinite. The estimated remaining useful life was based on several factors including the number of years the name has been in service, its popularity within the industry, and our intention to continue its use.

Customer Relationships

Customer relationships represent the non-contractual and contractual relationships that eSpeed has with its customers. The eSpeed customer relationships were valued using the income approach, specifically the with-and-without method. The with-and-without method is commonly used when the cash flows of a business can be estimated with and without the asset in place. The premise associated with this valuation technique is that the value of an asset is represented by the differences in the subject business’ cash flows under scenarios where (a) the asset is present and is used in operations (with); and (b) the asset is absent and not used in operations (without). Cash flow differentials are then discounted to present value to arrive at an estimate of fair value for the asset.

We estimated that without current customer relationships, it would take approximately 4-5 years for the customer base to grow from 10% of current revenues to 100% of revenues. We also made estimates related to compensation levels and other expenses such as sales and marketing that would be incurred as the business was ramped up through year 5, which is the year the customer base would be expected to reach the level that currently exists.

A discount rate of 10%, which reflects the estimated weighted average cost of capital for the overall business, was utilized when discounting the cash flows. The resulting discounted cash flows were then tax-effected at a rate of 40.0%, and a discounted tax amortization benefit was added to the fair value of the asset under the assumption that the customer relationships would be amortized for tax purposes over a period of 15 years.

Based on the historical behavior of the customers and a parallel analysis of the customers using the excess earnings method, we have estimated the remaining useful life to be 13 years for the acquired customer relationships.

Technology

The fair value of the eSpeed acquired developed technology was valued using the income approach, specifically the relief from royalty method, or RFRM. The RFRM is used to estimate the cost savings that accrue to the owner of an intangible asset who would otherwise have to pay royalties or license fees on revenues earned through the use of the asset. The royalty rate is applied to the projected revenue over the expected remaining life of the intangible asset to estimate royalty savings. The net after-tax royalty savings are calculated for each year in the remaining economic life of the intangible asset and discounted to present value.

To determine the royalty rate we searched for and identified market transactions and royalty rates for comparable technology. Due to the limited data, we relied on our estimates and benchmarked the estimated excess earnings of eSpeed to determine a range of royalty rates that would be reasonable for the use of its intangible assets based on a profit split methodology. Profit split theory states that a reasonable market participant would be willing and able to make revenue based royalty payments of 25 to 33 percent of their operating profit to receive the rights to certain licensable intellectual property necessary for conducting business. Conversely, the owner of such intellectual property would save that amount or be relieved from making those royalty payments. By analyzing these profit splits at 25 and 33 percent, we estimated supportable royalty rates for the technology and selected a pre-tax royalty rate of 5%.  

A discount rate of 10% was utilized, which reflects the estimated weighted average cost of capital for the overall business and we employed this rate when discounting the cash flows. The resulting discounted cash flows were then tax-effected at a rate of 40.0%,  

10


 

and a discounted tax amortization benefit was added to the fair value of the asset under the assumption that the technology would be amortized for tax purposes over a period of 15 years for both Market Services and Information Services.

We have estimated the remaining useful life to be 5 years for the acquired developed technology.

Acquisition of the Investor Relations, Public Relations and Multimedia Solutions Businesses of Thomson Reuters

On  May 31, 2013, we acquired from Thomson Reuters their Investor Relations, Public Relations and Multimedia Solutions businesses, or the TR Corporate Solutions businesses, which provide insight, analytics and communications solutions, for $390 million ($366 million cash paid plus $24 million in working capital adjustments).  We acquired net liabilities, at fair value, totaling $37 million and purchased intangible assets of $91 million which consisted of $89 million in customer relationships and $2 million in technology. The TR Corporate Solutions businesses are part of our Corporate Solutions business within our Technology Solutions segment. 

NASDAQ OMX used cash on hand and borrowed $50 million under the revolving credit commitment to fund this acquisition. See “2011 Credit Facility,” of Note 8, “Debt Obligations,” for further discussion.

