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NASDAQ OMX Group 10-Q 2015

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.1
20150630 Q2

 

 

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 June 30, 2015

 

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 July 28, 2015

 

Common Stock, $.01 par value per share

168,930,032 shares

 

 

 

 

 

 


 

The NASDAQ OMX Group, Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2015 

INDEX

 

 

 

 

 

 

 

PART I. FINANCIAL INFORMATION 

 

 

 

 

Item 1.

Financial Statements (unaudited)

2

 

 

 

 

Condensed Consolidated Balance Sheets—June 30,  2015 and December 31, 2014

2

 

 

 

 

Condensed Consolidated Statements of Income—Three and Six Months Ended June 30, 2015 and 2014

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2015 and 2014

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2015 and 2014

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements 

6

 

 

 

Item 2.

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

30

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

Item 4.

Controls and Procedures

52

 

 

PART II. OTHER INFORMATION 

 

 

 

 

Item 1.

Legal Proceedings

53

 

 

 

Item 1A..

Risk Factors

54

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

 

 

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

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

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

OMX” refers to OMX AB (publ) subsequent to the business combination with Nasdaq.

“Nasdaq Nordic” refers to collectively,  NASDAQ OMX Clearing AB, NASDAQ OMX Stockholm AB, NASDAQ OMX Copenhagen A/S, NASDAQ OMX Helsinki Ltd, and NASDAQ OMX Iceland hf. 

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

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

SEK”  or “Swedish Krona” refers to the lawful currency of Sweden.

* * * * * *

The following is a non-exclusive list of registered trademarks, registered service marks, or trademarks or service marks of Nasdaq or its subsidiaries, in the United States and/or other countries or jurisdictions:

 

ACES®, AGGREGATION, TRANSPARENCY, CONTROL®, AT-TRADE®, AUTO WORKUP®, AXE®, BWISE®, BX VENTURE MARKET®, CCBN®, CONDICO®, DATAXPRESS®, DIRECTORS DESK®, DIRECTORSDESK®, DORSEY WRIGHT®, DREAM IT. DO IT.®, DWA®, DX®, E-SPEED®, E-SPEED FILING®, ESPEED®, ESPEED ELITE®, EVI®, FINQLOUD®, FTEN®, GENIUM®, GLOBE NEWSWIRE®, GX®, IGNITE YOUR AMBITION®, INET®, ITCH®, KLEOS®, LIQUIDITYXPRESS®, MARKET INTELLIGENCE DESK®, MARKETSITE®, MYMEDIAINFO®, NASDAQ®, NASDAQ - FINANCIAL®, NASDAQ - FINANCIAL INDEX®, NASDAQ BIOTECHNOLOGY INDEX®, NASDAQ CAPITAL MARKET®, NASDAQ COMPOSITE®, NASDAQ COMPOSITE INDEX®, NASDAQ COMPUTER 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 MAX MARKET ANALYTIX®, 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 GROUP®, NASDAQ OMX NORDIC®, NASDAQ PRIVATE MARKET®, NASDAQ Q-50 INDEX®, NASDAQ TELECOMMUNICATIONS INDEX®, NASDAQ TOTALVIEW®, NASDAQ TRADER®, NASDAQ TRANSPORTATION INDEX®, NASDAQ US ALL MARKET®, NASDAQ VOLATILITY GUARD®, NASDAQ WORKSTATION II®, NASDAQ-100®, NASDAQ-100 EUROPEAN TRACKER®, NASDAQ-100 INDEX®, NASDAQ-100 INDEX TRACKING STOCK®, NDX®, NFX WORLD CURRENCY FUTURES®, NFX XL®, OMXS30®, PHILADELPHIA STOCK EXCHANGE®, PHLX®, PHLX XL®, PIXL®, PORTAL ALLIANCE®, QQQ®, QTARGET®, QVIEW®, RE-THINK®, RISKWRAPPER®, RISKXPOSURE®, RX®, SIDECAR®, SIGNALXPRESS®, STRUCTURED LIQUIDITY PROGRAM®, SX®, THE NASDAQ STOCK MARKET®, THE STOCK MARKET FOR THE NEXT 100 YEARS®, TOTAL EQUITY SOLUTION®, TRADE REPORTING DATA STORAGE®, TRADEGUARD®, TRADEXAMINER®, TRDS®, TX®, ULTRAFEED®, UNITED CURRENCY OPTIONS MARKET®, VX PROXY®, XDE® 

To the extent a name, logo or design does not appear on the above list, such lack of appearance does not constitute a waiver of any intellectual property rights that Nasdaq has established in its product or service names or logos, or in product configurations or designs, all of which rights are expressly reserved.

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

 

ii

 


 

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; 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 Nasdaq Nordic and Nasdaq Baltic exchanges also is based on data generated internally by us. IPOs and new listings data is presented as of period end. While we are not aware of any misstatements regarding industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors. We refer you to the “Risk Factors” section in this Quarterly Report on Form 10-Q for the quarter ended June  30, 2015, the “Risk Factors” section in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 that was filed with the U.S. Securities and Exchange Commission, or  SEC, on May 6, 2015 and the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 that was filed with the SEC on February 17, 2015.

iii

 


 

          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 “may,” “will,” “could,” “should,” “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 2015 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, restructuring, technology, de-leveraging and capital return initiatives;

·

our products and services

·

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, listed companies or other customers;  

·

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 and adequately address security risks;

·

the performance and reliability of our technology and technology of third parties;

·

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;

·

our ability to continue to generate cash and manage our indebtedness; and

·

adverse changes that may occur in the securities markets generally.  

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the uncertainty and any risk related to forward-looking statements that we make. These risk factors are discussed under the caption “Part II. Item 1A. Risk Factors,” in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 that was filed with the SEC on May 6, 2015 and more fully described in the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 that was filed with the SEC on February 17, 2015. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should carefully read this entire Quarterly Report on Form 10-Q, including “Part 1. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the condensed consolidated financial statements and the related notes. Except as required by the federal securities laws, we undertake no obligation to update any forward-looking statement, release publicly any revisions to any forward-looking statements or report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

1


 

PART 1—FINANCIAL INFORMATION

Item 1. Financial Statements.

The NASDAQ OMX Group, Inc.

 

Condensed Consolidated Balance Sheets

(in millions, except share and par value amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,     2015

 

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

324 

 

 

$

427 

Restricted cash

 

 

 

17 

 

 

 

49 

Financial investments, at fair value

 

 

 

264 

 

 

 

174 

Receivables, net

 

 

 

323 

 

 

 

389 

Deferred tax assets

 

 

 

35 

 

 

 

16 

Default funds and margin deposits

 

 

 

2,331 

 

 

 

2,194 

Other current assets

 

 

 

152 

 

 

 

151 

Total current assets

 

 

 

3,446 

 

 

 

3,400 

Property and equipment, net

 

 

 

295 

 

 

 

292 

Non-current deferred tax assets

 

 

 

621 

 

 

 

536 

Goodwill

 

 

 

5,469 

 

 

 

5,538 

Intangible assets, net

 

 

 

2,009 

 

 

 

2,077 

Other non-current assets

 

 

 

264 

 

 

 

228 

Total assets

 

 

$

12,104 

 

 

$

12,071 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

$

188 

 

 

$

189 

Section 31 fees payable to SEC

 

 

 

147 

 

 

 

124 

Accrued personnel costs

 

 

 

94 

 

 

 

143 

Deferred revenue

 

 

 

231 

 

 

 

177 

Other current liabilities

 

 

 

125 

 

 

 

116 

Deferred tax liabilities

 

 

 

30 

 

 

 

37 

Default funds and margin deposits

 

 

 

2,331 

 

 

 

2,194 

Total current liabilities

 

 

 

3,146 

 

 

 

2,980 

Debt obligations

 

 

 

2,281 

 

 

 

2,297 

Non-current deferred tax liabilities

 

 

 

606 

 

 

 

626 

Non-current deferred revenue

 

 

 

208 

 

 

 

215 

Other non-current liabilities

 

 

 

147 

 

 

 

159 

Total liabilities

 

 

 

6,388 

 

 

 

6,277 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Nasdaq stockholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, 300,000,000 shares authorized, shares issued: 171,707,297 at June 30, 2015 and 170,325,304 at December 31, 2014; shares outstanding: 168,906,727 at June 30, 2015 and 168,795,263 at December 31, 2014

 

 

 

 

 

 

Additional paid-in capital

 

 

 

3,257 

 

 

 

3,222 

Common stock in treasury, at cost: 2,800,570 shares at June 30, 2015 and 1,530,041 shares at December 31, 2014

 

 

 

(104)

 

 

 

(41)

Accumulated other comprehensive loss

 

 

 

(805)

 

 

 

(682)

Retained earnings

 

 

 

3,366 

 

 

 

3,292 

Total Nasdaq stockholders' equity

 

 

 

5,716 

 

 

 

5,793 

Noncontrolling interests

 

 

 

 -

 

 

 

Total equity

 

 

 

5,716 

 

 

 

5,794 

Total liabilities and equity

 

 

$

12,104 

 

 

$

12,071 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

2


 

The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Income 

(Unaudited)

(in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended    June 30,

 

Six Months Ended         June 30,

 

 

2015

 

2014

 

2015

 

2014

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Market Services

 

$

478 

 

$

539 

 

$

1,018 

 

$

1,116 

Listing Services

 

 

66 

 

 

60 

 

 

130 

 

 

117 

Information Services

 

 

128 

 

 

123 

 

 

253 

 

 

246 

Technology Solutions

 

 

135 

 

 

143 

 

 

265 

 

 

283 

     Total revenues

 

 

807 

 

 

865 

 

 

1,666 

 

 

1,762 

Transaction-based expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Transaction rebates

 

 

(216)

 

 

(252)

 

 

(477)

 

 

(536)

Brokerage, clearance and exchange fees

 

 

(73)

 

 

(90)

 

 

(164)

 

 

(174)

Revenues less transaction-based expenses

 

 

518 

 

 

523 

 

 

1,025 

 

 

1,052 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

144 

 

 

145 

 

 

291 

 

 

303 

Marketing and advertising

 

 

 

 

 

 

13 

 

 

18 

Depreciation and amortization

 

 

34 

 

 

35 

 

 

67 

 

 

69 

Professional and contract services

 

 

42 

 

 

42 

 

 

76 

 

 

81 

Computer operations and data communications

 

 

23 

 

 

23 

 

 

58 

 

 

45 

Occupancy

 

 

21 

 

 

24 

 

 

42 

 

 

49 

Regulatory

 

 

 

 

 

 

14 

 

 

14 

Merger and strategic initiatives

 

 

 

 

14 

 

 

 

 

42 

General, administrative and other

 

 

19 

 

 

33 

 

 

65 

 

 

56 

Restructuring charges

 

 

 

 

 -

 

 

152 

 

 

 -

     Total operating expenses

 

 

301 

 

 

332 

 

 

781 

 

 

677 

Operating income

 

 

217 

 

 

191 

 

 

244 

 

 

375 

Interest income

 

 

 

 

 

 

 

 

Interest expense

 

 

(27)

 

 

(30)

 

 

(55)

 

 

(59)

Net income from unconsolidated investees

 

 

 

 

 -

 

 

15 

 

 

 -

Income before income taxes

 

 

192 

 

 

162 

 

 

205 

 

 

319 

Income tax provision

 

 

60 

 

 

61 

 

 

64 

 

 

114 

Net income

 

 

132 

 

 

101 

 

 

141 

 

 

205 

Net loss attributable to noncontrolling interests

 

 

 

 

 -

 

 

 

 

 -

Net income attributable to Nasdaq

 

$

133 

 

$

101 

 

$

142 

 

$

205 

Per share information:

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.79 

 

$

0.60 

 

$

0.84 

 

$

1.21 

Diluted earnings per share

 

$

0.77 

 

$

0.59 

 

$

0.82 

 

$

1.18 

Cash dividends declared per common share

 

$

0.25 

 

$

 -

 

$

0.40 

 

$

0.28 

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
June 30,

 

Six Months Ended
June 30,

 

 

2015

 

2014

 

2015

 

2014

Net income

 

$

132 

 

$

101 

 

$

141 

 

$

205 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

Net foreign currency translation gains (losses)

 

 

125 

 

 

(124)

 

 

(188)

 

 

(137)

Income tax (expense) benefit

 

 

(48)

 

 

54 

 

 

65 

 

 

62 

Total other comprehensive income (loss), net of tax

 

 

77 

 

 

(70)

 

 

(123)

 

 

(75)

Comprehensive income

 

 

209 

 

 

31 

 

 

18 

 

 

130 

Comprehensive loss attributable to noncontrolling interests

 

 

 

 

 -

 

 

 

 

 -

Comprehensive income attributable to Nasdaq

 

$

210 

 

$

31 

 

$

19 

 

$

130 

 

See accompanying notes to condensed consolidated financial statements.

 

4


 

The NASDAQ OMX Group, Inc.

 

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in millions)

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

2015

 

2014

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

141 

 

$

205 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

67 

 

 

69 

Share-based compensation

 

 

32 

 

 

30 

Excess tax benefits related to share-based payments

 

 

(5)

 

 

(6)

Deferred income taxes

 

 

(64)

 

 

(21)

Non-cash restructuring charges

 

 

134 

 

 

 -

Non-cash merger and strategic initiatives

 

 

 -

 

 

20 

Net income from unconsolidated investees

 

 

(15)

 

 

 -

Other reconciling items included in net income

 

 

 

 

18 

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

 

 

 

 

 

 

Receivables, net

 

 

54 

 

 

(10)

Other assets

 

 

13 

 

 

(10)

Accounts payable and accrued expenses

 

 

(3)

 

 

(36)

Section 31 fees payable to SEC

 

 

23 

 

 

72 

Accrued personnel costs

 

 

(45)

 

 

(54)

Deferred revenue

 

 

58 

 

 

99 

Other liabilities

 

 

 

 

Net cash provided by operating activities

 

 

406 

 

 

383 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of trading securities

 

 

(190)

 

 

(201)

Proceeds from sales and redemptions of trading securities

 

 

117 

 

 

200 

Purchases of available-for-sale investment securities

 

 

(27)

 

 

(17)

Proceeds from sale of available-for-sale investment securities

 

 

 

 

 -

Capital contribution in equity method investment

 

 

(30)

 

 

 -

Acquisition of businesses, net of cash and cash equivalents acquired

 

 

(226)

 

 

 -

Purchases of property and equipment

 

 

(59)

 

 

(66)

Other investment activities

 

 

(6)

 

 

(10)

Net cash used in investing activities

 

 

(418)

 

 

(94)

Cash flows from financing activities:

 

 

 

 

 

 

Payments of debt obligations

 

 

(91)

 

 

(754)

Proceeds from utilization of credit commitment

 

 

131 

 

 

519 

Cash paid for repurchase of common stock

 

 

(55)

 

 

(93)

Cash dividends

 

 

(68)

 

 

(47)

Proceeds received from employee stock activity

 

 

17 

 

 

18 

Payments related to employee shares withheld for taxes

 

 

(27)

 

 

(23)

Excess tax benefits related to share-based payments

 

 

 

 

Other financing activities

 

 

 -

 

 

Net cash used in financing activities

 

 

(88)

 

 

(373)

Effect of exchange rate changes on cash and cash equivalents

 

 

(3)

 

 

 -

Net decrease in cash and cash equivalents

 

 

(103)

 

 

(84)

Cash and cash equivalents at beginning of period

 

 

427 

 

 

398 

Cash and cash equivalents at end of period

 

$

324 

 

$

314 

Supplemental Disclosure Cash Flow Information

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

65 

 

$

76 

Income taxes, net of refund

 

$

111 

 

$

103 

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 (unaudited)

1. Organization and Nature of Operations

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

We manage, operate and provide our products and services in four business segments: Market Services, Listing Services, Information Services and Technology Solutions.

Market Services

Our Market Services segment includes our equity derivative trading and clearing, cash equity trading, fixed income, currency and commodities trading and clearing, or FICC, and access and broker services businesses. We operate multiple exchanges and other marketplace facilities across several asset classes, including derivatives, commodities, cash equity, debt, structured products and ETFs. In addition, in some countries where we operate exchanges, we also provide broker services, clearing, settlement and central depository services. Our transaction-based platforms provide market participants with the ability to access, process, display and integrate orders and quotes. The platforms allow the routing and execution of buy and sell orders as well as the reporting of transactions, providing fee based revenues.

In the U.S., we operate three options exchanges, as well as three cash equity exchanges. The NASDAQ Stock Market, the largest of our cash equities exchanges, is the largest single venue of liquidity for trading U.S.-listed cash equities. We also operate a leading electronic platform for trading of U.S. Treasuries.

In Europe, we operate exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland, as well as the clearing operations of Nasdaq Nordic Clearing. We also operate exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as Nasdaq Baltic. Collectively, Nasdaq Nordic and Nasdaq Baltic offer trading in cash equities and depository receipts, warrants, convertibles, rights, fund units and ETFs, as well as trading and clearing of derivatives and clearing of resale and repurchase agreements. Through Nasdaq First North, our Nordic and Baltic operations also offer alternative marketplaces for smaller companies.

In addition, Nasdaq Commodities operates a power derivatives exchange regulated in Norway and a European carbon exchange. In the U.K., we operate Nasdaq NLX, a London-based multilateral trading venue that offers a range of both short-term interest rate and long-term interest rate euro- and sterling-based listed derivative products.

Through our access services business, we provide market participants with a wide variety of alternatives for connecting to and accessing our markets via a number of different protocols used for quoting, order entry, trade reporting, DROP functionality and connectivity to various data feeds. We also provide co-location services to market participants, whereby firms may lease cabinet space and power to house their own equipment and servers within our data center. Our broker services operations offer technology and customized securities administration solutions to financial participants in the Nordic market.

Listing Services

Our Listing Services segment includes our U.S. and European Listing Services businesses. We operate a variety of listing platforms around the world to provide multiple global capital raising solutions for private and public companies. Our main listing markets are The NASDAQ Stock Market and the Nasdaq Nordic and Nasdaq Baltic exchanges. We also operate The NASDAQ Private Market, LLC, or NPM, a marketplace for private growth companies. 

As of June 30, 2015, The NASDAQ Stock Market was home to 2,828 listed companies with a combined market capitalization of approximately $8.3 trillion, and in Europe, the Nasdaq Nordic and Nasdaq Baltic exchanges, together with Nasdaq First North, were home to 835 listed companies with a combined market capitalization of approximately $1.3 trillion.  

Information Services

Our Information Services segment includes our Data Products and our Index Licensing and Services businesses.

Our Data Products business sells and distributes historical and real-time quote and trade information to market participants and data distributors. Our data products enhance transparency of the market activity within the exchanges that we operate and provide critical information to financial professionals and individual investors globally.

Our Index Licensing and Services business develops and licenses Nasdaq branded indexes, associated derivatives, and financial products and also provides custom calculation services for third-party clients. We currently calculate and distribute over 42,000 indexes. We had over $108 billion of assets under management in exchange traded products tracking Nasdaq indexes as of June 30, 2015.

6


 

Technology Solutions

Our Technology Solutions segment includes our Corporate Solutions and Market Technology businesses.

Our Corporate Solutions business serves corporate clients, including companies listed on our exchanges. We help organizations manage the two-way flow of information with their key constituents, including their board members and investors, and with clients and the public through our suite of advanced technology, analytics, and consultative services. Our Corporate Solutions business primarily offers products to serve the following key areas: investor relations, public relations, multimedia solutions, and governance. We currently have approximately 10,000 Corporate Solutions clients.

Our Market Technology business is a leading global technology solutions provider and partner to exchanges, clearing organizations, central securities depositories, regulators, banks, brokers and corporate businesses. Our Market Technology business is the sales channel for our complete global offering to other marketplaces.

Market Technology provides technology solutions for trading, clearing, settlement, surveillance and information dissemination to markets with wide-ranging requirements, from the leading markets in the U.S., Europe and Asia to emerging markets in the Middle East, Latin America, and Africa. Our marketplace solutions can handle a wide array of assets including cash equities, equity derivatives, currencies, various interest-bearing securities, commodities, energy products and derivatives, and are currently powering more than 70 marketplaces in 50 countries. Market Technology also provides market surveillance services to broker-dealer firms worldwide, as well as enterprise governance, risk management and compliance software solutions.

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, its wholly-owned subsidiaries and other entities in which Nasdaq has a controlling financial interest. When we do not have a controlling interest in an entity but exercise significant influence over the entity’s operating and financial policies, such investment is accounted for under the equity method of accounting. We recognize our share of earnings or losses of an equity method investee based on our ownership percentage. As permitted under U.S. GAAP, for certain equity method investments for which financial information is not sufficiently timely for us to apply the equity method of accounting currently, we record our share of the earnings or losses of the investee from the most recently available financial statements on a lag. See “Equity Method Investments,” of Note 6, “Investments,” for further discussion of our equity method investments.

The accompanying 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’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

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. See Note 17, “Subsequent Event,” for further discussion. 

Income 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 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.

7


 

Nasdaq’s income tax provision was $60 million in the second quarter of 2015 and $64 million in the first six months of 2015 compared with $61 million in the second quarter of 2014 and $114 million in the first six months of 2014. The overall effective tax rate was 31% in the second quarter and first six months of 2015 compared with 38% in the second quarter of 2014 and 36% in the first six months of 2014. The lower effective tax rate in the second quarter and first six months of 2015 when compared with the same periods in 2014 is primarily due to a change in the geographic mix of earnings and losses. In addition, in the second quarter of 2014, we recorded adjustments related to our 2010 through 2012 tax return liabilities which resulted in an increase to the tax provision. The effective tax rate may vary from period to period depending on, among other factors, the geographic and business mix of earnings and losses. These same and other factors, including history of pre-tax earnings and losses, are taken into account in assessing the ability to realize deferred tax assets.

Nasdaq 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 2011 through 2013 are currently under audit by the Internal Revenue Service and we are subject to examination for years 2008 through 2010. Several state tax returns are currently under examination by the respective tax authorities for the years 2005 through 2013. Non-U.S. tax returns are subject to examination by the respective tax authorities for the years 2008 through 2014. We anticipate that the amount of unrecognized tax benefits at June 30, 2015 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 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. In June 2014, the Finnish Administrative Court also disagreed with the company’s tax return filing position for these years. We have appealed this ruling to the Finnish Supreme Administrative Court and expect to receive a favorable decision. Through June 30, 2015, we have recorded tax benefits of $26 million associated with this filing position. We have paid $37 million to the Finnish tax authorities, which includes $11 million in interest and penalties. We expect the Finnish Supreme Administrative Court to agree with our position, which would result in an expected refund to Nasdaq of $33 million, which reflects the impact of foreign currency translation. If the Finnish Supreme Administrative Court disagrees with our position, we would record tax expense of $33 million, or $0.19 per diluted share.

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 filed an application for an advance tax ruling with the Swedish Tax Council for Advance Tax Rulings. In June 2014, we received an unfavorable ruling from the Swedish Tax Council for Advance Tax Rulings. We appealed this ruling to the Swedish Supreme Administrative Court; however the Swedish Supreme Administrative Court has denied our request for a ruling based on procedural requirements. As a result of the Swedish Supreme Administrative Court’s denial of our request to provide a ruling, we will appeal to the Lower Administrative Court. We continue to expect a favorable decision. Since January 1, 2013, we have recorded tax benefits of $38 million, or $0.22 per diluted share, related to this matter. We expect to record recurring quarterly tax benefits of $3 million to $4 million with respect to this issue for the foreseeable future.

Other Tax Matter

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 amended VAT tax returns for 2011 and 2012, utilizing the same approach which was approved for the 2010 filing. We also utilized this approach in our 2013 and 2014 filings. However, even though the VAT return position was previously reviewed and approved by the Swedish Tax Agency, the Swedish Tax Agency challenged our approach. The revised position of the Swedish Tax Agency was upheld by the Lower Administrative Court during the first quarter of 2015. As a result, in the first quarter of 2015, we reversed the previously recorded benefit of $12 million, based on the court decision. We will appeal the ruling of the Lower Administrative Court to the Court of Appeals.

Recently Announced Accounting Pronouncements

ASU 2015-03

In April 2015, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather than as an asset. This guidance does not change the recognition and measurement of debt issuance costs. In the second quarter of 2015, we elected to early adopt this guidance retrospectively for all periods presented in the Condensed Consolidated Balance Sheets. The reclassification of debt issuance costs

8


 

resulted in reductions in other non-current assets and debt obligations of $16 million for the year ended December 31, 2014. Other than this reclassification, the adoption of this guidance did not have an impact on our consolidated financial statements.

ASU 2014-09

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition guidance in Accounting Standards Codification, or ASC, 605, “Revenue Recognition.” The new revenue recognition standard sets forth a five-step revenue recognition model to determine when and how revenue is recognized. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration it expects to receive in exchange for those goods or services. The standard also requires more detailed disclosures. The standard provides alternative methods of initial adoption. On July 9, 2015, the FASB approved the deferral of the effective date of the new revenue recognition standard by one year. As a result, this new standard will now be effective for us on January 1, 2018. Early adoption as of the original effective date is permitted. We are currently assessing the impact that this standard will have on our consolidated financial statements.  

3. Restructuring Charges

During the first quarter of 2015, we performed a comprehensive review of our processes, businesses and systems in a company-wide effort to improve performance, cut costs, and reduce spending. In the first quarter of 2015, we also decided to change our company name from The NASDAQ OMX Group, Inc. to Nasdaq, Inc., which we expect to become effective in the third quarter of 2015. We currently estimate that we will recognize net pre-tax restructuring charges of $182 million, consisting of the rebranding of our trade name, severance, asset impairments, facility-related and other costs. We recognized net restructuring charges of $2 million for the three months ended June 30, 2015 and $152 million for the six months ended June 30, 2015, with the remaining amount to be recognized through June 2016. The restructuring charge for both the three and six months ended June 30, 2015 includes the reversal of a sublease loss reserve of $10 million.  See “Facilities-related” below for further discussion. Through this initiative, we expect to generate pre-tax savings in 2015 of approximately $19 million and annualized savings of $23 million.  Restructuring charges are recorded on restructuring plans that have been committed to by management and are, in part, based upon management's best estimates of future events. Changes to the estimates may require future adjustments to the restructuring liabilities. There were no restructuring charges in the comparable periods of 2014.

The following table presents a summary of restructuring charges in the Condensed Consolidated Statements of Income: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
June 30, 2015

 

Six Months Ended June 30, 2015

 

 

(in millions)

Rebranding of trade name

 

$

 -

 

$

119 

Severance

 

 

 

 

21 

Facilities-related

 

 

(10)

 

 

(7)

Asset impairments

 

 

 

 

15 

Other

 

 

 

 

Total restructuring charges

 

$

 

$

152 

Rebranding of Trade Name

As noted above, in connection with our global rebranding initiative, we decided to change our company name from The NASDAQ OMX Group, Inc. to Nasdaq, Inc., which we expect to become effective in the third quarter of 2015. In connection with this action, we decided to discontinue the use of the OMX trade name and recorded a pre-tax, non-cash impairment charge of $119 million in March 2015 because we no longer attribute any material value to the trade name. The impairment charge did not impact the company's consolidated cash flows, liquidity, or capital resources. 

Severance

Severance, other termination benefits and other associated costs of $3 million for the three months ended June 30, 2015 and $21 million for the six months ended June 30, 2015, related to workforce reductions of 220 positions across our organization. In addition to reducing our workforce, we have relocated certain functions to lower cost locations and will continue hiring in these lower cost locations to support the business.

Facilities-related

The facilities-related credit of $10 million for the three months ended June 30, 2015 and $7 million for the six months ended June 30, 2015 primarily pertains to the release of a previously recorded sublease loss reserve for part of the space we lease in New York, New York located at 1500 Broadway. In June 2015, as part of our real estate reorganization plans, management decided to occupy this space. Based on management’s decision, we released the sublease loss reserve recorded for this space which totaled $10 million.  

 

9


 

Asset Impairments

Asset impairment charges of $6 million for the three months ended June 30, 2015 and $15 million for the six months ended June 30, 2015, primarily related to fixed assets and capitalized software that were retired during each respective period.

Restructuring Reserve

The following table presents the changes in the restructuring reserve during the six months ended June  30, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at        January 1, 2015

 

 

Expense Incurred

 

 

Cash     Payments

 

Balance at         June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

 

Severance

 

$

 -

 

$

21 

 

$

(4)

 

$

17 

 

Facilities-related

 

 

 -

 

 

 

 

(2)

 

 

 

Total

 

$

 -

 

$

24 

 

$

(6)

 

$

18 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2015, the majority of the restructuring reserve is included in other current liabilities in the Condensed Consolidated Balance Sheets and will be paid during the remainder of 2015. 

4. Acquisition

We completed the following acquisition in 2015. Financial results are included in our Condensed Consolidated Statements of Income from the date of the acquisition.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase Consideration

 

Total Net Assets (Liabilities) Acquired

 

Purchased Intangible Assets

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

Dorsey, Wright & Associates, LLC

 

$

226 

 

$

(26)

 

$

141 

 

$

111 

 

Acquisition of Dorsey, Wright & Associates, LLC

On January 30, 2015, we completed the acquisition of Dorsey, Wright & Associates, LLC, or DWA, for $226 million  ($225 million cash paid plus $1 million in working capital adjustments). DWA is a market leader in data analytics, passive indexing and smart beta strategies. We acquired net assets, at fair value, totaling $8 million and recorded a current deferred tax liability of $1 million and a non-current deferred tax liability of $33 million related to differences in the U.S. GAAP and tax basis of our investment in DWA, resulting in total net liabilities acquired of $26 million. DWA is part of our Information Services segment.

Nasdaq used cash on hand and borrowed $100 million under the revolving credit commitment of our current credit facility to fund this acquisition. 

Intangible Assets

The following table presents the details of the purchased intangible assets acquired in the acquisition of DWA. All purchased intangible assets with finite lives are amortized using the straight-line method.

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

Average Remaining

 

Value

 

Useful Life

Intangible assets:

 

(in millions)

 

(in years)

  Trade name

$

108 

 

Indefinite

  Customer relationships

 

29 

 

15 years

  Technology

 

 

5 years

Total intangible assets

$

141 

 

 

Trade Name

The DWA trade name is recognized in the industry and carries a reputation for quality. As such, DWA’s reputation and positive recognition embodied in the trade name is a valuable asset to Nasdaq. The trade name was considered the primary asset acquired in this transaction. In valuing the acquired trade name, we used the income approach, specifically the excess earnings method. The excess earnings method examines the economic returns contributed by the identified tangible and intangible assets of a company, and then isolates the excess return that is attributable to the intangible asset being valued.

A discount rate of 17% was utilized, which reflects the amount of risk associated with the hypothetical cash flows generated by the DWA trade name in the future. In developing a discount rate for the trade name, we estimated a weighted average cost of capital

10


 

for the overall business and we employed this rate when discounting the cash flows. The resulting discounted cash flows were then tax-effected at a rate of 36.5%, and a discounted tax amortization benefit was added to the fair value of the asset under the assumption that the trade name would be amortized for tax purposes over a period of 15 years.

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

Customer Relationships

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

We estimated that without current customer relationships, it would take approximately 3-6 years, depending on the business, for the customer base to grow to 100% of current projected revenues. We also made estimates related to compensation levels and other expenses such as sales and marketing that would be incurred as the business was ramped up through the year in which the customer base would be expected to reach the level that currently exists.

A discount rate of 17.5%, which reflects the estimated weighted average cost of capital for the overall business plus a premium of 0.5% reflecting the risk and uncertainty of the cash flows for the customer relationships relative to the overall business, was utilized when discounting the cash flows. The resulting discounted cash flows were then tax-effected at a rate of 36.5%, and a discounted tax amortization benefit was added to the fair value of the asset under the assumption that the customer relationships would be amortized for tax purposes over a period of 15 years.

Based on the historical behavior of the customers and a parallel analysis of the customers using the excess earnings method, we estimated the remaining useful life for the acquired customer relationships to be 15 years.

Technology

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

To determine the royalty rate we searched for and identified market transactions and royalty rates for comparable technology. In addition, we performed a profit split analysis that produced a range of royalty rates that were then compared for reasonableness to the royalty rates identified in the market transactions and royalty rates for comparable technology. Profit split theory states that a reasonable market participant would be willing and able to make revenue-based royalty payments of 25 to 30 percent of their operating profit to receive the rights to certain licensable intellectual property necessary for conducting business. Conversely, the owner of such intellectual property would save that amount or be relieved from making those royalty payments. We estimated supportable royalty rates for the technology and selected a pre-tax royalty rate of 15%.  

A discount rate of 17% was utilized, which reflects the estimated weighted average cost of capital for the overall business and we employed this rate when discounting the cash flows. The resulting discounted cash flows were then tax-effected at a rate of 36.5%, and a discounted tax amortization benefit was added to the fair value of the asset under the assumption that the technology would be amortized for tax purposes over a period of 15 years.

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

Pro Forma Results and Acquisition-related Costs

Pro forma financial results for the acquisition of DWA completed in January 2015 have not been presented since the acquisition was not material to our financial results.

 

Acquisition-related costs for the acquisition of DWA were immaterial.

11


 

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, 201