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NASDAQ OMX Group 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-10.2
  4. Ex-31.1
  5. Ex-31.2
  6. Ex-32.1
  7. Ex-32.1
1e09da7accb44a7

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended March 31, 2014

 

OR

 

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

 

For the transition period from              to           

  

Commission file number: 000-32651

 

The NASDAQ OMX Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

Delaware

52-1165937

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

One Liberty Plaza, New York, New York

10006

(Address of Principal Executive Offices)

(Zip Code)

 

+1 212 401 8700

(Registrant’s telephone number, including area code)

 

No changes

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

 

 

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

 

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

 

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

 

 

 

 

 

 

 

 

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

 

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

 

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

 

 

 

 

 

Class

 

Outstanding at April 25, 2014

 

Common Stock, $.01 par value per share

170,670,413 shares

 

 

 

 

 

 


 

The NASDAQ OMX Group, Inc.

Form 10-Q

For the Quarterly Period Ended March 31, 2014 

INDEX

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

Item 1.

Financial Statements (unaudited)

2

 

 

 

 

Condensed Consolidated Balance Sheets—March  31,  2014 and December 31, 2013

2

 

 

 

 

Condensed Consolidated Statements of Income—Three Months Ended March 31, 2014 and 2013

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income—Three Months Ended March  31, 2014 and 2013

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2014 and 2013

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

50

 

 

 

Item 4.

Controls and Procedures

52

 

 

PART II. OTHER INFORMATION 

 

 

 

 

Item 1.

Legal Proceedings

53

 

 

 

Item 1A..

Risk Factors

53

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53

 

 

 

Item 3.

Defaults Upon Senior Securities

54

 

 

 

Item 4.

Mine Safety Disclosures

54

 

 

 

Item 5.

Other Information

54

 

 

 

Item 6.

Exhibits

54

 

 

SIGNATURES 

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

i

 


 

About This Form 10-Q

Throughout this Form 10-Q, unless otherwise specified:

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

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

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

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

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

* * * * * *

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

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

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

* * * * * *

This Quarterly Report on Form 10-Q includes market share and industry data that we obtained from industry publications and surveys, reports of governmental agencies and internal company surveys. Industry publications and surveys generally state that the information they contain has been obtained from sources believed to be reliable, but we cannot assure you that this information is accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on the most currently available market data. For market comparison purposes, The NASDAQ Stock Market data in this Quarterly Report on Form 10-Q for initial public offerings, or IPOs, is based on data generated internally by us, which includes best efforts underwritings and closed-end funds; therefore, the data may not be comparable to other publicly-available IPO data. Data in this Quarterly Report on Form 10-Q for new listings of equity securities on The NASDAQ Stock Market is based on data generated internally by us, which includes best efforts underwritings, issuers that switched from other listing venues, closed-end funds and exchange traded funds, or ETFs. Data in this Quarterly Report on Form 10-Q for IPOs and new listings of equity securities on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic also is based on data generated internally by us. IPOs and new listings data is presented as of period end. While we are not aware of any misstatements regarding industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors. We refer you to the “Risk Factors” section in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, and the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 that was filed with the U.S. Securities and Exchange Commission, or SEC, on February 24, 2014.

ii

 


 

Forward-Looking Statements

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

our 2014 outlook;

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

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

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

the impact of pricing changes;

tax matters;

the cost and availability of liquidity; and

any litigation or regulatory or government investigation or action to which we are or could become a party.

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

our operating results may be lower than expected;

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

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

government and industry regulation;

our ability to keep up with rapid technological advances; 

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

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

adverse changes that may occur in the securities markets generally.

   

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the uncertainty and any risk related to forward-looking statements that we make. These risk factors are discussed under the caption “Part II. Item 1A. Risk Factors,” in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, and more fully described in the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 that was filed with the SEC on February 24, 2014. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should carefully read this entire Quarterly Report on Form 10-Q, including “Part 1. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the condensed consolidated financial statements and the related notes. Except as required by the federal securities laws, we undertake no obligation to update any forward-looking statement, release publicly any revisions to any forward-looking statements or report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

1


 

PART 1—FINANCIAL INFORMATION

Item 1. Financial Statements.

