|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||
1. Organization and Nature of Operations
We are a leading global exchange group that delivers trading, clearing, exchange technology, 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, 2011, The NASDAQ Stock Market was home to 2,724 listed companies with a combined market capitalization of approximately $4.7 trillion. In addition, in the U.S. we operate two additional cash equities trading markets, two options markets, a futures market and a derivatives clearinghouse. We also engage in riskless principal trading 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, 2011, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, together with NASDAQ OMX First North, were home to 780 listed companies with a combined market capitalization of approximately $1.1 trillion. We also operate NASDAQ OMX Armenia. In addition, NASDAQ OMX Commodities operates the world's largest power derivatives exchange, one of Europe's largest carbon exchanges, and N2EX, a marketplace for physical U.K. power contracts.
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 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. The financial statements include the accounts of NASDAQ OMX, its wholly-owned subsidiaries and other entities in which NASDAQ OMX has a controlling financial interest. 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, 2010.
Certain prior period amounts have been reclassified to conform to the current period presentation.
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 our subsequent events through the issuance date of this Quarterly Report on Form 10-Q.
Income Taxes
We use the asset and liability method to provide 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.
In the fourth quarter of 2010, we received an appeal from the Finnish Tax Authority in which such authority challenges certain interest expense deductions claimed by NASDAQ OMX in Finland for the years 2008 and 2009. NASDAQ OMX's tax return position with respect to this deduction was previously reviewed and approved by the Finnish Tax Authority. The appeal also demands certain penalties be paid with regard to the company's tax return filing position. If the Finnish Tax Authority prevails in its challenge, additional tax and penalties for the years 2008-2010 would total approximately $18 million. We expect the Finnish Tax Authority to agree with our position once its review is completed and, as such, believe it is unlikely NASDAQ OMX will be assessed any additional tax and penalties. Through June 30, 2011, we have recorded the tax benefits associated with the filing position.
In June 2009, NASDAQ OMX filed an application for an advance tax ruling with the Swedish Tax Council for Advance Tax Rulings. The application was filed to confirm whether certain interest expense is deductible for Swedish tax purposes under legislation that became effective on January 1, 2009. In June 2010, we received a favorable response from the Swedish Tax Council for Advance Tax Rulings in which all members of the Council agreed that the interest expense is deductible for Swedish tax purposes. The Swedish Tax Agency has appealed the Council's ruling to the Swedish Supreme Administrative Court. We expect the Swedish Supreme Administrative Court to agree with the ruling from the Swedish Tax Council for Advance Tax Rulings. In the second quarter of 2011, we recorded a tax benefit of $5 million, or $0.03 per diluted share, and in the second quarter of 2010, we recorded a tax benefit of $4 million, or $0.02 per diluted share, related to this matter. In the first six months of 2011, we recorded a tax benefit of $10 million, or $0.06 per diluted share, and in the first six months of 2010, we recorded a tax benefit of $9 million, or $0.04 per diluted share, related to this matter. Since January 1, 2009, we have recorded a tax benefit of $47 million, or $0.23 per diluted share, related to this matter.
|
|||
3. Recently Adopted Accounting Pronouncements
ASC Topic 820 —In January 2010, the Financial Accounting Standards Board, or FASB, issued amended guidance relating to FASB Accounting Standards Codification, or ASC, Topic 820, "Fair Value Measurements and Disclosures." The amended guidance requires new disclosures as follows:
| • |
Amounts related to transfers in and out of Levels 1 and 2 shall be disclosed separately and the reasons for the transfers shall be described. |
| • |
In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements on a gross basis. |
The guidance also provides amendments that clarify existing disclosures related to the following:
| • |
Reporting fair value measurement disclosures for each class of assets and liabilities. |
| • |
Providing disclosure surrounding the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements. |
This accounting guidance was effective for us beginning on January 1, 2010, except for the disclosure requirements surrounding the reconciliation of Level 3 fair value measurements, which were effective for us on January 1, 2011. Since this guidance only required additional disclosure, it did not affect our financial position or results of operations.
|
|||
4. Acquisitions
We completed the following acquisitions in 2010. The results of operations of each transaction are included in our Condensed Consolidated Statements of Income from the dates of each acquisition. A summary of the allocation of the total purchase consideration is presented as follows:
| Purchase Consideration |
Total Net (Liabilities) Assets Acquired |
Purchased Intangible Assets |
Goodwill | |||||||||||||
| (in millions) | ||||||||||||||||
|
FTEN(1) |
$ | 110 | $ | (1 | ) | $ | 46 | $ | 65 | |||||||
|
SMARTS(2) |
77 | (5 | ) | 28 | 54 | |||||||||||
|
Nord Pool (3) |
17 | 7 | 2 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total for 2010 |
$ | 204 | $ | 1 | $ | 76 | $ | 127 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) |
In December 2010, we acquired FTEN, Inc., or FTEN, a leading provider of Real-Time Risk Management solutions for the financial securities market for $110 million. FTEN purchase consideration included $11 million held in escrow to be paid in 2012, in accordance with the purchase agreement. We acquired net assets, at fair value, totaling $3 million and recorded a current deferred tax liability of $2 million and a non-current deferred tax liability of $16 million related to purchased intangible assets, and we also recorded a non-current deferred tax asset of $14 million related to net operating loss carry forwards, resulting in total net liabilities acquired of $1 million. The total deferred tax liabilities of $18 million represent the tax effect of the difference between the estimated assigned fair value of the acquired intangible assets ($46 million) and the tax basis ($0) of such assets. The estimated amount of $18 million is determined by multiplying the difference of $46 million by FTEN's effective tax rate of 39.55%. The purchased intangible assets of $46 million consisted of $23 million in customer relationships, $12 million in technology, $9 million for the FTEN trade name and $2 million related to non-compete agreements. |
| (2) |
In August 2010, we acquired SMARTS Group Holdings Pty Ltd, or SMARTS, a leading technology provider of surveillance solutions to exchanges, regulators and brokers to diversify our Market Technology business and enter the broker surveillance and compliance market. We completed our acquisition of SMARTS for $77 million, which included a $75 million initial purchase price, as well as a $2 million working capital adjustment. SMARTS purchase consideration also included $2 million held in escrow that was paid in the first quarter of 2011 and $12 million held in escrow to be paid in 2012, in accordance with the purchase agreement. We acquired net assets, at fair value, totaling $3 million and recorded a current deferred tax liability of $1 million and a non-current deferred tax liability of $7 million related to purchased intangible assets, resulting in total net liabilities acquired of $5 million. The total deferred tax liabilities of $8 million represent the tax effect of the difference between the estimated assigned fair value of the acquired intangible assets ($28 million) and the tax basis ($0) of such assets. The estimated amount of $8 million is determined by multiplying the difference of $28 million by SMARTS' effective tax rate of 30%. The purchased intangible assets of $28 million consisted of $11 million in technology and $17 million in customer relationships. |
| (3) |
In May 2010, we acquired Nord Pool, a derivatives trading market, for $17 million (101 million Norwegian Krone). We acquired net assets, at fair value, totaling $8 million and recorded a non-current deferred tax liability of $1 million related to purchased intangible assets, resulting in total net assets acquired of $7 million. Through this acquisition, we now hold a Norwegian exchange license and operate the Nordic power market and the European carbon market on one trading platform. |
In the second quarter of 2011, we finalized the allocation of the purchase price for Nord Pool. The above amounts for FTEN and SMARTS 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 during the three and six months ended June 30, 2011.
Acquisition of ZVM
In December 2010, we acquired Zoomvision Mamato, or ZVM, a provider of webcasting and investor relation communication services for companies in the Nordic region, for an immaterial amount. ZVM, which is the leading provider of webcasting services in Northern Europe, adds to the growing range of capabilities and services NASDAQ OMX offers public and private companies in the U.S. and Europe.
Acquisition of Assets of North American Energy Credit and Clearing Corp.
In March 2010, we purchased the assets of North American Energy Credit and Clearing Corp. for an immaterial amount. With this purchase, NASDAQ OMX expanded its presence in the OTC energy commodity markets. The acquisition of these assets was effected through NASDAQ OMX Commodities Clearing Company, or NOCC. In March 2010, we also provided cash of $25 million to NOCC to improve its liquidity position. As of June 30, 2011 and December 31, 2010, this amount is classified as non-current restricted cash in the Condensed Consolidated Balance Sheets.
Pro Forma Results and Acquisition-related Costs
Pro forma results of operations for the acquisitions completed during 2010 have not been presented since the acquisitions both individually and in the aggregate were not material to our financial results.