Intangible Assets

The following table presents the details of the purchased intangible assets acquired in the acquisition of the TR Corporate Solutions businesses. All purchased intangible assets with finite lives are amortized using the straight-line method. See Note 5, “Goodwill and Purchased Intangible Assets,” for further discussion.

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

Average Remaining

 

 

Value

 

Useful Life

Intangible assets:

 

(in millions)

 

(in years)

  Customer relationships

$

89 

 

9-14 years

  Technology

 

 

2-5 years

Total intangible assets

$

91 

 

 

 

Below is a discussion of the methods used to determine the fair value of the purchased intangible assets acquired in the acquisition of the TR Corporate Solutions businesses, as well as a discussion of the estimated average remaining useful life of each intangible asset. The carrying amounts of all other assets and liabilities were deemed to approximate their estimated fair values.

Customer Relationships

Customer relationships represent the non-contractual and contractual relationships that each of the TR Corporate Solutions businesses has with its customers and represented a key intangible asset in this transaction. Customer relationships were identified and valued individually for each of the TR Corporate Solutions businesses using the income approach, specifically an excess earnings method. This valuation method relied on assumptions regarding projected revenues, attrition rates, and operating cash flows for each of the TR Corporate Solutions businesses.

We assumed annual revenue attrition of 10.0% for the customers for each of the TR Corporate Solutions businesses, as well as charges for contributory assets. Operating expenses associated with maintaining the asset were applied to the attrition adjusted revenues. For the five years following 2016, operating margins were adjusted in order to reach a normalized operating margin level that included an estimate for the fixed costs for the businesses. From 2021 onward, the operating margin was held constant at a normalized level. The tax-effected cash flows were discounted at a rate of 11% to 11.5% based on the risk associated with the hypothetical cash flows generated by the customer base for each specific business line.

The cash flows were then tax-effected at a rate of 40.0%, and a discounted tax amortization benefit was added to the fair value of the asset under the assumption that the customer relationships would be amortized for tax purposes over a period of 15 years.

The estimated remaining useful life captured 90.0% of the present value of the cash flows generated by each customer relationship.

Technology

The fair values of the acquired developed technologies were valued using the income approach, specifically the RFRM, as discussed above under technology relating to eSpeed. 

11


 

To determine the royalty rate we searched for and identified market transactions and royalty rates for comparable technology and relied on our estimates and expectations surrounding the relative importance of the acquired developed technologies, competing technologies, foreseeable shifts in the market, and expected royalty payments for comparable technologies. We also performed a profit split analysis, as described above in technology, for each separate acquired technology in order to estimate an acceptable royalty rate. Based on the information obtained and the profit spilt analysis, we selected a pre-tax royalty rate of 1.5% for the webhosting technology and 0.5% for the public relations and multimedia solutions technologies.

A discount rate of 11% was utilized based on the risk associated with the hypothetical cash flows generated by the developed technologies and we employed this rate when discounting the cash flows. The resulting discounted cash flows were then tax-effected at a rate of 40.0%, and a discounted tax amortization benefit was added to the fair value of the asset under the assumption that the developed technology would be amortized for tax purposes over a period of 15 years.

We have estimated the remaining useful life to be 2-5 years for the acquired developed technology.

Formation of The NASDAQ Private Market Joint Venture 

In March 2013, we formed a joint venture with SharesPost, Inc., or SharesPost, creating The NASDAQ Private Market, or NPM, a preeminent marketplace for private growth companies. We own a majority interest in NPM, combining NASDAQ OMX’s resources, market and operating expertise with SharesPost’s leading web-based platform. NPM plans to provide improved access to liquidity for early investors, founders and employees while enabling the efficient buying and selling of private company shares. Subject to regulatory approvals, NPM is expected to launch later in 2013. NPM is part of our U.S. Listing Services business within our Listing Services segment.