The NASDAQ OMX Group, Inc.

Condensed Consolidated Balance Sheets

(in millions, except share and par value amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

December 31, 2013

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

384 

 

$

398 

Restricted cash

 

 

84 

 

 

84 

Financial investments, at fair value

 

 

197 

 

 

189 

Receivables, net

 

 

434 

 

 

393 

Deferred tax assets

 

 

17 

 

 

12 

Default funds and margin deposits

 

 

2,253 

 

 

1,961 

Other current assets

 

 

150 

 

 

126 

Total current assets

 

 

3,519 

 

 

3,163 

Property and equipment, net

 

 

266 

 

 

268 

Non-current deferred tax assets

 

 

415 

 

 

404 

Goodwill

 

 

6,173 

 

 

6,186 

Intangible assets, net

 

 

2,362 

 

 

2,386 

Other non-current assets

 

 

243 

 

 

170 

Total assets

 

$

12,978 

 

$

12,577 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

227 

 

$

228 

Sections 31 fees payable to SEC

 

 

74 

 

 

82 

Accrued personnel costs

 

 

96 

 

 

154 

Deferred revenue

 

 

276 

 

 

151 

Other current liabilities

 

 

186 

 

 

141 

Deferred tax liabilities

 

 

36 

 

 

38 

Default funds and margin deposits

 

 

2,253 

 

 

1,961 

Current portion of debt obligations

 

 

430 

 

 

45 

Total current liabilities

 

 

3,578 

 

 

2,800 

Debt obligations

 

 

2,084 

 

 

2,589 

Non-current deferred tax liabilities

 

 

707 

 

 

708 

Non-current deferred revenue

 

 

222 

 

 

143 

Other non-current liabilities

 

 

147 

 

 

153 

Total liabilities

 

 

6,738 

 

 

6,393 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

Equity

 

 

 

 

 

 

NASDAQ OMX stockholders' equity:

 

 

 

 

 

 

Common stock, $0.01 par value, 300,000,000 shares authorized, shares issued: 216,181,636 at March 31, 2014 and 214,419,155 at December 31, 2013; shares outstanding: 170,568,534 at March 31, 2014 and 169,357,084 at December 31, 2013

 

 

 

 

Preferred stock, 30,000,000 shares authorized, series A convertible preferred stock: shares issued: none at March 31, 2014 and 1,600,000 at December 31, 2013; shares outstanding: none at March 31, 2014 and December 31, 2013

 

 

 -

 

 

 -

Additional paid-in capital

 

 

4,302 

 

 

4,278 

Common stock in treasury, at cost: 45,613,102 shares at March 31, 2014 and 45,062,071 shares at December 31, 2013

 

 

(1,026)

 

 

(1,005)

Accumulated other comprehensive loss

 

 

(71)

 

 

(67)

Retained earnings

 

 

3,032 

 

 

2,976 

Total NASDAQ OMX stockholders' equity

 

 

6,239 

 

 

6,184 

Noncontrolling interests

 

 

 

 

 -

Total equity

 

 

6,240 

 

 

6,184 

Total liabilities and equity

 

$

12,978 

 

$

12,577 

See accompanying notes to condensed consolidated financial statements.