Acquisition-related costs for the above acquisitions 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
The following table presents the changes in goodwill by business segment during the six months ended June 30, 2011:
| Market Services |
Issuer Services |
Market Technology |
Total | |||||||||||||
| (in millions) | ||||||||||||||||
|
Balance at December 31, 2010 |
$ | 4,679 | $ | 292 | $ | 156 | $ | 5,127 | ||||||||
|
Foreign currency translation adjustment |
193 | 14 | 11 | 218 | ||||||||||||
|
Balance at June 30, 2011 |
$ | 4,872 | $ | 306 | $ | 167 | $ | 5,345 | ||||||||
As of June 30, 2011, the amount of goodwill that is expected to be deductible for tax purposes in future periods is $101 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 the reporting units based on the assignment of the fair values of each reporting unit of the acquired company. We are required to test goodwill for impairment at the reporting unit level annually, or in interim periods if certain events occur indicating that the carrying value may be impaired. We test for impairment during the fourth quarter of our fiscal year using October 1st carrying values. We considered the need to update our most recent annual goodwill impairment test as of June 30, 2011 and concluded that none of the impairment indicators triggered a revised impairment analysis. As such, we concluded the assumptions used during the annual assessment remained appropriate. There was no impairment of goodwill for the three and six months ended June 30, 2011 and 2010. Although there is no impairment as of June 30, 2011, events such as economic weakness and unexpected significant declines in operating results of reporting units may result in our having to perform a goodwill impairment test for some or all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could 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, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
| 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 |
$ | 38 | $ | (8 | ) | $ | 30 | 9 | $ | 72 | $ | (41 | ) | $ | 31 | 6 | ||||||||||||||||
|
Customer relationships |
853 | (175 | ) | 678 | 21 | 853 | (152 | ) | 701 | 21 | ||||||||||||||||||||||
|
Other |
6 | (1 | ) | 5 | 8 | 6 | (1 | ) | 5 | 8 | ||||||||||||||||||||||
|
Foreign currency translation adjustment |
20 | (2 | ) | 18 | (15 | ) | 4 | (11 | ) | |||||||||||||||||||||||
|
Total finite-lived intangible assets |
$ | 917 | $ | (186 | ) | $ | 731 | $ | 916 | $ | (190 | ) | $ | 726 | ||||||||||||||||||
|
Indefinite-Lived Intangible Assets |
||||||||||||||||||||||||||||||||
|
Exchange and clearing registrations |
$ | 790 | $ | — | $ | 790 | $ | 790 | $ | — | $ | 790 | ||||||||||||||||||||
|
Trade names |
181 | — | 181 | 181 | — | 181 | ||||||||||||||||||||||||||
|
Licenses |
78 | — | 78 | 78 | — | 78 | ||||||||||||||||||||||||||
|
Foreign currency translation adjustment |
(13 | ) | — | (13 | ) | (56 | ) | — | (56 | ) | ||||||||||||||||||||||
|
Total indefinite-lived intangible assets |
$ | 1,036 | $ | — | $ | 1,036 | $ | 993 | $ | — | $ | 993 | ||||||||||||||||||||
|
Total intangible assets |
$ | 1,953 | $ | (186 | ) | $ | 1,767 | $ | 1,909 | $ | (190 | ) | $ | 1,719 | ||||||||||||||||||
Amortization expense for purchased finite-lived intangible assets was $13 million for the three months ended June 30, 2011 and $28 million for the six months ended June 30, 2011 compared to $13 million for the three months ended June 30, 2010 and $27 million for the six months ended June 30, 2010.
The estimated future amortization expense (excluding the impact of foreign currency translation adjustments of $18 million as of June 30, 2011) of purchased finite-lived intangible assets as of June 30, 2011 is as follows:
| (in millions) | ||||
|
2011(1) |
$ | 25 | ||
|
2012 |
51 | |||
|
2013 |
50 | |||
|
2014 |
48 | |||
|
2015 |
46 | |||
|
2016 and thereafter |
493 | |||
|
Total |
$ | 713 | ||
| (1) |
Represents the estimated amortization to be recognized for the remaining six months of 2011. |
|
|||
6. Investments
Trading Securities
Trading securities, which are included in financial investments, at fair value in the Condensed Consolidated Balance Sheets, were $295 million as of June 30, 2011 and $220 million as of December 31, 2010. These securities are primarily comprised of Swedish government debt securities, of which $233 million as of June 30, 2011 and $190 million as of December 31, 2010, are restricted assets to meet regulatory capital requirements primarily for NASDAQ OMX Stockholm's clearing operations.
Available-for-Sale Investment Security
Investment in DFM
Our available-for-sale investment security, which is included in financial investments, at fair value in the Condensed Consolidated Balance Sheets, represents our 1% investment in Dubai Financial Market PJSC, or DFM. In May 2010, we completed the exchange of our equity interest in NASDAQ Dubai Limited, or NASDAQ Dubai, for a 1% investment in DFM. See "Investment in NASDAQ Dubai" below for further discussion.
As of June 30, 2011 and December 31, 2010, the cost basis of this security was $36 million. As of June 30, 2011, the fair value was $25 million and as of December 31, 2010, the fair value was $33 million. The gross change of $11 million between the cost basis and fair value as of June 30, 2011 is reflected as an unrealized holding loss in accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets, net of taxes. We reviewed the carrying value of this investment security to determine whether an other-than-temporary decline in value exists. We considered factors affecting the investee, factors affecting the industry the investee operates in and general market trends. We also considered the length of time the market value has been below the cost basis and the near-term prospects for recovery of unrealized losses. As of June 30, 2011 and December 31, 2010, we have not recognized an other-than-temporary decline in value on this investment security.
Equity Method Investments
In general, the equity method of accounting is used when we own 20% to 50% of the outstanding voting stock and when we are able to exercise significant influence over the operating and financial policies of a company.
Equity interest in our equity method investments was $29 million as of June 30, 2011 and $27 million as of December 31, 2010, which consisted primarily of our equity interest in European Multilateral Clearing Facility N.V., a leading European clearinghouse in which we own a 22% equity stake. Equity method investments are included in other non-current assets in the Condensed Consolidated Balance Sheets.
Income recognized from our equity interest in the earnings and losses of these companies was $1 million for both the three and six months ended June 30, 2011 and 2010.
Investment in NASDAQ Dubai
In May 2010, we participated in the realignment of the ownership structure of NASDAQ Dubai, in which NASDAQ Dubai became a wholly-owned subsidiary of DFM, a publicly traded company controlled by Borse Dubai Limited, a Dubai company, or Borse Dubai. We received a 1% equity interest in DFM in exchange for our equity interest in NASDAQ Dubai. Our existing technology and trademark licensing arrangements with Borse Dubai and NASDAQ Dubai remain unchanged.
NASDAQ Dubai and DFM are related parties, as both of them are primarily owned by Borse Dubai, our largest stockholder.
|
|||
7. Deferred Revenue
Deferred revenue represents cash payments received that are yet to be recognized as revenue. At June 30, 2011, we have estimated that our deferred revenue, which is primarily related to Global Listing Services and Market Technology revenues, will be recognized in the following years:
| Initial Listing Revenues |
Listing of Additional Shares Revenues |
Annual Renewal and Other Revenues |
Market Technology Revenues(2) |
Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Fiscal year ended: |
||||||||||||||||||||
|
2011(1) |
$ | 8 | $ | 19 | $ | 96 | $ | 30 | $ | 153 | ||||||||||
|
2012 |
12 | 30 | 2 | 43 | 87 | |||||||||||||||
|
2013 |
8 | 23 | — | 34 | 65 | |||||||||||||||
|
2014 |
6 | 11 | — | 21 | 38 | |||||||||||||||
|
2015 |
4 | 2 | — | 12 | 18 | |||||||||||||||
|
2016 and thereafter |
3 | — | — | 8 | 11 | |||||||||||||||
| $ | 41 | $ | 85 | $ | 98 | $ | 148 | $ | 372 | |||||||||||
| (1) |
Represents deferred revenue that is anticipated to be recognized over the remaining six months of 2011. |
| (2) |
The timing of recognition of our deferred Market Technology revenues is dependent upon when significant modifications are made pursuant to existing contracts. As such, as it relates to these revenues, the timing represents our best estimate. |
Our deferred revenue during the six months ended June 30, 2011 and 2010 is reflected in the following table.
| Initial Listing Revenues |
Listing of Additional Shares Revenues |
Annual Renewal and Other Revenues |
Market Technology Revenues (2) |
Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Balance at January 1, 2011 |
$ | 42 | $ | 83 | $ | 21 | $ | 146 | $ | 292 | ||||||||||
|
Additions (1) |
7 | 22 | 189 | 25 | 243 | |||||||||||||||
|
Amortization (1) |
(8 | ) | (20 | ) | (113 | ) | (30 | ) | (171 | ) | ||||||||||
|
Translation adjustment |
— | — | 1 | 7 | 8 | |||||||||||||||
|
Balance at June 30, 2011 |
$ | 41 | $ | 85 | $ | 98 | $ | 148 | $ | 372 | ||||||||||
|
Balance at January 1, 2010 |
$ | 46 | $ | 76 | $ | 18 | $ | 125 | $ | 265 | ||||||||||
|
Additions (1) |
6 | 25 | 185 | 14 | 230 | |||||||||||||||
|
Amortization (1) |
(9 | ) | (19 | ) | (104 | ) | (8 | ) | (140 | ) | ||||||||||
|
Translation adjustment |
— | — | — | (10 | ) | (10 | ) | |||||||||||||
|
Balance at June 30, 2010 |
$ | 43 | $ | 82 | $ | 99 | $ | 121 | $ | 345 | ||||||||||
| (1) |
The additions and amortization for initial listing revenues, listing of additional shares revenues and annual renewal and other revenues primarily reflect Issuer Services revenues from U.S. listing revenues. |
| (2) |
Market Technology deferred revenues include revenues from delivered client contracts in the support phase charged during the period. Under contract accounting, where customization and significant modifications to the software are made to meet the needs of our customers, total revenues as well as costs incurred, are deferred until significant modifications are completed and delivered. Once delivered, deferred revenue and the related deferred costs are recognized over the post contract support period. We have included the deferral of costs in other current assets and other non-current assets in the Condensed Consolidated Balance Sheets. The amortization of Market Technology deferred revenue primarily includes revenues earned from client contracts recognized during the period. |
|
|||
8. Debt Obligations
The following table presents the changes in the carrying value of our debt obligations during the six months ended June 30, 2011:
| December 31, 2010 |
Additions | Payments, Conversions, Accretion and Other |
June 30, 2011 |
|||||||||||||
| (in millions) | ||||||||||||||||
|
3.75% convertible notes due October 22, 2012 (net of discount)(1) |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
2.50% convertible senior notes due August 15, 2013 |
388 | — | 7 | 395 | ||||||||||||
|
4.00% senior unsecured notes due January 15, 2015 (net of discount)(2) |
398 | — | 1 | 399 | ||||||||||||
|
5.55% senior unsecured notes due January 15, 2020 (net of discount)(2) |
598 | — | — | 598 | ||||||||||||
|
$700 million senior unsecured term loan facility credit agreement due January 15, 2013 (average interest rate of 2.26% for the six months ended June 30, 2011)(2) |
570 | — | (120 | ) | 450 | |||||||||||
|
5.25% senior unsecured notes due January 16, 2018 (net of discount)(3) |
367 | — | — | 367 | ||||||||||||
|
Total debt obligations |
2,321 | — | (112 | ) | 2,209 | |||||||||||
|
Less current portion |
(140 | ) | — | — | (140 | ) | ||||||||||
|
Total long-term debt obligations |
$ | 2,181 | $ | — | $ | (112 | ) | $ | 2,069 | |||||||
| (1) |
As of June 30, 2011 and December 31, 2010, approximately $0.5 million aggregate principal amount of the 3.75% convertible notes remained outstanding. |
| (2) |
See "Senior Unsecured Notes and Credit Facility" below for further discussion. |
| (3) |
See "5.25% Senior Unsecured Notes" below for further discussion. |
2.50% Convertible Senior Notes
During the first quarter of 2008, in connection with the business combination with OMX AB, we completed the offering of $475 million aggregate principal amount of 2.50% convertible senior notes due 2013. The interest rate on the notes is 2.50% per annum payable semi-annually in arrears on February 15 and August 15 and the notes will mature on August 15, 2013. In 2009, we repurchased $47 million aggregate principal amount of the 2.50% convertible senior notes. As a result of the $47 million repurchase, the remaining aggregate principal amount outstanding on these notes as of June 30, 2011 and December 31, 2010 was $428 million.