Acquisition of Dutch Cash Equities and Equity Derivatives Trading Venue 

In April 2013, we acquired a  25%  equity interest in The Order Machine, or TOM, a Dutch cash equities and equity derivatives trading venue. The terms of the transaction also provide us an option to acquire an additional 25.1% of the remaining shares at a future date. This transaction delivers on our strategy to expand our derivatives presence across the European market and is part of our Market Services segment. We account for our investment in TOM under the equity method of accounting. See “Equity Method Investments,” of Note 6, “Investments,” for further discussion of our equity method investments.

2012 Acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Consideration

 

Total Net Assets (Liabilities) Acquired

 

Purchased Intangible Assets

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

NOS Clearing(1)

 

$

40 

 

$

43 

 

$

 

$

 -

BWise

 

 

77 

 

 

(11)

 

 

35 

 

 

53 

 

(1)       In the third quarter of 2012, we recognized a gain of $4 million on our acquisition of NOS Clearing. 

We finalized the allocation of the purchase price for BWise Beheer B.V., or BWise, in May 2013. The amounts in the table above for NOS Clearing represent the preliminary allocation of the purchase price and are subject to revision during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments to the provisional values during the measurement period will be pushed back to the date of acquisition. Comparative information for periods after acquisition but before the period in which the adjustments are identified will be adjusted to reflect the effects of the adjustments as if they were taken into account as of the acquisition date. Changes to amounts recorded as assets and liabilities may result in a corresponding adjustment to goodwill. There were no adjustments to the provisional values for the above acquisitions during the three and six months ended June 30, 2013. 

Acquisition of NOS Clearing

In July 2012, we acquired NOS Clearing for approximately $40 million (233 million Norwegian Krone) in cash. NOS Clearing is a leading Norway-based clearinghouse primarily for OTC traded derivatives for the freight market and seafood derivatives market. We acquired net assets of $43 million, primarily restricted cash related to regulatory capital. The purchased intangible assets totaling $1 million consisted of customer relationships. NOS Clearing is part of our European derivative trading and clearing business within our Market Services segment.

Acquisition of BWise

In May 2012, we acquired a 72% ownership interest in BWise, a Netherlands-based service provider that offers enterprise governance, risk management and compliance software and services to help companies track, measure and manage key organizational risks for approximately $57 million (47 million Euro) in cash. We have agreed to purchase the remaining 28% ownership interest in BWise in two separate transactions, resulting in 100% ownership by the first half of 2015 for a total purchase price of approximately

12


 

$77 million (62 million Euro). We acquired net liabilities of $2 million and recorded a current deferred tax liability of $1 million and a non-current deferred tax liability of $8 million related to purchased intangible assets, resulting in total net liabilities acquired of $11 million. The total deferred tax liabilities of $9 million represent the tax effect of the difference between the estimated assigned fair value of the acquired intangible assets ($35 million) and the tax basis ($0) of such assets. The estimated amount of $9 million was determined by multiplying the difference of $35 million by BWise’s effective tax rate of 25%. The purchased intangible assets of $35 million consisted of $23 million in customer relationships, $7 million in technology and $5 million for the BWise trade name. BWise is part of our Market Technology business within our Technology Solutions segment.

Acquisition of the Index Business of Mergent, Inc., including Indxis

In December 2012, we acquired the index business of Mergent, Inc., including Indxis, for approximately $15 million in cash. The $5 million in intangible assets, $9 million in goodwill and $1 million in net assets resulting from this acquisition are included in our Index Licensing and Services business within our Information Services segment.

Pro Forma Results and Acquisition-related Costs

Pro forma financial results for the acquisitions completed in 2013 and 2012 have not been presented since these acquisitions both individually and in the aggregate were not material to our financial results.

Acquisition-related costs for the transactions described above were expensed as incurred and are included in merger and strategic initiatives expense in the Condensed Consolidated Statements of Income.

5. Goodwill and Purchased Intangible Assets

Goodwill

In connection with the change in reportable segments discussed in Note 16, “Business Segments,” we reallocated the goodwill that existed as of December 31, 2012 to our new reporting units on a relative fair value basis.