2


 

The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Income 

(Unaudited)

(in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2014

 

2013

Revenues:

 

 

 

 

 

 

Market Services

 

$

582 

 

$

508 

Listing Services

 

 

58 

 

 

55 

Information Services

 

 

123 

 

 

106 

Technology Solutions

 

 

135 

 

 

75 

     Total revenues

 

 

898 

 

 

744 

 

 

 

 

 

 

 

Cost of revenues:

 

 

 

 

 

 

Transaction rebates

 

 

(285)

 

 

(242)

Brokerage, clearance and exchange fees

 

 

(84)

 

 

(84)

     Total cost of revenues

 

 

(369)

 

 

(326)

Revenues less transaction rebates, brokerage, clearance and exchange fees

 

 

529 

 

 

418 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

Compensation and benefits

 

 

158 

 

 

117 

Marketing and advertising

 

 

 

 

Depreciation and amortization

 

 

35 

 

 

27 

Professional and contract services

 

 

39 

 

 

29 

Computer operations and data communications

 

 

22 

 

 

15 

Occupancy

 

 

25 

 

 

22 

Regulatory

 

 

 

 

Merger and strategic initiatives

 

 

28 

 

 

General, administrative and other

 

 

23 

 

 

25 

Restructuring charges

 

 

 -

 

 

Voluntary accommodation program

 

 

 -

 

 

62 

     Total operating expenses

 

 

345 

 

 

328 

Operating income

 

 

184 

 

 

90 

Interest income

 

 

 

 

Interest expense

 

 

(30)

 

 

(24)

Asset impairment charges

 

 

 -

 

 

(10)

Income before income taxes

 

 

156 

 

 

59 

Income tax provision

 

 

53 

 

 

17 

Net income

 

 

103 

 

 

42 

Net (income) loss attributable to noncontrolling interests

 

 

 -

 

 

 -

Net income attributable to NASDAQ OMX

 

$

103 

 

$

42 

 

 

 

 

 

 

 

Per share information:

 

 

 

 

 

 

Basic earnings per share

 

$

0.61 

 

$

0.26 

Diluted earnings per share

 

$

0.59 

 

$

0.25 

Cash dividends declared per common share

 

$

0.28 

 

$

0.13 

See accompanying notes to condensed consolidated financial statements.

3


 

 

The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2014

 

2013

Net income

 

$

103 

 

$

42 

Other comprehensive loss:

 

 

 

 

 

 

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

 

 

 -

 

 

 

 

 

 

 

 

 

Foreign currency translation losses:

 

 

 

 

 

 

Net foreign currency translation losses

 

 

(12)

 

 

(41)

Income tax benefit

 

 

 

 

Total

 

 

(4)

 

 

(34)

Total other comprehensive loss, net of tax

 

 

(4)

 

 

(33)

Comprehensive income

 

 

99 

 

 

Comprehensive (income) loss attributable to noncontrolling interests

 

 

 -

 

 

 -

Comprehensive income attributable to NASDAQ OMX

 

$

99 

 

$

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2014

 

2013

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

103 

 

$

42 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

35 

 

 

27 

Share-based compensation

 

 

14 

 

 

Excess tax benefits related to share-based compensation

 

 

(3)

 

 

(2)

Provision for bad debts

 

 

 

 

Deferred income taxes

 

 

(10)

 

 

(23)

Non-cash merger and strategic initiatives

 

 

18 

 

 

 -

Non-cash restructuring charges

 

 

 -

 

 

Asset impairment charges

 

 

 -

 

 

10 

Other non-cash items included in net income

 

 

 -

 

 

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

 

 

 

 

 

 

Receivables, net

 

 

(42)

 

 

14 

Other assets

 

 

(17)

 

 

(7)

Accounts payable and accrued expenses

 

 

(1)

 

 

44 

Section 31 fees payable to SEC

 

 

(8)

 

 

(26)

Accrued personnel costs

 

 

(58)

 

 

(52)

Deferred revenue

 

 

128 

 

 

105 

Other liabilities

 

 

20 

 

 

Net cash provided by operating activities

 

 

183 

 

 

149 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of trading securities

 

 

(96)

 

 

(112)

Proceeds from sales and redemptions of trading securities

 

 

93 

 

 

118 

Purchases of available-for-sale investment securities

 

 

(5)

 

 