The notes are convertible in certain circumstances specified in the indenture for the notes. Upon conversion, holders will receive, at the election of NASDAQ OMX, cash, common stock or a combination of cash and common stock. It is our current intent and policy to settle the principal amount of the notes in cash. The conversion rate will initially be 18.1386 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $55.13 per share of common stock. At June 30, 2011 and December 31, 2010, the 2.50% convertible senior notes are convertible into 7,757,283 shares of our common stock, subject to adjustment upon the occurrence of specified events. Subject to certain exceptions, if we undergo a "fundamental change" as described in the indenture, holders may require us to purchase their notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.
Since the settlement structure of our 2.50% convertible senior notes permits settlement in cash upon conversion, we are required to separately account for the liability and equity components of the convertible debt in a manner that reflects our nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This entails bifurcation of a component of the debt, classification of that component in equity and then accretion of the resulting discount on the debt being reflected in the income statement as part of interest expense.
The changes in the liability and equity components of our 2.50% convertible senior notes during the six months ended June 30, 2011 are as follows:
| Liability Component | Equity Component | |||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||
| Principal Balance |
Unamortized Debt Discount |
Net Carrying Amount |
Gross Equity Component |
Deferred Taxes |
Net Equity Component |
|||||||||||||||||||
|
December 31, 2010 |
$ | 428 | $ | 40 | $ | 388 | $ | 80 | $ | 32 | $ | 48 | ||||||||||||
|
Accretion of debt discount |
— | (7 | ) | 7 | — | — | — | |||||||||||||||||
|
June 30, 2011 |
$ | 428 | $ | 33 | $ | 395 | $ | 80 | $ | 32 | $ | 48 | ||||||||||||
The unamortized debt discount on the convertible debt was $33 million as of June 30, 2011 and $40 million as of December 31, 2010 and is included in debt obligations in the Condensed Consolidated Balance Sheets. This amount will be accreted as part of interest expense through the maturity date of the convertible debt of August 15, 2013. The effective annual interest rate on the 2.50% convertible senior notes was 6.53% for the three and six months ended June 30, 2011 and 2010, which includes the accretion of the debt discount in addition to the annual contractual interest rate of 2.50%.
As of June 30, 2011 and December 31, 2010, the equity component of the convertible debt included in additional paid-in capital in the Condensed Consolidated Balance Sheets was $48 million. This amount is calculated as follows: $80 million of excess principal of the convertible debt over the carrying amount less $32 million of deferred taxes. The deferred tax liability is determined by multiplying the $80 million of excess principal of the convertible debt over the carrying amount by the U.S. marginal tax rate of 39.55%.
Interest expense recognized on our 2.50% convertible senior notes in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2011 and 2010 is as follows:
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Components of interest expense recognized on our 2.50% convertible senior notes |
||||||||||||||||
|
Accretion of debt discount |
$ | 3 | $ | 3 | $ | 7 | $ | 7 | ||||||||
|
Contractual interest |
3 | 3 | 5 | 5 | ||||||||||||
|
Total interest expense recognized on our 2.50% convertible senior notes |
$ | 6 | $ | 6 | $ | 12 | $ | 12 | ||||||||
Debt Issuance Costs
In 2008, in conjunction with the issuance of the 2.50% convertible senior notes, we incurred debt issuance costs of $10 million. These costs, which are capitalized and included in other non-current assets in the Condensed Consolidated Balance Sheets, are being amortized over the life of the debt obligation. Amortization expense, which is recorded as additional interest expense for these costs, was immaterial for both the three months ended June 30, 2011 and 2010 and $1 million for both the six months ended June 30, 2011 and 2010.
Senior Unsecured Notes and Credit Facility
In January 2010, NASDAQ OMX issued $1 billion of senior unsecured notes, or the Notes, and entered into a $950 million senior unsecured three-year credit facility. The credit facility provides for an unfunded $250 million revolving credit commitment (including a swingline facility and letter of credit facility), a $350 million funded Tranche A term loan, or the Term Loan A, and a $350 million funded Tranche X term loan, or the Term Loan X and, together with Term Loan A, the Term Loans. NASDAQ OMX applied the net proceeds from the Notes, the $700 million funded Term Loans and cash on hand to repay all amounts outstanding under our senior secured credit facilities in place as of December 31, 2009 and related fees. As a result, NASDAQ OMX terminated the associated credit agreement.
The Notes
The Notes were issued at a discount in two separate series consisting of $400 million aggregate principal amount of 4.00% senior notes due 2015, or the 2015 Notes, and $600 million aggregate principal amount of 5.55% senior notes due 2020, or the 2020 Notes. As a result of the discount, the proceeds received from the issuance were less than the aggregate principal amounts. As of June 30, 2011, the balance of $399 million for the 2015 Notes and the balance of $598 million for the 2020 Notes, reflect the aggregate principal amounts, less the unamortized debt discount. The unamortized debt discount will be accreted through interest expense over the life of the Notes.
The 2015 Notes pay interest semiannually at a rate of 4.00% per annum until January 15, 2015, and the 2020 Notes pay interest semiannually at a rate of 5.55% per annum until January 15, 2020. The Notes are general unsecured obligations of ours and rank equally with all of our existing and future unsubordinated obligations. The Notes are not guaranteed by any of our subsidiaries. The Notes were issued under an indenture that, among other things, limits our ability to consolidate, merge or sell all or substantially all of our assets, create liens, and enter into sale and leaseback transactions.
Credit Facility
The credit facility provides for an unfunded $250 million revolving credit commitment (including a swingline facility and letter of credit facility), a $350 million funded Term Loan A and a $350 million funded Term Loan X. The loans under the credit facility have a variable interest rate based on either the London Interbank Offered Rate, or LIBOR, or the Federal Funds Rate, plus an applicable margin that varies with NASDAQ OMX's debt rating.
Under our credit facility, we are required to pay quarterly principal payments of $35 million on our Term Loans. We made required payments of $70 million, as well as an optional payment of $50 million, during the first six months of 2011 on our Term Loans.
The credit facility contains financial and operating covenants. Financial covenants include an interest expense coverage ratio and a maximum leverage ratio. Operating covenants include limitations on NASDAQ OMX's ability to incur additional indebtedness, grant liens on assets, enter into affiliate transactions and pay dividends.
The credit facility also contains customary affirmative covenants, including access to financial statements, notice of defaults and certain other material events, maintenance of business and insurance, and events of default, including cross-defaults to our material indebtedness.
NASDAQ OMX is permitted to repay borrowings under the credit facility at any time in whole or in part, without penalty. We are also required to repay loans outstanding under the credit facility with net cash proceeds from sales of property and assets of NASDAQ OMX and its subsidiaries (excluding inventory sales and other sales in the ordinary course of business) and casualty and condemnation proceeds, in each case subject to specified exceptions and thresholds.
Debt Issuance and Other Costs
We incurred debt issuance and other costs of $21 million in connection with the issuance of the Notes and the entry into the new credit facility. These costs, which are capitalized and included in other non-current assets in the Condensed Consolidated Balance Sheets, are being amortized over the life of the debt obligations. Amortization expense, which is recorded as additional interest expense for these costs, was $1 million for both the three months ended June 30, 2011 and 2010, $3 million for the six months ended June 30, 2011 and $2 million for the six months ended June 30, 2010.
In January 2010, as a result of the repayment of our senior secured credit facilities in place as of December 31, 2009, we recorded a pre-tax charge of $40 million, which included the write-off of the remaining unamortized balance of debt issuance costs incurred of $28 million, costs to terminate our float-to-fixed interest rate swaps previously designated as a cash flow hedge of $9 million and other costs of $3 million. These charges are included in general, administrative and other expense in the Condensed Consolidated Statements of Income for the six months ended June 30, 2010.