The following table presents the changes in goodwill by business segment during the six months ended June 30, 2013:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market Services

 

Listing Services

 

Information Services

 

Technology Solutions

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

Balance at December 31, 2012

 

$

2,955 

 

$

136 

 

$

1,964 

 

$

280 

 

$

5,335 

Goodwill acquired

 

 

470 

 

 

 -

 

 

49 

 

 

312 

 

 

831 

Foreign currency translation adjustment

 

 

(66)

 

 

(3)

 

 

(42)

 

 

(7)

 

 

(118)

Balance at June 30, 2013

 

$

3,359 

 

$

133 

 

$

1,971 

 

$

585 

 

$

6,048 

 

As of June 30, 2013, the amount of goodwill that is expected to be deductible for tax purposes in future periods is $909 million.

Goodwill represents the excess of the purchase price over the value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill is allocated to our reporting units based on the assignment of the fair values of each reporting unit of the acquired company. We perform an annual goodwill impairment test during the fourth quarter of our fiscal year using carrying amounts as of October 1. Should certain events or indicators of impairment occur between annual impairment tests, we will perform the impairment test as those events or indicators occur. We assess goodwill impairment at the reporting unit level.

During the first quarter of 2013, we performed a goodwill impairment assessment as a result of our change in reportable segments. For purposes of performing the impairment test for goodwill, our six reporting units are the Market Services segment, the Listing Services segment, the two businesses comprising the Information Services segment: Market Data Products and Index Licensing and Services, and the two businesses comprising the Technology Solutions segment: Corporate Solutions and Market Technology. We allocated goodwill to each reporting unit based on its relative fair value. We then compared the fair value of the reporting units to the reporting units carrying amount and determined that goodwill was not impaired since the fair values of each of the reporting units exceeded their carrying amounts. However, events such as economic weakness or unexpected significant declines in operating results of a reporting unit may result in goodwill impairment charges in the future.

Purchased Intangible Assets

The following table presents details of our total purchased intangible assets, both finite- and indefinite-lived:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2013

 

December 31, 2012

 

 

Gross Amount

 

Accumulated Amortization

 

Net Amount

 

Weighted-Average Useful Life (in Years)

 

Gross Amount

 

Accumulated Amortization

 

Net Amount

 

Weighted-Average Useful Life (in Years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

 

 

 

(in millions)

 

 

 

Finite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Technology

 

$

43 

 

$

(11)

 

$

32 

 

 

 

$

26 

 

$

(10)

 

$

16 

 

 

Customer relationships

 

 

1,075 

 

 

(262)

 

 

813 

 

 

19 

 

 

871 

 

 

(238)

 

 

633 

 

 

21 

Other

 

 

 

 

(3)

 

 

 

 

 

 

 

 

(2)

 

 

 

 

Foreign currency translation adjustment

 

 

(14)

 

 

 

 

(11)

 

 

 

 

 

 

 

(1)

 

 

 

 

 

Total finite-lived intangible assets

 

$

1,110 

 

$

(273)

 

$

837 

 

 

 

 

$

909 

 

$

(251)

 

$

658 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange and clearing registrations

 

$

790 

 

$

 -

 

$

790 

 

 

 

 

$

790 

 

$

 -

 

$

790 

 

 

 

Trade names

 

 

760 

 

 

 -

 

 

760 

 

 

 

 

 

185 

 

 

 -

 

 

185 

 

 

 

Licenses

 

 

51 

 

 

 -

 

 

51 

 

 

 

 

 

51 

 

 

 -

 

 

51 

 

 

 

Foreign currency translation adjustment

 

 

(55)

 

 

 -

 

 

(55)

 

 

 

 

 

(34)

 

 

 -

 

 

(34)

 

 

 

Total indefinite-lived intangible assets

 

$

1,546 

 

$

 -

 

$

1,546 

 

 

 

 

$

992 

 

$

 -

 

$

992 

 

 

 

Total intangible assets

 

$

2,656 

 

$

(273)

 

$

2,383 

 

 

 

 

$

1,901