 -

Purchases of property and equipment

 

 

(31)

 

 

(20)

Other investment activities

 

 

(7)

 

 

 -

Net cash used in investing activities

 

 

(46)

 

 

(14)

Cash flows from financing activities:

 

 

 

 

 

 

Payments of debt obligations

 

 

(146)

 

 

(11)

Proceeds from debt obligations

 

 

25 

 

 

 -

Cash paid for repurchase of common stock

 

 

 -

 

 

(10)

Cash dividends

 

 

(22)

 

 

(21)

Proceeds received from employee stock activity

 

 

 

 

Payments related to employee shares withheld for taxes

 

 

(21)

 

 

(1)

Excess tax benefits related to share-based compensation

 

 

 

 

Other financing activities

 

 

 

 

 -

Net cash used in financing activities

 

 

(153)

 

 

(35)

Effect of exchange rate changes on cash and cash equivalents

 

 

 

 

(6)

Net (decrease) increase in cash and cash equivalents

 

 

(14)

 

 

94 

Cash and cash equivalents at beginning of period

 

 

398 

 

 

497 

Cash and cash equivalents at end of period

 

$

384 

 

$

591 

Supplemental Disclosure Cash Flow Information

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

36 

 

$

37 

Income taxes, net of refund

 

$

11 

 

$

11 

Non-cash investing activities:

 

 

 

 

 

 

Cost method investment

 

$

75 

 

$

 -

  See accompanying notes to condensed consolidated financial statements.

5


 

 

The NASDAQ OMX Group, Inc.

Notes to Condensed Consolidated Financial Statements

1. Organization and Nature of Operations

We are a leading global exchange group that delivers trading, clearing, exchange technology, regulatory, securities listing, and public company services across six continents. Our global offerings are diverse and include trading and clearing across multiple asset classes, access services, market data products, financial indexes, capital formation solutions, financial services, corporate solutions and market technology products and services. Our technology powers markets across the globe, supporting derivatives trading, clearing and settlement, cash equity trading, fixed income trading 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 March  31, 2014, The NASDAQ Stock Market was home to 2,667 listed companies with a combined market capitalization of approximately $7.4 trillion. In addition, in the U.S. we operate two additional cash equities trading markets, three options markets and an electronic platform for trading of U.S. Treasuries. In March 2014, we launched NASDAQ Private Market, or NPM, a marketplace for private growth companies.

In Europe, we operate exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland, as well as the clearing operations of NASDAQ OMX Clearing AB, as NASDAQ OMX Nordic. We also operate exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as NASDAQ OMX Baltic. Collectively, 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 March  31, 2014, the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic, together with NASDAQ OMX First North, were home to 755 listed companies with a combined market capitalization of approximately $1.4 trillion. We also operate NASDAQ OMX Armenia. 

In addition, NASDAQ OMX Commodities operates a power derivatives exchange regulated in Norway and a European carbon exchange. We also operate NOS Clearing ASA,  or NOS Clearing, a leading Norway-based clearinghouse primarily for over-the-counter, or OTC, traded derivatives for the freight market and seafood derivatives market. In the U.K., we operate NASDAQ OMX NLX, a London-based market for trading of listed short-term and long-term European (Euro and Sterling denominated) interest rate derivative products.

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

2. Basis of Presentation and Principles of Consolidation

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

As permitted under U.S. GAAP, certain footnotes or other financial information can be condensed or omitted in the interim condensed consolidated financial statements. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in NASDAQ OMX’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

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

Tax Matters

We use the asset and liability method to determine income taxes on all transactions recorded in the condensed consolidated financial statements. Deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will

6


 

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.