5.25% Senior Unsecured Notes
In December 2010, NASDAQ OMX issued $370 million of 5.25% senior unsecured notes due 2018, or the 2018 Notes. We applied the net proceeds from the 2018 Notes of $367 million and cash on hand of $3 million to repay all amounts outstanding under our bridge facility, discussed below, as well as related fees.
The 2018 Notes were issued at a discount. As a result of the discount, the proceeds received from the issuance were less than the aggregate principal amount. As of June 30, 2011, the balance of $367 million reflects the aggregate principal amount, less the unamortized debt discount. The unamortized debt discount will be accreted through interest expense over the life of the 2018 Notes.
The 2018 Notes pay interest semiannually at a rate of 5.25% per annum until January 16, 2018 and may vary with NASDAQ OMX's debt rating up to a rate not to exceed 7.25%. The 2018 Notes are general unsecured obligations of ours and rank equally with all of our existing and future unsubordinated obligations. They are not guaranteed by any of our subsidiaries. The 2018 Notes were issued under indentures that among other things, limit our ability to consolidate, merge or sell all or substantially all of our assets, create liens, and enter into sale and leaseback transactions. In addition, upon a change of control triggering event (as defined in the indenture), the terms require us to repurchase all or part of each holder's notes for cash equal to 101% of the aggregate principal amount purchased plus accrued and unpaid interest, if any.
Debt Issuance Costs
We incurred debt issuance costs of $3 million in connection with the issuance of the 2018 Notes. These costs, which are capitalized and included in other non-current assets in the Condensed Consolidated Balance Sheets, are being amortized over the life of the debt obligation. Amortization expense, which is recorded as additional interest expense for these costs, was immaterial for both the three and six months ended June 30, 2011.
Bridge Facility
In December 2010, NASDAQ OMX entered into a $400 million senior unsecured bridge facility, or the bridge facility, and borrowed $370 million to partially finance the purchase of our stock from Borse Dubai. See "Share Repurchase Program and Share Repurchase from Borse Dubai," of Note 12, "NASDAQ OMX Stockholders' Equity," for further discussion of our share repurchase from Borse Dubai. We applied the net proceeds from the issuance of our 2018 Notes, discussed above, and cash on hand to repay all amounts outstanding under the bridge facility and terminated the bridge facility as of December 31, 2010. The effective interest rate on borrowings under the bridge facility was 1.76%.
Other Credit Facilities
In addition to the $250 million revolving credit commitment discussed above, we have credit facilities related to our clearinghouses in order to meet liquidity and regulatory requirements. These credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $460 million ($208 million in available liquidity and $252 million to satisfy regulatory requirements), of which $10 million was utilized at June 30, 2011. At December 31, 2010, these facilities totaled $440 million ($196 million in available liquidity and $244 million to satisfy regulatory requirements), none of which was utilized.
Debt Covenants
At June 30, 2011, we were in compliance with the covenants of all of our debt obligations.
|
|||
9. Pension and Other Benefit Programs
U.S. Defined-Benefit Pension and Supplemental Executive Retirement Plans
We maintain non-contributory, defined-benefit pension plans, non-qualified supplemental executive retirement plans, or SERPs, for certain senior executives and post-retirement benefit plans for eligible employees in the U.S., collectively referred to as the NASDAQ OMX Benefit Plans.
Our pension plans and SERPs are frozen. Future service and salary for all participants do not count toward an accrual of benefits under the pension plans and SERPs.
Components of Net Periodic Benefit Cost
The following table sets forth the components of net periodic pension, SERP and post-retirement benefit costs from the NASDAQ OMX Benefit Plans recognized in compensation and benefits expense in the Condensed Consolidated Statements of Income:
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Components of net periodic benefit cost |
||||||||||||||||
|
Interest cost |
$ | 2 | $ | 1 | $ | 3 | $ | 3 | ||||||||
|
Expected return on plan assets |
(1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||||||
|
Recognized net actuarial loss |
— | 1 | 1 | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net periodic benefit cost |
$ | 1 | $ | 1 | $ | 2 | $ | 3 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Non-U.S. Benefit Plans
Most employees outside the U.S. are covered by local retirement plans or by applicable social laws. Benefits under social laws are generally expensed in the periods in which the costs are incurred. These costs are included in compensation and benefits expense in the Condensed Consolidated Statements of Income and were $4 million for the three months ended June 30, 2011, $3 million for the three months ended June 30, 2010 and $7 million for both the six months ended June 30, 2011 and 2010.
As part of the acquisition of Nord Pool's derivatives, clearing and consulting subsidiaries, we assumed the obligation for several pension plans providing benefits for these employees. The benefit cost for these plans was immaterial for both the three months ended June 30, 2011 and 2010 and was $1 million for both the six months ended June 30, 2011 and 2010.
U.S. Defined Contribution Savings Plan
We sponsor a voluntary defined contribution savings plan, or 401(k) Plan, for U.S. employees. Employees are immediately eligible to make contributions to the plan and are also eligible for an employer contribution match at an amount equal to 100.0% of the first 4.0% of eligible employee contributions. Savings plan expense included in compensation and benefits expense in the Condensed Consolidated Statements of Income was $1 million for both the three months ended June 30, 2011 and 2010 and $2 million for both the six months ended June 30, 2011 and 2010.
We have a profit-sharing contribution feature to our 401(k) Plan which allows eligible U.S. employees to receive employer retirement contributions, or ERCs, when we meet our annual corporate goals. In addition, we have a supplemental ERC for select highly compensated employees whose ERCs are limited by the annual Internal Revenue Service compensation limit. ERC expense recorded in compensation and benefits expense in the Condensed Consolidated Statements of Income was $1 million for both the three months ended June 30, 2011 and 2010 and $2 million for both the six months ended June 30, 2011 and 2010.
Employee Stock Purchase Plan
We have an employee stock purchase plan, or ESPP, under which approximately 3.7 million shares of our common stock have been reserved for future issuance as of June 30, 2011.
Our ESPP allows eligible U.S. and non-U.S. employees to purchase a limited number of shares of our common stock at six-month intervals, called offering periods, at 85.0% of the lower of the fair market value on the first or the last day of each offering period. The 15.0% discount given to our employees is included in compensation and benefits expense in the Condensed Consolidated Statements of Income.
|
|||
12. NASDAQ OMX Stockholders' Equity
Common Stock
At June 30, 2011, 300,000,000 shares of our common stock were authorized, 213,379,758 shares were issued and 177,064,158 shares were outstanding. The holders of common stock are entitled to one vote per share, except that our certificate of incorporation limits the ability of any person to vote in excess of 5.0% of the then-outstanding shares of NASDAQ OMX common stock. This limitation does not apply to persons exempted from this limitation by our board of directors prior to the time such person owns more than 5.0% of the then-outstanding shares of NASDAQ OMX common stock.
In 2008, we issued 60,561,515 shares of common stock to Borse Dubai and a trust for Borse Dubai's economic benefit in connection with the OMX AB business combination. In December 2010, we purchased 22,781,000 shares of our common stock from Borse Dubai. See "Share Repurchase Program and Share Repurchase from Borse Dubai" below for further discussion. In addition, Borse Dubai agreed to sell in a private transaction 8,000,000 shares of our stock to Nomura International plc. Nomura International plc agreed, under a forward sale agreement, to sell these 8,000,000 shares to Investor AB. As a result of the settlement of this forward sale agreement, Investor AB's ownership in NASDAQ OMX increased to 17,004,142 shares. During the second quarter of 2011, all shares held by the trust for Borse Dubai's economic benefit were transferred to Borse Dubai. As of June 30, 2011, Borse Dubai held 29,780,515 shares of our common stock.
In addition, as of December 31, 2010, SLP held 10,539,614 shares of our common stock, and subsequently sold these shares in February 2011. Investor AB purchased 1,000,000 of the shares sold by SLP and owns 18,004,142 shares of our common stock as of June 30, 2011.
Common Stock in Treasury, at Cost
We account for the purchase of treasury stock under the cost method with the shares of stock repurchased reflected as a reduction to NASDAQ OMX stockholders' equity and included in common stock in treasury, at cost in the Condensed Consolidated Balance Sheets. When treasury shares are reissued, they are recorded at the average cost of the treasury shares acquired. We held 36,315,600 shares of common stock in treasury as of June 30, 2011 and 37,587,403 shares as of December 31, 2010.
Share Repurchase Program and Share Repurchase from Borse Dubai
Under the share repurchase program authorized by our board of directors during 2010, we were authorized to repurchase up to $550 million of our outstanding common stock. During 2010, we repurchased 15,050,647 shares of our common stock at an average price of $19.95, for an aggregate purchase price of $300 million. In December 2010, our board of directors also approved the repurchase of 22,781,000 shares of our common stock from Borse Dubai for $21.82 per share for an aggregate purchase price of approximately $497 million. The share repurchase from Borse Dubai expanded, accelerated and completed our share repurchase program. The shares repurchased under the share repurchase program and from Borse Dubai are available for general corporate purposes.
Other Repurchases of Common Stock
For the six months ended June 30, 2011, we repurchased 97,598 shares of our common stock in settlement of employee tax withholding obligations due upon the vesting of restricted stock.
Preferred Stock
Our certificate of incorporation authorizes the issuance of 30,000,000 shares of preferred stock, par value $0.01 per share, issuable from time to time in one or more series. At June 30, 2011 and December 31, 2010, 1,600,000 shares of series A convertible preferred stock were issued and none were outstanding.
|
|||
13. Fair Value of Financial Instruments
Fair Value Measurement—Definition and Hierarchy
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants at the measurement date. Fair value measurement establishes a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect NASDAQ OMX's market assumptions. These two types of inputs create the following fair value hierarchy:
| • |
Level 1—Quoted prices for identical instruments in active markets. |
| • |
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
| • |
Level 3—Instruments whose significant value drivers are unobservable. |
This hierarchy requires the use of observable market data when available.
The following table presents for each of the above hierarchy levels, our financial assets and liabilities that are measured at fair value on a recurring basis at June 30, 2011.
| Balance as of June 30, 2011 |
Fair Value Measurements | |||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
| (in millions) | ||||||||||||||||
|
Financial Assets Measured at Fair Value on a Recurring Basis |
||||||||||||||||
|
Derivative positions, at fair value(1) |
$ | 1,417 | $ | — | $ | 1,417 | $ | — | ||||||||
|
Financial investments, at fair value(2) |
320 | 320 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 1,737 | $ | 320 | $ | 1,417 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Financial Liabilities Measured at Fair Value on a Recurring Basis |
||||||||||||||||
|
Derivative positions, at fair value(1) |
$ | 1,417 | $ | — | $ | 1,417 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total |
$ | 1,417 | $ | — | $ | 1,417 | $ | — | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) |
Represents net amounts associated with our clearing operations in the derivative markets of NASDAQ OMX Commodities and NASDAQ OMX Stockholm. Receivables and payables attributable to outstanding derivative positions have been netted to the extent that such a legal offset right exists and, at the same time, if it is our intention to settle these items. See "Derivative Positions, at Fair Value" below for further discussion. |
| (2) |
Primarily comprised of Swedish government debt securities of $295 million. These securities are classified as trading securities and $233 million are restricted assets to meet regulatory capital requirements primarily for NASDAQ OMX Stockholm's clearing operations. Also includes our 1% available-for-sale investment security in DFM of $25 million. See Note 6, "Investments," for further discussion of our trading investment securities and available-for-sale investment security. |
The following table presents for each of the above hierarchy levels, our financial assets and liabilities that are measured at fair value on a recurring basis at December 31, 2010:
| Balance as of December 31, 2010 |
Fair Value Measurements | |||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | ||||||||||||||
| (in millions) | ||||||||||||||||
|
Financial Assets Measured at Fair Value on a Recurring Basis |
||||||||||||||||
|
Derivative positions, at fair value(1) |
$ | 4,037 | $ | — | $ | 4,037 | $ | — | ||||||||
|
Financial investments, at fair value(2) |
253 | 253 | — | — | ||||||||||||
|
Total |
$ | 4,290 | $ | 253 | $ | 4,037 | $ | — | ||||||||
|
Financial Liabilities Measured at Fair Value on a Recurring Basis |
||||||||||||||||
|
Derivative positions, at fair value(1) |
$ | 4,037 | $ | — | $ | 4,037 | $ | — | ||||||||
|
Total |
$ | 4,037 | $ | — | $ | 4,037 | $ | — | ||||||||
| (1) |
Represents net amounts associated with our clearing operations in the derivative markets of NASDAQ OMX Commodities and NASDAQ OMX Stockholm. Receivables and payables attributable to outstanding derivative positions have been netted to the extent that such a legal offset right exists and, at the same time, if it is our intention to settle these items. See "Derivative Positions, at Fair Value" below for further discussion. |
| (2) |
Primarily comprised of Swedish government debt securities of $220 million. These securities are classified as trading securities and $190 million are restricted assets to meet regulatory capital requirements primarily for NASDAQ OMX Stockholm's clearing operations. Also includes our 1% available-for-sale investment security in DFM of $33 million. See Note 6, "Investments," for further discussion of our trading investment securities and available-for-sale investment security. |
Open Clearing Contracts at NASDAQ OMX Commodities and NASDAQ OMX Stockholm
Derivative Positions, at Fair Value
Through our clearing operations in the derivative markets with NASDAQ OMX Commodities and NASDAQ OMX Stockholm, we are the legal counterparty for each derivative position traded and thereby guarantee the fulfillment of each contract. We also act as the counterparty for certain trades on OTC derivative contracts. The derivatives are not used by NASDAQ OMX Commodities or NASDAQ OMX Stockholm for the purpose of trading on their own behalf. As the legal counterparty of each transaction, NASDAQ OMX Commodities and NASDAQ OMX Stockholm bear the counterparty risk between the purchaser and seller in the contract. The counterparty risks are measured using models that are agreed to with the Financial Supervisory Authority of the applicable country, which requires us to provide minimum guarantees and maintain certain levels of regulatory capital.
The structure and operations of NASDAQ OMX Commodities and NASDAQ OMX Stockholm differ from most other clearinghouses. NASDAQ OMX Commodities and NASDAQ OMX Stockholm are not member-owned organizations, do not maintain a guarantee fund to which members contribute and do not enforce loss sharing assessments amongst members. In addition, unlike most other clearinghouses, they do not record any margin deposits and guarantee funds in the Condensed Consolidated Balance Sheets, as all risks and rewards of collateral ownership, including interest, belongs to the counterparty. Market participants must provide collateral to cover the daily margin call as needed, which is in addition to the initial collateral placed when entering into the transaction. Acceptable collateral is cash and eligible securities in a pledged bank account and/or an on-demand guarantee. All collateral is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX in the event of default. In addition, market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. For NASDAQ OMX Commodities, trading on the contracts can take place up until the delivery period which can occur over a period of several years. For NASDAQ OMX Stockholm, following the completion of a transaction, settlement primarily takes place between parties by net cash settlement or with the exchange of securities and funds. For those transactions where there is an exchange of securities and funds, the transfer of ownership is registered and the securities are stored on the owner's behalf.
The fair value of these derivative contracts with NASDAQ OMX Commodities and NASDAQ OMX Stockholm is reported gross in the Condensed Consolidated Balance Sheets as a receivable pertaining to the purchasing party and a payable pertaining to the selling party. Such receivables and payables attributable to outstanding derivative positions have been netted to the extent that such a legal offset right exists and, at the same time, that it is our intention to settle these items. Our derivative positions, at fair value in the Condensed Consolidated Balance Sheets were $1,417 million at June 30, 2011 and $4,037 million at December 31, 2010. See "Collateral Received for Clearing Operations, Guarantees Issued and Credit Facilities Available," of Note 15, "Commitments, Contingencies and Guarantees," for further discussion of our guarantees on the fulfillment of these contracts and collateral received.
The following table presents the fair value of our outstanding derivative positions at June 30, 2011 and December 31, 2010 prior to netting:
| June 30, 2011 | December 31, 2010 | |||||||||||||||
| Asset | Liability | Asset | Liability | |||||||||||||
| (in millions) | ||||||||||||||||
|
Commodity forwards and options(1) (2) |
$ | 969 | $ | 969 | $ | 3,437 | $ | 3,437 | ||||||||
|
Fixed-income options and futures(2) (3) |
276 | 276 | 578 | 578 | ||||||||||||
|
Stock options and futures(2) (3) |
220 | 220 | 237 | 237 | ||||||||||||
|
Index options and futures(2) (3) |
112 | 112 | 208 | 208 | ||||||||||||
|
Total |
$ | 1,577 | $ | 1,577 | $ | 4,460 | $ | 4,460 | ||||||||
| (1) |
We determine the fair value of our forward contracts using standard valuation models that are based on market-based observable inputs including LIBOR rates and the spot price of the underlying instrument. |
| (2) |
We determine the fair value of our option contracts using standard valuation models that are based on market-based observable inputs including implied volatility, interest rates and the spot price of the underlying instrument. |
| (3) |
We determine the fair value of our futures contracts based upon quoted market prices and average quoted market yields. |
Resale and Repurchase Agreements, at Contract Value
Through our clearing operations in the resale and repurchase markets with NASDAQ OMX Stockholm, we are the legal counterparty for each resale and repurchase contract traded and thereby guarantee the fulfillment of each contract. We only clear these transactions once a bilateral contract between members has been entered into whereby the two members have agreed on all terms in the transaction. The resale and repurchase agreements are not used for financing purposes by NASDAQ OMX Stockholm. As the legal counterparty of each transaction, NASDAQ OMX Stockholm bears the counterparty risk between the purchaser and seller in the resale and repurchase agreement.
The structure and operations for the resale and repurchase market are similar to the derivative markets for NASDAQ OMX Commodities and NASDAQ OMX Stockholm. As discussed above in "Derivative Positions, at Fair Value," NASDAQ OMX Commodities and NASDAQ OMX Stockholm are not member-owned organizations, do not maintain a guarantee fund to which members contribute and do not enforce loss sharing assessments amongst members. In addition, unlike most other clearinghouses, they do not record any margin deposits and guarantee funds in the Condensed Consolidated Balance Sheets, as all risks and rewards of collateral ownership, including interest, belongs to the counterparty. For resale and repurchase agreements, collateral is not held by NASDAQ OMX Stockholm. All resale and repurchase clearing activities are transacted under our clearing member agreements that give us the right, in the event of default, to liquidate collateral pledged between the clearing members and to offset receivables and payables with the same counterparty.
Pledged collateral, which is transferred through NASDAQ OMX Stockholm at initiation of the bilateral contract between the two clearing member counterparties, primarily consists of Swedish government debt securities. Market participants must meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. In the event that one of the participants cannot fulfill its obligation to deliver or receive the underlying security at the agreed upon price, NASDAQ OMX Stockholm is required to buy or sell the security in the open market to fulfill its obligation. In order to protect itself against a price movement in the value of the underlying security, or price risk, NASDAQ OMX Stockholm requires all participants to provide additional margin as needed, which is valued on a daily basis and is maintained at a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX Stockholm in the event of default.