NASDAQ OMX and its eligible subsidiaries file a consolidated U.S. federal income tax return and applicable state and local income tax returns and non-U.S. income tax returns. Federal income tax returns for the years 2007 through 2010 are currently under audit by the Internal Revenue Service and we are subject to examination for 2011 and 2012. Several state tax returns are currently under examination by the respective tax authorities for the years 2005 through 2012. Non-U.S. tax returns are subject to examination by the respective tax authorities for the years 2006 through 2012. We anticipate that the amount of unrecognized tax benefits at March 31, 2014 will significantly decrease in the next twelve months as we expect to settle certain tax audits. The final outcome of such audits cannot yet be determined. We anticipate that such adjustments will not have a material impact on our consolidated financial position or results of operations.

In the fourth quarter of 2010, we received an appeal from the Finnish Tax Authority challenging certain interest expense deductions claimed by NASDAQ OMX in Finland for the year 2008. The appeal also demanded certain penalties be paid with regard to the company’s tax return filing position. In October 2012, the Finnish Appeals Board disagreed with the company’s tax return filing position for years 2009 through 2011, even though the tax return position with respect to this deduction was previously reviewed and approved by the Finnish Tax Authority. NASDAQ OMX has appealed the ruling by the Finnish Appeals Board to the Finnish Administrative Court. Through March 31, 2014, we have recorded tax benefits of $20 million associated with this filing position. Of this amount we have paid $12 million to the Finnish tax authorities. We have also paid $11 million in interest and penalties. In 2014, we will pay $8 million, which represents the benefit taken in 2013 and the first quarter of 2014. We expect the Finnish Administrative Court to agree with our position, which would result in an expected refund to NASDAQ OMX of $31 million. 

From 2009 through 2012, we recorded tax benefits associated with certain interest expense incurred in Sweden. Our position is supported by a 2011 ruling we received from the Swedish Supreme Administrative Court. However, under new legislation effective January 1, 2013, limitations are imposed on certain forms of interest expense. Because this legislation is unclear with regard to our ability to continue to claim such interest deductions, NASDAQ OMX has filed an application for an advance tax ruling with the Swedish Tax Council for Advance Tax Rulings. We expect to receive a favorable response from the Swedish Tax Council for Advance Tax Rulings. Since January 1, 2013, we have recorded tax benefits of $20 million, or $0.12 per diluted share, related to this matter. We expect to record recurring quarterly tax benefits of $4 million to $5 million with respect to this issue for the foreseeable future.

In December 2012, the Swedish Tax Agency approved our 2010 amended value added tax, or VAT, tax return and we received a cash refund for the amount claimed. In 2013, we filed VAT tax returns for 2011 and 2012 and utilized the same approach which was approved for the 2010 filing. However, even though the VAT return position was previously reviewed and approved by the Swedish Tax Agency, we were informed by the Swedish Tax Agency that our VAT refund claims for 2011 and 2012 are not valid. However, they will not seek reimbursement of the 2010 refund. We have appealed the finding by the Swedish Tax Agency to the Administrative Court. For the period January 1, 2011 through March 31, 2014, we have recorded benefits of $15 million associated with this position.

 

3. Restructuring Charges

During the first quarter of 2012, we performed a comprehensive review of our processes, organizations and systems in a company-wide effort to improve performance, cut costs, and reduce spending. This restructuring program was completed in the first quarter of 2013. 

The following table presents a summary of restructuring charges in the Condensed Consolidated Statements of Income for the three months ended March 31, 2013:  

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2013

 

 

 

 

 

 

(in millions)

Severance

 

$

Facilities-related

 

 

Asset impairments

 

 

Other

 

 

7


 

Total restructuring charges

 

$

 

During the first quarter of 2013, we recognized restructuring charges totaling $9 million, including severance costs of $6 million related to workforce reductions of 31 positions across our organization, $1 million for facilities-related charges related to lease rent accruals for facilities we no longer occupy due to facilities consolidation, $1 million for asset impairments, primarily consisting of fixed assets and capitalized software that have been retired, and $1 million of other charges.