We record resale and repurchase agreements at contract value plus interest gross in the Condensed Consolidated Balance Sheets as a receivable pertaining to the purchasing party and a payable pertaining to the selling party. Such receivables and payables attributable to outstanding resale and repurchase agreements have been netted to the extent that such a legal offset right exists and, at the same time, that it is our intention to settle these items. Our resale and repurchase agreements, at contract value in the Condensed Consolidated Balance Sheets were $3,560 million at June 30, 2011 and $3,441 million at December 31, 2010. The resale and repurchase agreements are recorded at their contractual amounts plus interest which approximates fair value, as the fair value of these items is not materially sensitive to shifts in market interest rates because of the short-term nature of these instruments and/or variable interest rates or to credit risk because the resale and repurchase agreements are fully collateralized. The resale and repurchase agreements generally mature in less than 30 days. See "Collateral Received for Clearing Operations, Guarantees Issued and Credit Facilities Available," of Note 15, "Commitments, Contingencies and Guarantees," for further discussion of our guarantees on the fulfillment of these contracts and collateral received.
Financial Instruments Not Measured at Fair Value on a Recurring Basis
Some of our financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature. Such financial assets and financial liabilities include: cash and cash equivalents, restricted cash, receivables, net, certain other current assets, non-current restricted cash, accounts payable and accrued expenses, Section 31 fees payable to SEC, accrued personnel costs, and certain other current liabilities.
We also consider our debt obligations to be financial instruments. The fair value of our debt obligations was estimated using discounted cash flow analyses based on our assumed incremental borrowing rates for similar types of borrowing arrangements and a Black-Scholes valuation technique that is utilized to calculate the convertible option value for the 3.75% convertible notes and the 2.50% convertible senior notes. At June 30, 2011, the carrying value of our debt obligations, before the $33 million unamortized debt discount on the 2.50% convertible senior notes, was approximately $20 million less than fair value. The difference primarily relates to an increase in the fair value of the 2.50% convertible senior notes and our Term Loans as a result of changes in current market interest rates during the period, partially offset by a decrease in fair value on the 2.50% convertible senior notes due to the convertible option feature which is equivalent to a conversion price of approximately $55.13 as compared to the closing price of our common stock of $25.30 at June 30, 2011. At December 31, 2010, the carrying value of our debt obligations, before the $40 million unamortized debt discount on the 2.50% convertible senior notes, was approximately $17 million less than fair value, primarily due to an increase in the fair value of the 2.50% convertible senior notes as a result of changes in current market interest rates during the period, partially offset by a decrease in fair value on the 2.50% convertible senior notes due to the convertible option feature which is equivalent to a conversion price of approximately $55.13 as compared to the closing price of our common stock of $23.73 at December 31, 2010. For further discussion of our debt obligations, see Note 8, "Debt Obligations."
|
|||
14. Derivative Financial Instruments and Hedging Activities
In the ordinary course of business, we may enter into various types of derivative contracts. These derivative contracts include:
| • |
Futures and foreign currency forward contracts which are commitments to buy or sell at a future date a financial instrument, commodity or currency at a contracted price and may be settled in cash or through delivery. |
| • |
Interest rate swap contracts which are agreements between two parties to exchange one stream of future interest payments for another based on a specified principal amount over a set period of time. |
| • |
Foreign currency option contracts which give the purchaser, for a fee, the right, but not the obligation, to buy or sell within a limited time a financial instrument or currency at a contracted price that may also be settled in cash, based on differentials between specified indices or prices. |
NASDAQ OMX may use these derivative financial instruments to manage exposure to various market risks, primarily foreign currency exchange rate fluctuations and changes in interest rates on our variable rate debt. Such instruments are an integral component of our market risk and related asset/liability management strategy and processes.
Fair Value Hedges
Depending on market conditions, we may use foreign currency futures, forward and option contracts to limit our exposure to foreign currency exchange rate fluctuations on contracted revenue streams (hedged item) relating to our Market Technology sales. When the contracted revenue streams meet the definition of a firm commitment, these derivative contracts may be designated as fair value hedges if the applicable hedge criteria are met. Changes in fair value on the derivatives and the related hedged items are recognized in the Condensed Consolidated Statements of Income. As of June 30, 2011 and December 31, 2010, there were no outstanding fair value hedges.
Cash Flow Hedges
In the third quarter of 2008, we entered into interest rate swap agreements that effectively converted $200 million of our senior secured credit facilities in place as of December 31, 2009, which was floating rate debt, to a fixed rate basis through August 2011, thus reducing the impact of interest rate changes on future interest expense. As of December 31, 2009, these interest rate swaps were in a net liability position of $9 million and were recorded in other non-current liabilities in the Condensed Consolidated Balance Sheets. In the first quarter of 2010, in connection with the repayment of our senior secured credit facilities in place as of December 31, 2009, we terminated our interest rate swaps and reclassified into earnings the unrealized loss of $9 million which was included in accumulated other comprehensive loss in the Condensed Consolidated Balance Sheets at December 31, 2009. This loss is included in general, administrative and other expense in the Condensed Consolidated Statements of Income for the six months ended June 30, 2010. See "Senior Unsecured Notes and Credit Facility," of Note 8, "Debt Obligations," for further discussion.
All derivative contracts used to manage interest rate risk are measured at fair value and are recorded in assets or liabilities as appropriate with the offset in accumulated other comprehensive loss within NASDAQ OMX stockholders' equity in the Condensed Consolidated Balance Sheets. Any hedge ineffectiveness would impact earnings through interest expense. There was no material hedge ineffectiveness recorded in earnings for both the three and six months ended June 30, 2011 and 2010. As of June 30, 2011 and December 31, 2010, there were no outstanding cash flow hedges.
Net Investment Hedges
Net assets of our foreign subsidiaries are exposed to volatility in foreign currency exchange rates. We may utilize net investment hedges to offset the translation adjustment arising from remeasuring our investment in foreign subsidiaries. As of June 30, 2011 and December 31, 2010, there were no outstanding net investment hedges.
Derivatives Not Designated as Hedges
NASDAQ OMX may also enter into economic hedges that either do not qualify or are not designated for hedge accounting treatment. This type of hedge is undertaken when hedge accounting requirements cannot be achieved or management decides not to apply hedge accounting.
We use foreign exchange forward contracts to manage foreign currency exposure of intercompany loans. These contracts are not designated as hedges for financial reporting purposes. The change in fair value of these contracts is recognized in general, administrative and other expense in the Condensed Consolidated Statements of Income and offsets the foreign currency impact recognized on the intercompany loans.
We did not enter into any material economic hedges that did not qualify or were not designated for hedge accounting during the three and six months ended June 30, 2011 and 2010.
|
|||
15. Commitments, Contingencies and Guarantees
Collateral Received for Clearing Operations, Guarantees Issued and Credit Facilities Available
Collateral Received for Clearing Operations
Through our clearing operations in the derivative markets with NASDAQ OMX Commodities, NASDAQ OMX Stockholm and our majority-owned subsidiary International Derivatives Clearing Group, or IDCG, (through International Derivatives Clearinghouse, LLC), as well as riskless principal trading at NOCC and the resale and repurchase market with NASDAQ OMX Stockholm, we are the legal counterparty for each position traded and thereby guarantee the fulfillment of each contract. The derivatives are not used by the above entities for the purpose of trading on their own behalf and the resale and repurchase agreements are not used for financing purposes by NASDAQ OMX Stockholm. The structure and operations of NASDAQ OMX Commodities and NASDAQ OMX Stockholm differ from most other clearinghouses. See "Derivative Positions, at Fair Value," and "Resale and Repurchase Agreements, at Contract Value," of Note 13, "Fair Value of Financial Instruments," for further discussion.
We require market participants at NASDAQ OMX Commodities and NASDAQ OMX Stockholm to provide collateral and meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. Total customer pledged collateral with NASDAQ OMX Commodities and NASDAQ OMX Stockholm was $6.9 billion at June 30, 2011 and $8.7 billion at December 31, 2010. This pledged collateral is held by a third-party custodian bank for the benefit of the clearing members and is accessible by NASDAQ OMX in the event of default. NASDAQ OMX Commodities and NASDAQ OMX Stockholm do not receive any interest on these funds as the risks and rewards of collateral ownership, including interest, belong to the counterparty.
We also require market participants at IDCG and NOCC to meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations and to provide collateral to cover the daily margin call as needed. Customer pledged cash collateral held by IDCG and NOCC, which was $20 million at June 30, 2011 and $15 million at December 31, 2010, is included in restricted cash with an offsetting liability included in other current liabilities in the Condensed Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belong to IDCG and NOCC. Clearing member pledged cash collateral, included in IDCG's guaranty fund, was $8 million at both June 30, 2011 and December 31, 2010. This cash is included in non-current restricted cash with an offsetting liability included in other non-current liabilities in the Condensed Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest income, belong to IDCG.
Guarantees Issued and Credit Facilities Available
In addition to the collateral pledged by market participants discussed above, we have obtained financial guarantees and credit facilities which are guaranteed by us through counter indemnities, to provide further liquidity and default protection related to our clearing businesses. At June 30, 2011, financial guarantees issued to us totaled $5 million. Credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $460 million ($208 million in available liquidity and $252 million to satisfy regulatory requirements), of which $10 million was utilized at June 30, 2011. At December 31, 2010, these facilities totaled $440 million ($196 million in available liquidity and $244 million to satisfy regulatory requirements), none of which was utilized.
We believe that the potential for us to be required to make payments under these arrangements is mitigated through the pledged collateral and our risk management policies. Accordingly, no contingent liability is recorded in the Condensed Consolidated Balance Sheets for these arrangements.
Lease Commitments
We lease some of our office space and equipment under non-cancelable operating leases with third parties and sublease office space to third parties. Some of our lease agreements contain renewal options and escalation clauses based on increases in property taxes and building operating costs.
Other Guarantees
We have provided other guarantees as of June 30, 2011 of $20 million, primarily related to obligations for our rental and leasing contracts. In addition, for certain Market Technology contracts, we have provided performance guarantees of $6 million related to the delivery of software technology and support services. We have received financial guarantees from various financial institutions to support the above guarantees. At December 31, 2010, the total of these guarantees was $24 million.
We have also provided a $25 million guarantee to our wholly-owned subsidiary, NOCC, to cover potential losses in the event of customer defaults, net of any collateral posted against such losses.
We believe that the potential for us to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Condensed Consolidated Balance Sheets for the above guarantees.
Escrow Agreements
In connection with our acquisitions of FTEN and SMARTS, we entered into escrow agreements to secure the payments of post-closing adjustments and other closing conditions. At June 30, 2011, these escrow agreements provide for future payments of $23 million in 2012 and are included in other current liabilities in the Condensed Consolidated Balance Sheets.
Brokerage Activities
Our broker-dealer subsidiaries, Nasdaq Execution Services and NASDAQ Options Services, provide guarantees to securities clearinghouses and exchanges under their standard membership agreements, which require members to guarantee the performance of other members. If a member becomes unable to satisfy its obligations to a clearinghouse or exchange, other members would be required to meet its shortfalls. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral, as well as meet certain minimum financial standards. Nasdaq Execution Services' and NASDAQ Options Services' maximum potential liability under these arrangements cannot be quantified. However, we believe that the potential for Nasdaq Execution Services and NASDAQ Options Services to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Condensed Consolidated Balance Sheets for these arrangements.
Litigation
We may be subject to legal claims arising out of the conduct of our business. We are not currently a party to any litigation that we believe could have a material adverse effect on our business, financial condition, or operating results. However, from time to time, we have been threatened with, or named as a defendant in, lawsuits or involved in regulatory proceedings.
|
|||
16. Business Segments
We manage, operate and provide our products and services in three business segments: Market Services, Issuer Services and Market Technology.
Our Market Services segment includes our U.S. and European Transaction Services businesses and our Market Data business, which are interrelated because the Transaction Services businesses generate the quote and trade information that we sell to market participants and data distributors. Market Services also includes our Broker Services business, which offers technology and customized securities administration solutions to financial participants in the Nordic markets.
Our Issuer Services segment includes our Global Listing Services and Global Index Group businesses. The companies listed on The NASDAQ Stock Market, our Nordic and Baltic exchanges and NASDAQ OMX First North represent a diverse array of industries. This diversity of companies listed on NASDAQ OMX markets allows us to develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group. The Global Listing Services business also includes our Corporate Solutions business, which generates revenues through our shareholder, directors, newswire and other services.
Our Market Technology segment delivers technology and services to marketplaces, brokers and regulators throughout the world. Market Technology provides technology solutions for trading, clearing, settlement and information dissemination, and also offers facility management integration, surveillance solutions and advisory services.
Our management allocates resources, assesses performance and manages these businesses as three separate segments. We evaluate the performance of our segments based on several factors, of which the primary financial measure is income before income taxes. Results of individual businesses are presented based on our management accounting practices and our management structure. Certain amounts are allocated to corporate items in our management reports based on the decision that those activities should not be used to evaluate the segment's operating performance. These amounts include, but are not limited to, amounts related to mergers, strategic initiatives and financing activities. See below for further discussion.
The following table presents certain information regarding these operating segments for the three and six months ended June 30, 2011 and 2010.
| Market Services |
Issuer Services |
Market Technology |
Corporate Items and Eliminations |
Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Three months ended June 30, 2011 |
||||||||||||||||||||
|
Total revenues |
$ | 699 | $ | 93 | $ | 46 | $ | — | $ | 838 | ||||||||||
|
Cost of revenues |
(422 | ) | — | — | — | (422 | ) | |||||||||||||
|
Revenues less transaction rebates, brokerage, clearance and exchange fees |
277 | 93 | 46 | — | 416 | |||||||||||||||
|
Income (loss) before income taxes (1) |
$ | 123 | $ | 32 | $ | 4 | $ | (28 | ) | $ | 131 | |||||||||
|
Three months ended June 30, 2010 |
||||||||||||||||||||
|
Total revenues |
$ | 766 | $ | 86 | $ | 34 | $ | — | $ | 886 | ||||||||||
|
Cost of revenues |
(496 | ) | — | — | — | (496 | ) | |||||||||||||
|
Revenues less transaction rebates, brokerage, clearance and exchange fees |
270 | 86 | 34 | — | 390 | |||||||||||||||
|
Income (loss) before income taxes (2) |
$ | 122 | $ | 30 | $ | 3 | $ | (9 | ) | $ | 146 | |||||||||
|
Six months ended June 30, 2011 |
||||||||||||||||||||
|
Total revenues |
$ | 1,382 | $ | 184 | $ | 89 | $ | — | $ | 1,655 | ||||||||||
|
Cost of revenues |
(824 | ) | — | — | — | (824 | ) | |||||||||||||
|
Revenues less transaction rebates, brokerage, clearance and exchange fees |
558 | 184 | 89 | — | 831 | |||||||||||||||
|
Income (loss) before income taxes ( 1 ) |
$ | 247 | $ | 63 | $ | 6 | $ | (33 | ) | $ | 283 | |||||||||
|
Six months ended June 30, 2010 |
||||||||||||||||||||
|
Total revenues |
$ | 1,418 | $ | 170 | $ | 68 | $ | 1 | $ | 1,657 | ||||||||||
|
Cost of revenues |
(907 | ) | — | — | — | (907 | ) | |||||||||||||
|
Revenues less transaction rebates, brokerage, clearance and exchange fees |
511 | 170 | 68 | 1 | 750 | |||||||||||||||
|
Income (loss) before income taxes ( 3 ) |
$ | 223 | $ | 60 | $ | 5 | $ | (53 | ) | $ | 235 | |||||||||
| (1) |
The corporate items and eliminations for the three and six months ended June 30, 2011 primarily include merger and strategic initiatives expense. |
| (2) |
The corporate items and eliminations for the three months ended June 30, 2010 primarily include charges of $11 million related to loss on divestiture of businesses as a result of our decision to close the businesses of our pan-European multilateral trading facility NASDAQ OMX Europe, or NEURO ($6 million) and Agora-X ($5 million). |
| (3) | For the six months ended June 30, 2010, corporate items and eliminations primarily include charges of $40 million related to the repayment of our senior secured credit facilities in place as of December 31, 2009 and $11 million related to loss on divestiture of businesses as a result of our decision to close the businesses of both NEURO ($6 million) and Agora-X ($5 million). See "Senior Unsecured Notes and Credit Facility," of Note 8, "Debt Obligations," for further discussion of the charges related to the repayment of our senior secured credit facilities. |
|
|||
| Purchase Consideration |
Total Net (Liabilities) Assets Acquired |
Purchased Intangible Assets |
Goodwill | |||||||||||||
| (in millions) | ||||||||||||||||
|
FTEN(1) |
$ | 110 | $ | (1 | ) | $ | 46 | $ | 65 | |||||||
|
SMARTS(2) |
77 | (5 | ) | 28 | 54 | |||||||||||
|
Nord Pool (3) |
17 | 7 | 2 | 8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total for 2010 |
$ | 204 | $ | 1 | $ | 76 | $ | 127 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) |
In December 2010, we acquired FTEN, Inc., or FTEN, a leading provider of Real-Time Risk Management solutions for the financial securities market for $110 million. FTEN purchase consideration included $11 million held in escrow to be paid in 2012, in accordance with the purchase agreement. We acquired net assets, at fair value, totaling $3 million and recorded a current deferred tax liability of $2 million and a non-current deferred tax liability of $16 million related to purchased intangible assets, and we also recorded a non-current deferred tax asset of $14 million related to net operating loss carry forwards, resulting in total net liabilities acquired of $1 million. The total deferred tax liabilities of $18 million represent the tax effect of the difference between the estimated assigned fair value of the acquired intangible assets ($46 million) and the tax basis ($0) of such assets. The estimated amount of $18 million is determined by multiplying the difference of $46 million by FTEN's effective tax rate of 39.55%. The purchased intangible assets of $46 million consisted of $23 million in customer relationships, $12 million in technology, $9 million for the FTEN trade name and $2 million related to non-compete agreements. |
| (2) |
In August 2010, we acquired SMARTS Group Holdings Pty Ltd, or SMARTS, a leading technology provider of surveillance solutions to exchanges, regulators and brokers to diversify our Market Technology business and enter the broker surveillance and compliance market. We completed our acquisition of SMARTS for $77 million, which included a $75 million initial purchase price, as well as a $2 million working capital adjustment. SMARTS purchase consideration also included $2 million held in escrow that was paid in the first quarter of 2011 and $12 million held in escrow to be paid in 2012, in accordance with the purchase agreement. We acquired net assets, at fair value, totaling $3 million and recorded a current deferred tax liability of $1 million and a non-current deferred tax liability of $7 million related to purchased intangible assets, resulting in total net liabilities acquired of $5 million. The total deferred tax liabilities of $8 million represent the tax effect of the difference between the estimated assigned fair value of the acquired intangible assets ($28 million) and the tax basis ($0) of such assets. The estimated amount of $8 million is determined by multiplying the difference of $28 million by SMARTS' effective tax rate of 30%. The purchased intangible assets of $28 million consisted of $11 million in technology and $17 million in customer relationships. |
| (3) |
In May 2010, we acquired Nord Pool, a derivatives trading market, for $17 million (101 million Norwegian Krone). We acquired net assets, at fair value, totaling $8 million and recorded a non-current deferred tax liability of $1 million related to purchased intangible assets, resulting in total net assets acquired of $7 million. Through this acquisition, we now hold a Norwegian exchange license and operate the Nordic power market and the European carbon market on one trading platform. |
|
|||
| Market Services |
Issuer Services |
Market Technology |
Total | |||||||||||||
| (in millions) | ||||||||||||||||
|
Balance at December 31, 2010 |
$ | 4,679 | $ | 292 | $ | 156 | $ | 5,127 | ||||||||
|
Foreign currency translation adjustment |
193 | 14 | 11 | 218 | ||||||||||||
|
Balance at June 30, 2011 |
$ | 4,872 | $ | 306 | $ | 167 | $ | 5,345 | ||||||||
| June 30, 2011 | December 31, 2010 | |||||||||||||||||||||||||||||||
| 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 |
$ | 38 | $ | (8 | ) | $ | 30 | 9 | $ | 72 | $ | (41 | ) | $ | 31 | 6 | ||||||||||||||||
|
Customer relationships |
853 | (175 | ) | 678 | 21 | 853 | (152 | ) | 701 | 21 | ||||||||||||||||||||||
|
Other |
6 | (1 | ) | 5 | 8 | 6 | (1 | ) | 5 | 8 | ||||||||||||||||||||||
|
Foreign currency translation adjustment |
20 | (2 | ) | 18 | (15 | ) | 4 | (11 | ) | |||||||||||||||||||||||
|
Total finite-lived intangible assets |
$ | 917 | $ | (186 | ) | $ | 731 | $ | 916 | $ | (190 | ) | $ | 726 | ||||||||||||||||||
|
Indefinite-Lived Intangible Assets |
||||||||||||||||||||||||||||||||
|
Exchange and clearing registrations |
$ | 790 | $ | — | $ | 790 | $ | 790 | $ | — | $ | 790 | ||||||||||||||||||||
|
Trade names |
181 | — | 181 | 181 | — | 181 | ||||||||||||||||||||||||||
|
Licenses |
78 | — | 78 | 78 | — | 78 | ||||||||||||||||||||||||||
|
Foreign currency translation adjustment |
(13 | ) | — | (13 | ) | (56 | ) | — | (56 | ) | ||||||||||||||||||||||
|
Total indefinite-lived intangible assets |
$ | 1,036 | $ | — | $ | 1,036 | $ | 993 | $ | — | $ | 993 | ||||||||||||||||||||
|
Total intangible assets |
$ | 1,953 | $ | (186 | ) | $ | 1,767 | $ | 1,909 | $ | (190 | ) | $ | 1,719 | ||||||||||||||||||
| (in millions) | ||||
|
2011(1) |
$ | 25 | ||
|
2012 |
51 | |||
|
2013 |
50 | |||
|
2014 |
48 | |||
|
2015 |
46 | |||
|
2016 and thereafter |
493 | |||
|
Total |
$ | 713 | ||
| (1) |
Represents the estimated amortization to be recognized for the remaining six months of 2011. |
|
|||
| Initial Listing Revenues |
Listing of Additional Shares Revenues |
Annual Renewal and Other Revenues |
Market Technology Revenues(2) |
Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Fiscal year ended: |
||||||||||||||||||||
|
2011(1) |
$ | 8 | $ | 19 | $ | 96 | $ | 30 | $ | 153 | ||||||||||
|
2012 |
12 | 30 | 2 | 43 | 87 | |||||||||||||||
|
2013 |
8 | 23 | — | 34 | 65 | |||||||||||||||
|
2014 |
6 | 11 | — | 21 | 38 | |||||||||||||||
|
2015 |
4 | 2 | — | 12 | 18 | |||||||||||||||
|
2016 and thereafter |
3 | — | — | 8 | 11 | |||||||||||||||
| $ | 41 | $ | 85 | $ | 98 | $ | 148 | $ | 372 | |||||||||||
| (1) |
Represents deferred revenue that is anticipated to be recognized over the remaining six months of 2011. |
| (2) |
The timing of recognition of our deferred Market Technology revenues is dependent upon when significant modifications are made pursuant to existing contracts. As such, as it relates to these revenues, the timing represents our best estimate. |
| Initial Listing Revenues |
Listing of Additional Shares Revenues |
Annual Renewal and Other Revenues |
Market Technology Revenues (2) |
Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Balance at January 1, 2011 |
$ | 42 | $ | 83 | $ | 21 | $ | 146 | $ | 292 | ||||||||||
|
Additions (1) |
7 | 22 | 189 | 25 | 243 | |||||||||||||||
|
Amortization (1) |
(8 | ) | (20 | ) | (113 | ) | (30 | ) | (171 | ) | ||||||||||
|
Translation adjustment |
— | — | 1 | 7 | 8 | |||||||||||||||
|
Balance at June 30, 2011 |
$ | 41 | $ | 85 | $ | 98 | $ | 148 | $ | 372 | ||||||||||
|
Balance at January 1, 2010 |
$ | 46 | $ | 76 | $ | 18 | $ | 125 | $ | 265 | ||||||||||
|
Additions (1) |
6 | 25 | 185 | 14 | 230 | |||||||||||||||
|
Amortization (1) |
(9 | ) | (19 | ) | (104 | ) | (8 | ) | (140 | ) | ||||||||||
|
Translation adjustment |
— | — | — | (10 | ) | (10 | ) | |||||||||||||
|
Balance at June 30, 2010 |
$ | 43 | $ | 82 | $ | 99 | $ | 121 | $ | 345 | ||||||||||
| (1) |
The additions and amortization for initial listing revenues, listing of additional shares revenues and annual renewal and other revenues primarily reflect Issuer Services revenues from U.S. listing revenues. |
| (2) |
Market Technology deferred revenues include revenues from delivered client contracts in the support phase charged during the period. Under contract accounting, where customization and significant modifications to the software are made to meet the needs of our customers, total revenues as well as costs incurred, are deferred until significant modifications are completed and delivered. Once delivered, deferred revenue and the related deferred costs are recognized over the post contract support period. We have included the deferral of costs in other current assets and other non-current assets in the Condensed Consolidated Balance Sheets. The amortization of Market Technology deferred revenue primarily includes revenues earned from client contracts recognized during the period. |
|
|||
| December 31, 2010 |
Additions | Payments, Conversions, Accretion and Other |
June 30, 2011 |
|||||||||||||
| (in millions) | ||||||||||||||||
|
3.75% convertible notes due October 22, 2012 (net of discount)(1) |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
2.50% convertible senior notes due August 15, 2013 |
388 | — | 7 | 395 | ||||||||||||
|
4.00% senior unsecured notes due January 15, 2015 (net of discount)(2) |
398 | — | 1 | 399 | ||||||||||||
|
5.55% senior unsecured notes due January 15, 2020 (net of discount)(2) |
598 | — | — | 598 | ||||||||||||
|
$700 million senior unsecured term loan facility credit agreement due January 15, 2013 (average interest rate of 2.26% for the six months ended June 30, 2011)(2) |
570 | — | (120 | ) | 450 | |||||||||||
|
5.25% senior unsecured notes due January 16, 2018 (net of discount)(3) |
367 | — | — | 367 | ||||||||||||
|
Total debt obligations |
2,321 | — | (112 | ) | 2,209 | |||||||||||
|
Less current portion |
(140 | ) | — | — | (140 | ) | ||||||||||
|
Total long-term debt obligations |
$ | 2,181 | $ | — | $ | (112 | ) | $ | 2,069 | |||||||
| (1) |
As of June 30, 2011 and December 31, 2010, approximately $0.5 million aggregate principal amount of the 3.75% convertible notes remained outstanding. |
| (2) |
See "Senior Unsecured Notes and Credit Facility" below for further discussion. |
| (3) |
See "5.25% Senior Unsecured Notes" below for further discussion. |
| Liability Component | Equity Component | |||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||
| Principal Balance |
Unamortized Debt Discount |
Net Carrying Amount |
Gross Equity Component |
Deferred Taxes |
Net Equity Component |
|||||||||||||||||||
|
December 31, 2010 |
$ | 428 | $ | 40 | $ | 388 | $ | 80 | $ | 32 | $ | 48 | ||||||||||||
|
Accretion of debt discount |
— | (7 | ) | 7 | — | — | — | |||||||||||||||||
|
June 30, 2011 |
$ | 428 | $ | 33 | $ | 395 | $ | 80 | $ | 32 | $ | 48 | ||||||||||||
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Components of interest expense recognized on our 2.50% convertible senior notes |
||||||||||||||||
|
Accretion of debt discount |
$ | 3 | $ | 3 | $ | 7 | $ | 7 | ||||||||
|
Contractual interest |
3 | 3 | 5 | 5 | ||||||||||||
|
Total interest expense recognized on our 2.50% convertible senior notes |
$ | 6 | $ | 6 | $ | 12 | $ | 12 | ||||||||
|
|||
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| (in millions) | ||||||||||||||||
|
Components of net periodic benefit cost |
||||||||||||||||
|
Interest cost |
$ | 2 | $ | 1 | $ | 3 | $ | 3 | ||||||||
|
Expected return on plan assets |
(1 | ) | (1 | ) | (2 | ) | (2 | ) | ||||||||
|
Recognized net actuarial loss |
— | 1 | 1 | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net periodic benefit cost |
$ | 1 | $ | 1 | $ | 2 | $ | 3 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||