Restructuring Reserve

Severance

The accrued severance balance was $3 million at December 31, 2013 and is included in other current liabilities in the Condensed Consolidated Balance Sheets. The accrued severance balance as of December 31, 2013 was paid during the first quarter of 2014.  

Facilities-related

Facilities-related reserves are calculated using a present value of future minimum lease payments, offset by an estimate for future sublease income. The facilities-related reserve balance was $1 million at December 31, 2013. The majority of the facilities-related reserve balance as of December 31, 2013 was utilized during the first quarter of 2014.

 

 

 

4. Acquisitions

We completed the following acquisitions in 2014 and 2013. Financial results of each transaction are included in our Condensed Consolidated Statements of Income from the dates of each acquisition.

2014 Acquisition

On March 31, 2014, we completed the acquisition of the remaining 28% ownership interest in BWise Beheer B.V. and its subsidiaries, or BWise, a Netherlands-based service provider that offers enterprise governance, risk management and compliance software and services to help companies track, measure and manage key organizational risks. BWise is part of our Market Technology business within our Technology Solutions segment. 

2013 Acquisitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Consideration

 

Total Net Assets (Liabilities) Acquired

 

Purchased Intangible Assets

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

eSpeed

 

$

1,239 

 

$

 

$

715 

 

$

519 

TR Corporate Solutions businesses

 

 

366 

 

 

(37)

 

 

91 

 

 

312 

 

The amounts in the table above represent the preliminary allocation of the purchase price and are subject to revision during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date. Adjustments to the provisional values during the measurement period will be recorded as of the date of acquisition. Comparative information for periods after acquisition but before the period in which the adjustments are identified will be adjusted to reflect the effects of the adjustments as if they were taken into account as of the acquisition date. Changes to amounts recorded as assets and liabilities may result in a corresponding adjustment to goodwill. There were no adjustments to the provisional values for the above acquisitions during the first quarter of 2014. 

Acquisition of eSpeed for Trading of U.S. Treasuries

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

The purchase price consisted of $755 million in cash and contingent future annual issuances of 992,247 shares of NASDAQ OMX common stock, which approximated certain tax benefits associated with the transaction of $484 million. Such contingent future issuances of NASDAQ OMX common stock will be paid ratably through 2027 if NASDAQ OMX achieves a designated revenue

8


 

target in each such year.  The contingent future issuances of NASDAQ OMX common stock are subject to anti-dilution protections and acceleration upon certain events.

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

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

In the first quarter of 2014, we performed a review of our legacy Corporate Solutions’ technology platforms in an effort to leverage our scale and expertise as well as improve the efficiencies that we deliver to our customers and reduce our costs. This review resulted in the consolidation and retirement of several technology platforms, resulting in a charge of $18 million in the first quarter of 2014. In addition, other merger costs of $8 million relating to our acquisition of the TR Corporate Solutions businesses were recorded in the first quarter of 2014. These charges are included in merger and strategic initiatives expense in the Condensed Consolidated Statements of Income. 

Formation of The NASDAQ Private Market Joint Venture 

In March 2013, we formed a joint venture with SharesPost, Inc. creating NPM, a marketplace for private growth companies. We own a majority interest in NPM, combining NASDAQ OMX’s resources, market and operating expertise with SharesPost’s web-based platform. NPM launched in March 2014 and is part of our U.S. Listing Services business within our Listing Services segment.

We finalized the allocation of the purchase price for NPM in the first quarter of 2014. There were no adjustments to the provisional values for this acquisition during the first quarter of 2014. 

EMCF and EuroCCP Merger

In December 2013, European Multilateral Clearing Facility N.V., or EMCF, merged with EuroCCP, creating EuroCCP N.V., a new combined clearinghouse. NASDAQ OMX previously had a 22% equity interest in EMCF and, upon completion of the merger, currently has a 25% equity interest in EuroCCP N.V. We account for our investment in EuroCCP N.V. under the equity method of accounting. We purchased the additional ownership interest in EuroCCP N.V. for an immaterial amount. See “Equity Method Investments,” of Note 6, “Investments,” for further discussion of our equity method investments.

Acquisition of Dutch Cash Equities and Equity Derivatives Trading Venue 

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

Pro Forma Results and Acquisition-related Costs

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

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

 

5. Goodwill and Purchased Intangible Assets

Goodwill

The following table presents the changes in goodwill by business segment during the three months ended March 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market Services

 

Listing Services

 

Information Services

 

Technology Solutions

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

Balance at December 31, 2013

 

$

3,433 

 

$

136 

 

$

2,019 

 

$

598 

 

$

6,186 

Goodwill acquired

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Foreign currency translation adjustment

 

 

(7)

 

 

 -

 

 

(4)

 

 

(2)

 

 

(13)

9


 

Balance at March 31, 2014

 

$

3,426 

 

$

136 

 

$

2,015 

 

$

596 

 

$

6,173 

 

As of March 31, 2014, the amount of goodwill that is expected to be deductible for tax purposes in future periods is $861 million, of which $493 million is related to our acquisition of eSpeed and $294 million is related to our acquisition of the TR Corporate Solutions businesses. 

Goodwill represents the excess of the purchase price over the value assigned to the net tangible and identifiable intangible assets of a business acquired. Goodwill is allocated to our reporting units based on the assignment of the fair values of each reporting unit of the acquired company. We perform an annual goodwill impairment test during the fourth quarter of our fiscal year using carrying amounts as of October 1. Should certain events or indicators of impairment occur between annual impairment tests, we will perform the impairment test as those events or indicators occur. We assess goodwill impairment at the reporting unit level. There was no impairment of goodwill for the three months ended March 31, 2014 and 2013, however, events such as economic weakness or unexpected significant declines in operating results of a reporting unit may result in goodwill impairment charges in the future. 

Purchased Intangible Assets

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2014

 

December 31, 2013

 

 

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

 

$

37 

 

$

(12)

 

$

25 

 

 

 

$

39 

 

$

(12)

 

$

27 

 

 

Customer relationships

 

 

1,075 

 

 

(309)

 

 

766 

 

 

19 

 

 

1,075 

 

 

(292)

 

 

783 

 

 

19 

Other

 

 

 

 

(3)

 

 

 

 

 

 

 

 

(3)

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 -

 

 

 

 

 

 

 

 

 

 -

 

 

 

 

 

Total finite-lived intangible assets

 

$

1,119 

 

$

(324)

 

$

795 

 

 

 

 

$

1,122 

 

$

(307)

 

$

815 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indefinite-Lived Intangible Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exchange and clearing registrations

 

$

790 

 

$

 -

 

$

790 

 

 

 

 

$

790 

 

$

 -

 

$

790 

 

 

 

Trade names

 

 

756 

 

 

 -

 

 

756 

 

 

 

 

 

756 

 

 

 -

 

 

756 

 

 

 

Licenses

 

 

51 

 

 

 -

 

 

51 

 

 

 

 

 

51 

 

 

 -

 

 

51 

 

 

 

Foreign currency translation adjustment

 

 

(30)

 

 

 -

 

 

(30)

 

 

 

 

 

(26)

 

 

 -

 

 

(26)

 

 

 

Total indefinite-lived intangible assets

 

$

1,567 

 

$

 -

 

$

1,567 

 

 

 

 

$

1,571 

 

$

 -

 

$

1,571 

 

 

 

Total intangible assets

 

$

2,686 

 

$

(324)

 

$

2,362 

 

 

 

 

$

2,693 

 

$

(307)

 

$

2,386 

 

 

 

 

 

Amortization expense for purchased finite-lived intangible assets was $18 million for the three months ended March 31, 2014 and  $13 million for the three months ended March 31, 2013.

The estimated future amortization expense (excluding the impact of foreign currency translation adjustment) of purchased finite-lived intangible assets as of March 31, 2014 is as follows: