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NYSE EURONEXT - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion together with the condensed
consolidated financial statements and related notes included in this Quarterly
Report on Form 10-Q. This discussion contains forward-looking statements. Actual
results may differ from such forward-looking statements. See "Forward-Looking
Statements" and the information under Part I, Item 1A of our Annual Report on
Form 10-K for the year ended December 31, 2011. Certain prior period amounts
presented in the discussion and analysis have been reclassified to conform to
the current presentation.
Overview
NYSE Euronext was formed from the combination of the businesses of NYSE Group
and Euronext, which was consummated on April 4, 2007. Prior to that date, NYSE
Euronext had no significant assets and did not conduct any material activities
other than those incidental to its formation. Following consummation of the
combination, NYSE Euronext became the parent company of NYSE Group and Euronext
and each of their respective subsidiaries. Under the purchase method of
accounting, NYSE Group was treated as the accounting and legal acquiror in the
combination with Euronext. On October 1, 2008, NYSE Euronext completed its
acquisition of The Amex Membership Corporation, including its subsidiary, the
American Stock Exchange, which is now known as NYSE Amex.
We operate under three reportable segments: Derivatives, Cash Trading and
Listings, and Information Services and Technology Solutions. We evaluate the
performance of our operating segments based on revenue and operating income. We
have aggregated all of our corporate costs, including the costs to operate as a
public company, within "Corporate/ Eliminations."
The following is a description of our reportable segments:
Derivatives consist of the following in NYSE Euronext's global businesses:
• providing access to trade execution in derivatives products, options and
futures;
• providing certain clearing services for derivative products; and
• selling and distributing market data and related information.
Cash Trading and Listings consist of the following in NYSE Euronext's global
businesses:
• providing access to trade execution in cash trading
• providing settlement of transactions in certain European markets;
• obtaining new listings and servicing existing listings;
• selling and distributing market data and related information; and
• providing regulatory services.
Information Services and Technology Solutions consist of the following in NYSE
Euronext's global businesses:
• operating sellside and buyside connectivity networks for our markets and for
other major market centers and market participants in the United States,
Europe and Asia;
• providing trading and information technology software and solutions;
• selling and distributing market data and related information to data subscribers for proprietary data products; and
• providing multi-asset managed services and expert consultancy to exchanges and
liquidity centers.
For a discussion of these segments, see Note 4 to the condensed consolidated
financial statements.
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Factors Affecting Our Results
The business environment in which NYSE Euronext operates directly affects its
results of operations. Our results have been and will continue to be affected by
many factors, including the level of trading activity in our markets, which
during any period is significantly influenced by general market conditions,
competition, market share and the pace of industry consolidation; broad trends
in the brokerage and finance industry; price levels and price volatility; the
number and financial health of companies listed on NYSE Euronext's cash markets;
changing technology in the financial services industry; and legislative and
regulatory changes, among other factors. In particular, in recent years, the
business environment has been characterized by increasing competition among
global markets for trading volumes and listings; the globalization of exchanges,
customers and competitors; market participants' demand for speed, capacity and
reliability, which requires continuing investment in technology; and increasing
competition for market data revenues. The maintenance and growth of our revenues
could also be impacted if we face increased pressure on pricing.
Uncertainty in the U.S. credit markets that commenced with the upheaval in 2008
continues to impact the economy. Equity market indices have experienced
volatility and the market may remain volatile throughout 2012. Economic
uncertainty in the European Union and the political upheaval in certain North
African countries could spread to other countries and may continue to negatively
affect global financial markets. While markets may improve, these factors have
adversely affected our revenues and operating income and may negatively impact
future growth.
As a result of recent events, there has been, and it is likely that there will
continue to be, significant change in the regulatory environment in which we
operate. In particular, the Dodd-Frank Wall Street Reform and Consumer
Protection Act was signed into law in July 2010. Although many of its provisions
require the adoption of rules to implement, and it contains substantial
ambiguities, many of which will not be resolved until regulations are adopted,
such reforms could adversely affect our business or result in increased costs
and the expenditure of significant resources. In addition, there are significant
structural changes underway within the European regulatory framework.
While we have not experienced reductions in our borrowing capacity, lenders in
general have taken actions that indicate their concerns regarding liquidity in
the marketplace. These actions have included reduced advance rates for certain
security types, more stringent requirements for collateral eligibility and
higher interest rates. Should lenders continue to take additional similar
actions, the cost of conducting our business may increase and our ability to
implement our business initiatives could be limited.
We expect that all of these factors will continue to impact our businesses. Any
potential growth in the global cash markets will likely be tempered by investor
uncertainty resulting from volatility in the cost of energy and commodities,
unemployment concerns, contagion concerns in relation to the sovereign debt
issues faced by some members of the Eurozone, as well as the general state of
the world economy. We continue to focus on our strategy to broaden and diversify
our revenue streams, as well as our company-wide expense reduction initiatives
in order to mitigate these uncertainties.
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Sources of Revenues
Transaction and Clearing Fees
Our transaction and clearing fees consist of fees collected from our cash
trading, derivatives trading and clearing fees.
• Cash trading. Revenues for cash trading consist of transaction charges for
executing trades on our cash markets, as well as transaction charges
related to orders on our U.S. cash markets which are routed to other market
centers for execution. Additionally, our U.S. cash markets pay fees to the
SEC pursuant to Section 31 of the Exchange Act. These fees are designed to
recover the costs to the government of supervision and regulation of
securities markets and securities professionals. Activity assessment fees
are collected from member organizations executing trades on our U.S. cash
markets, and are recognized when these amounts are invoiced. Fees received
are included in cash at the time of receipt and, as required by law, the
amount due to the SEC is remitted semiannually and recorded as an accrued
liability until paid. The activity assessment fees are designed so that
they are equal to the Section 31 fees. As a result, activity assessment
fees and Section 31 fees do not have an impact on NYSE Euronext's net
income.
• Derivatives trading and clearing. Revenues from derivatives trading and
clearing consist of per-contract fees for executing trades of derivatives
contracts and clearing charges on the London market of NYSE Liffe and NYSE
Liffe US and executing options contracts traded on NYSE Arca and NYSE Amex.
In some cases, these fees are subject to caps.
Revenues for per-contract fees are driven by the number of trades executed and
fees charged per contract. The principal types of derivative contracts traded
and cleared are equity and index products and short-term interest rate products.
Trading in equity products is primarily driven by price volatility in equity
markets and indices and trading in short-term interest rate products is
primarily driven by volatility resulting from uncertainty over the direction of
short-term interest rates. The level of trading and clearing activity for all
products is also influenced by market conditions and other factors. See "-
Factors Affecting Our Results."
Market Data
We generate revenues from the dissemination of our market data in the U.S. and
Europe to a variety of users. In the U.S., we collect market data fees
principally for consortium-based data products and, to a lesser extent, for NYSE
proprietary data products. Consortium-based data fees are dictated as part of
the securities industry plans and charged to vendors based on their
redistribution of data. Consortium-based data revenues from the dissemination of
market data (net of administrative costs) are distributed to participating
markets on the basis of a formula set by the SEC under Regulation NMS. Last sale
prices and quotes in NYSE-listed, NYSE Amex-listed, and NYSE Arca-listed
securities are disseminated through "Tape A" and "Tape B," which constitute the
majority of the NYSE Euronext's U.S. revenues from consortium-based market data
revenues. We also receive a share of the revenues from "Tape C", which
represents data related to trading of certain securities that are listed on
Nasdaq. These revenues are influenced by demand for the data by professional and
nonprofessional subscribers. In addition, we receive fees for the display of
data on television and for vendor access. Our proprietary products make market
data available to subscribers covering activity that takes place solely on our
U.S. markets, independent of activity on other markets. Our proprietary data
products also include depth of book information, historical price information
and corporate action information.
NYSE Euronext offers NYSE Realtime Reference Prices, which allows internet and
media organizations to buy real-time, last-sale market data from NYSE and
provide it broadly and free of charge to the public. CNBC, Google Finance and
nyse.com display NYSE Realtime stock prices on their respective websites.
In Europe, we charge a variety of users, primarily the end-users, for the use of
Euronext's real-time market data services. We also collect annual license fees
from vendors for the right to distribute Euronext market data to third parties
and a service fee from vendors for direct connection to market data. A
substantial majority of European market data revenues is derived from monthly
end-user fees. We also derive revenues from selling historical and reference
data about securities, and by publishing the daily official lists for the
Euronext markets. The principal drivers of market data revenues are the number
of end-users and the prices for data packages.
Listings
There are two types of fees applicable to companies listed on our U.S. and
European securities exchanges - listing fees and annual fees. Listing fees
consist of two components: original listing fees and fees related to other
corporate-related actions. Original listing fees, subject to a minimum and
maximum amount, are based on the number of shares that the company initially
lists. Original listing fees, however, are generally not applicable to companies
that transfer to one of our U.S. securities exchanges from another market,
except for companies transferring to NYSE Amex from the over-the-counter market.
Other corporate action related fees are paid by listed companies in connection
with corporate actions involving the issuance of new shares to be listed, such
as stock splits, rights issues, sales of additional securities, as well as
mergers and acquisitions, which are subject to a minimum and maximum fee.
In the U.S., annual fees are charged based on the number of outstanding shares
of the listed U.S. companies at the end of the prior year. Non-U.S. companies
pay fees based on the number of listed securities issued or held in the United
States. Annual fees are recognized as revenue on a pro rata basis over the
calendar year.
Original fees are recognized as revenue on a straight-line basis over estimated
service periods of ten years for the NYSE and the Euronext cash equities markets
and five years for NYSE Arca and NYSE Amex. Unamortized balances are recorded as
deferred revenue on the condensed consolidated statements of financial
condition.
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Listing fees for our European markets comprise admission fees paid by issuers to
list securities on the cash market, annual fees paid by companies whose
financial instruments are listed on the cash market, and corporate activity and
other fees, consisting primarily of fees charged by Euronext Paris and Euronext
Lisbon for centralizing shares in IPOs and tender offers. Original listing fees,
subject to a minimum and maximum amount, are based on the market capitalization
at the time of the IPO. Revenues from annual listing fees relate to the number
of shares outstanding and the market capitalization of the listed company.
In general, Euronext Paris, Euronext Amsterdam, Euronext Brussels and Euronext
Lisbon have adopted a common set of listing fees. Under the harmonized fee book,
domestic issuers (i.e., those from France, the Netherlands, Belgium and
Portugal) pay admission fees to list their securities based on the market
capitalization of the respective issuer. Subsequent listings of securities
receive a discount on admission fees. Domestic issuers also pay annual fees
based on the number of equity securities and the market capitalization of the
respective issuer. Non-domestic companies listing in connection with raising
capital are charged admission and annual fees on a similar basis, although they
are generally charged lower maximum admission fees and annual fees. Non-domestic
companies that are in the Euronext 100 index are treated as domestic. Euronext
Paris and Euronext Lisbon also charge centralization fees for collecting and
allocating retail investor orders in IPOs and tender offers.
The revenue NYSE Euronext derives from listing fees is primarily dependent on
the number and size of new company listings as well as the level of other
corporate-related activity of existing listed issuers. The number and size of
new company listings and other corporate-related activity in any period depend
primarily on factors outside of NYSE Euronext's control, including general
economic conditions in Europe and the United States (in particular, stock market
conditions) and the success of competing stock exchanges in attracting and
retaining listed companies.
Technology Services
Revenues are generated primarily from connectivity services related to the SFTI
and FIX networks, software licenses and maintenance fees as well as consulting
services. Colocation revenue is recognized monthly over the life of the
contract. We also generate revenues from software license contracts and
maintenance agreements. We provide software that allows customers to receive
comprehensive market-agnostic connectivity, transaction and data management
solutions. Software license revenues are recognized at the time of client
acceptance and maintenance agreement revenues are recognized monthly over the
life of the maintenance term subsequent to acceptance. Consulting services are
offered for customization or installation of the software and for general
advisory services. Consulting revenue is generally billed in arrears on a time
and materials basis, although customers sometimes prepay for blocks of
consulting services in bulk. NYSE Euronext records revenues from subscription
agreements on a pro rata basis over the life of the subscription agreements. The
unrealized portions of invoiced subscription fees, maintenance fees and prepaid
consulting fees are recorded as deferred revenue on the consolidated statements
of financial condition.
Other Revenues
Other revenues include trading license fees, fees for facilities and other
services provided to designated market markers ("DMMs"), brokers and clerks
physically located on the floors of our U.S. markets that enable them to engage
in the purchase and sale of securities on the trading floor, the revenues of our
NYSE Blue joint venture and fees for clearance and settlement activities in our
European markets, as well as regulatory revenues. Regulatory fees are charged to
member organizations of our U.S. securities exchanges.
Components of Expenses
Section 31 Fees
See "Sources of Revenues- Transaction and Clearing Fees" above.
Liquidity Payments, Routing and Clearing
We offer our customers a variety of liquidity payment structures, tailored to
specific market and product characteristics in order to attract order flow,
enhance liquidity and promote use of our markets. We charge a "per share" or
"per contract" execution fee to the market participant who takes the liquidity
on certain of our trading platforms and, in turn, we pay, on certain of our
markets, a portion of this "per share" or "per contract" execution fee to the
market participant who provides the liquidity.
We also incur routing charges in the U.S. when we do not have the best bid or
offer in the market for a security that a customer is trying to buy or sell on
one of our U.S. securities exchanges. In that case, we route the customer's
order to the external market center that displays the best bid or offer. The
external market center charges us a fee per share (denominated in tenths of a
cent per share) for routing to its system. We include costs incurred due to
erroneous trade execution within routing and clearing. Furthermore, NYSE Arca
incurs clearance, brokerage and related transaction expenses, which primarily
include costs incurred in self-clearing activities, and per trade service fees
paid to exchanges for trade execution.
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Other Operating Expenses
Other operating expenses include compensation, depreciation and amortization,
systems and communications, professional services, selling, general and
administrative, and merger expenses and exit costs.
Compensation
Compensation expense includes employee salaries, incentive compensation
(including stock-based compensation) and related benefits expense, including
pension, medical, post-retirement medical and supplemental executive retirement
plan ("SERP") charges. Part-time help, primarily related to security personnel
at the NYSE, is also recorded as part of compensation.
Depreciation and Amortization
Depreciation and amortization expenses consist of costs from depreciating fixed
assets (including computer hardware and capitalized software) and amortizing
intangible assets over their estimated useful lives.
Systems and Communications
Systems and communications expense includes costs for development and
maintenance of trading, regulatory and administrative systems; investments in
system capacity, reliability and security; and cost of network connectivity
between our customers and data centers, as well as connectivity to various other
market centers. Systems and communications expense also includes fees paid to
third-party providers of networks and information technology resources,
including fees for consulting, research and development services, software
rental costs and licenses, hardware rental and related fees paid to third-party
maintenance providers.
Professional Services
Professional services expense includes consulting charges related to various
technological and operational initiatives, including fees paid to LCH.Clearnet
in connection with certain clearing guarantee arrangements and FINRA in
connection with the performance of certain member firm regulatory functions, as
well as legal and audit fees.
Selling, General and Administrative
Selling, general and administrative expenses include (i) occupancy costs,
(ii) marketing costs consisting of advertising, printing and promotion expenses,
(iii) insurance premiums, travel and entertainment expenses, co-branding,
investor education and advertising expenses with NYSE listed companies,
(iv) general and administrative expenses and (v) regulatory fine income levied
by NYSE Regulation. Regulatory fine income must be used for regulatory purposes.
Subsequent to the July 30, 2007 asset purchase agreement with FINRA, the amount
of regulatory fine income has been relatively immaterial.
Merger Expenses and Exit Costs
Merger expenses and exit costs consist of severance costs and related
curtailment losses, contract termination costs, depreciation charges triggered
by the acceleration of certain fixed asset useful lives, as well as legal and
other professional fees and expenses directly attributable to business
combinations and cost reduction initiatives.
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Results of Operations
Three Months Ended March 31, 2012 Versus Three Months Ended March 31, 2011
The following table sets forth NYSE Euronext's condensed consolidated statements
of operations for the three months ended March 31, 2012 and 2011, as well as the
percentage increase or decrease for each condensed consolidated statement of
operations item for the three months ended March 31, 2012, as compared to such
item for the three months ended March 31, 2011.
Three months ended Percent
March 31, Increase
(Dollars in Millions) 2012 2011 (Decrease)
Revenues
Transaction and clearing fees $ 609 $ 815 (25 )%
Market data 91 96 (5 )%
Listing 110 109 1 %
Technology services 86 82 5 %
Other revenues 56 46 22 %
Total revenues 952 1,148 (17 )%
Transaction-based expenses:
Section 31 fees 66 89 (26 )%
Liquidity payments, routing and clearing 285 380 (25 )%
Total revenues, less transaction-based
expenses 601 679 (11 )%
Other operating expenses:
Compensation 160 161 (1 )%
Depreciation and amortization 66 70 (6 )%
Systems and communications 45 52 (13 )%
Professional services 73 69 6 %
Selling, general and administrative 61 63 (3 )%
Merger expenses and exit costs 31 21 48 %
Total other operating expenses 436 436 - %
Operating income 165 243 (32 )%
Net interest and investment income (loss) (28 ) (29 ) (3 )%
Loss from associates (1 ) (1 ) - %
Income before income taxes 136 213 (36 )%
Income tax provision (45 ) (62 ) (27 )%
Net income 91 151 (40 )%
Net (income) loss attributable to
noncontrolling interest (4 ) 4 200 %
Net income attributable to NYSE Euronext $ 87 $ 155 (44 )%
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Highlights
For the three months ended March 31, 2012, NYSE Euronext reported total
revenues, less transaction-based expenses, operating income and net income
attributable to NYSE Euronext of $601 million, $165 million and $87 million,
respectively. This compares to total revenues, less transaction-based expenses,
operating income and net income attributable to NYSE Euronext of $679 million,
$243 million and $155 million, respectively, for the three months ended
March 31, 2011.
The $78 million decrease in both total revenues, less transaction-based expenses
and operating income, and $68 million decrease in net income attributable to
NYSE Euronext for the period reflects the following principal factors:
Decreased total revenues, less transaction-based expenses - Total revenues, less
transaction-based expenses, decreased primarily due to lower volumes across our
trading venues and the negative impact of foreign currency, partially offset by
the growth in our non-transaction-based revenues (including listing and
technology services).
Decreased operating income - The period-over-period decrease in operating income
of $78 million was primarily due to lower total revenues, less transaction-based
expenses. Excluding the net impact of merger and exit activities, foreign
currency ($5 million) and new business initiatives ($7 million), our other
operating expenses decreased $12 million or 3% as compared to the three months
ended March 31, 2011.
Decreased net income attributable to NYSE Euronext - The period-over-period
decrease in net income attributable to NYSE Euronext of $68 million was mainly
due to decreased operating income and a higher effective tax rate.
Segment Results
We operate under three reportable segments: Derivatives, Cash Trading and
Listings, and Information Services and Technology Solutions. We evaluate the
performance of our operating segments based on revenue and operating income. For
discussion of these segments, see Note 4 to the condensed consolidated financial
statements and "-Overview" above.
Three months ended March 31,
% of Total Revenues
Segment Revenues (in millions) 2012 2011 2012 2011
Derivatives $ 229 $ 307 24 % 27 %
Cash Trading and Listings 602 726 63 % 63 %
Information Services and Technology Solutions 121 116 13 % 10 %
Total segment revenues $ 952 $ 1,149 100 % 100 %
Derivatives
Three months ended March 31,
Increase % of Revenues
(in millions) 2012 2011 (decrease) 2012 2011
Transaction and clearing fees $ 206 $ 286 (28 )% 90 % 93 %
Market data 11 12 (8 )% 5 % 4 %
Other revenues 12 9 33 % 5 % 3 %
Total revenues 229 307 (25 )% 100 % 100 %
Transaction-based expenses:
Liquidity payments, routing and
clearing 53 71 (25 )% 23 % 23 %
Total revenues, less
transaction-based expenses 176 236 (25 )% 77 % 77 %
Total other operating expenses 98 91 8 % 43 % 30 %
Operating income $ 78 $ 145 (46 )% 34 % 47 %
For the three months ended March 31, 2012, Derivatives operating income
decreased $67 million to $78 million, and operating income as a percentage of
revenues in 2012 decreased 13 percentage points to 34%. Compared to the first
quarter of 2011, the $60 million decrease in total revenues, less
transaction-based expenses, was driven by a $56 million decrease in European
derivatives net trading revenue as a result of a 28% decrease in average daily
volume and average net revenue capture per contract and a $8 million decrease in
U.S. equity options trading net revenue driven by a 6% decrease in average daily
volume and a decline in average net capture per U.S. equity option contract.
Other operating expenses for the three months ended March 31, 2012 increased
$7 million reflecting new business initiatives, including plans to clear our
European derivatives business through new clearing facilities.
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Cash Trading and Listings
Three months ended March 31,
Increase % of Revenues
(in millions) 2012 2011 (decrease) 2012 2011
Transaction and clearing fees $ 403 $ 529 (24 )% 67 % 73 %
Market data 45 50 (10 )% 8 % 7 %
Listing 110 109 1 % 18 % 15 %
Other revenues 44 38 16 % 7 % 5 %
Total revenues 602 726 (17 )% 100 % 100 %
Transaction-based expenses:
Section 31 fees 66 89 (26 )% 11 % 12 %
Liquidity payments, routing and
clearing 232 309 (25 )% 39 % 43 %
Total revenues, less
transaction-based expenses 304 328 (7 )% 50 % 45 %
Total other operating expenses 191 206 (7 )% 31 % 28 %
Operating income $ 113 $ 122 (7 )% 19 % 17 %
For the three months ended March 31, 2012, Cash Trading and Listings operating
income as a percentage of revenues in 2012 increased 2 percentage points to 19%
despite a decrease in operating income of $9 million to $113 million. The
decrease in operating income is primarily due to a decrease in our total
revenues, less transaction-based expenses, of $24 million as a result of lower
average daily trading volumes across our cash trading venues and the impact of
foreign currency, partially offset by a decrease in other operating expenses of
$15 million for the three months ended March 31, 2012 reflecting the results of
operating efficiencies.
Information Services and Technology Solutions
Three months ended March 31,
Increase % of Revenues
(in millions) 2012 2011 (decrease) 2012 2011
Market data $ 35 $ 34 3 % 29 % 29 %
Technology services 86 82 5 % 71 % 71 %
Total revenues 121 116 4 % 100 % 100 %
Total other operating expenses 99 89 11 % 82 % 77 %
Operating income $ 22 $ 27 (19 )% 18 % 23 %
For the three months ended March 31, 2012, Information Services and Technology
Solutions operating income decreased $5 million to $22 million, and operating
income as a percentage of revenues in 2012 decreased 5 percentage points to 18%.
This decrease was primarily due to (i) additional operating expenses as we ramp
up our co-location services and expand our SFTI network, (ii) severance charges
in the 2012 period as we continue to realize operating efficiencies, and
(iii) the unfavorable impact of foreign currency, partially offset by (iv) an
increase in revenue driven by higher connectivity revenue related to our Mahwah
data center and incremental revenue from the Metabit acquisition.
Corporate / Eliminations
Three months ended March 31,
Increase
(in millions) 2012 2011 (decrease)Revenues, less transaction-based expenses $ - $ (1 )
100 %
Total revenues - (1 ) 100 %
Total other operating expenses 48 50 (4 )%
Operating loss $ (48 ) $ (51 ) (6 )%
Corporate and eliminations include unallocated costs primarily related to
corporate governance, public company expenses and costs associated with our
pension, SERP and postretirement benefit plans and intercompany eliminations of
revenues and expenses. Operating expenses for the three months ended March 31,
2012 decreased $2 million to $48 million compared to the same period a year ago.
Non-Operating Income and Expenses
Net Interest and Investment Income (Loss)
Interest expense is primarily attributable to the interest expense on the debt
incurred in connection with $750 million of fixed rate bonds due in June 2013
and €1,000 million of fixed rate bonds due in June 2015. See - "Liquidity and
Capital Resources".
Loss from Associates
For the three months ended March 31, 2012, the loss from associates primarily
reflects the impact of our investment in NYPC which is still in development
stage.
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Noncontrolling Interest
For the three months ended March 31, 2012, NYSE Euronext recorded noncontrolling
interest income of $4 million as compared to a $4 million loss in the same
period a year ago. This reflects the operating income generated by NYSE Amex
Options (launched in June 2011) which more than offset the operating losses of
NYSE Liffe US and NYSE Blue.
Income Taxes
For the three months ended March 31, 2012 and 2011, NYSE Euronext provided for
income taxes at an estimated tax rate of 33% and 29%, respectively. For the
three months ended March 31, 2012, NYSE Euronext's effective tax rate was lower
than the statutory rate primarily due to higher earnings generated from foreign
operations, where the applicable foreign jurisdiction tax rate is lower than the
statutory rate. For the three months ended March 31, 2012, our effective tax
rate reflected the release of reserves following a favorable settlement reached
with the UK tax authorities regarding an uncertain tax position, which was more
than offset by a discrete deferred tax expense related to the reorganization of
certain of our U.S. businesses.
Liquidity and Capital Resources
NYSE Euronext's financial policy seeks to finance the growth of its business,
remunerate shareholders and ensure financial flexibility, while maintaining
strong creditworthiness and liquidity. NYSE Euronext's primary sources of
liquidity are cash flows from operating activities, current assets and existing
bank facilities. NYSE Euronext's principal liquidity requirements are for
working capital, capital expenditures and general corporate use.
Cash flows from operating activities
For the three months ended March 31, 2012, net cash provided by operating
activities was $200 million, representing primarily net income of $91 million
and depreciation and amortization of $66 million, partially offset by a decrease
in working capital of $25 million.
Cash flows from investing and financing activities
Capital expenditures for the three months ended March 31, 2012 were $43 million.
During the quarter, we repurchased 4.3 million shares of our common stock for
approximately $127 million.
Net financial indebtedness
As of March 31, 2012, NYSE Euronext had approximately $2.1 billion in debt
outstanding and $0.4 billion of cash, cash equivalents and financial
investments, resulting in $1.7 billion in net indebtedness. We define net
indebtedness as outstanding debt less cash, cash equivalents and financial
investments.
Net indebtedness was as follows (in millions):
March 31, December 31,
2012 2011 Cash and cash equivalents $ 369 $ 396
Financial investments 32 36
Cash, cash equivalents and financial investments 401 432
Short term debt 66 39
Long term debt 2,074 2,036
Total debt 2,140 2,075
Net indebtedness $ 1,739 $ 1,643
Cash, cash equivalents and financial investments are managed as a global
treasury portfolio of non-speculative financial instruments that are readily
convertible into cash, such as overnight deposits, term deposits, money market
funds, mutual funds for treasury investments, short duration fixed income
investments and other money market instruments, thus ensuring high liquidity of
financial assets.
As of March 31, 2012, NYSE Euronext's main debt instruments were as follows (in
millions):
Principal amount as of
March 31, 2012 Maturity
4.8% bond in U.S. dollar $ 750 June 30, 2013 5.375% bond in Euro € 1,000 ($1,333 ) June30, 2015
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In 2007, NYSE Euronext entered into a U.S. dollar and euro-denominated global
commercial paper program of $3.0 billion in order to refinance the acquisition
of the Euronext shares. As of March 31, 2012, NYSE Euronext had no debt
outstanding under this commercial paper program. The effective interest rate of
commercial paper issuances does not materially differ from short term interest
rates (Libor U.S. for commercial paper issued in U.S. dollar and Euribor for
commercial paper issued in euro). The fluctuation of these rates due to market
conditions may therefore impact the interest expense incurred by NYSE Euronext.
The commercial paper program is backed by a $1.4 billion syndicated revolving
bank facility maturing on July 31, 2012. This bank facility is also available
for general corporate purposes and was not drawn on as of March 31, 2012. This
bank facility was initially entered into in 2007 for an amount of $2.0 billion
and was subsequently amended on December 8, 2011. Pursuant to the amendment, the
size of the facility decreased to $1,357 million as of December 8, 2011 and was
further reduced to $1.2 billion as of April 4, 2012. The commercial paper
program and the credit facilities include terms and conditions customary for
agreements of this type, which may restrict NYSE Euronext's ability to engage in
additional transactions or incur additional indebtedness.
In 2008, NYSE Euronext issued $750 million of 4.8% fixed rate bonds due in June
2013 and €750 million of 5.375% fixed rate bonds due in June 2015 in order to,
among other things, refinance outstanding commercial paper and lengthen the
maturity profile of its debt. In 2009, NYSE Euronext increased the €750 million
5.375% notes due in June 2015 to €1 billion as a result of an incremental
offering of €250 million. The terms of the bonds do not contain any financial
covenants. The bonds may be redeemed by NYSE Euronext or the bond holders under
certain customary circumstances, including a change in control accompanied by a
downgrade of the bonds below an investment grade rating. The terms of the bonds
also provide for customary events of default and a negative pledge covenant.
Liquidity risk
NYSE Euronext continually reviews its liquidity and debt positions, and subject
to market conditions and credit and strategic considerations, may from time to
time determine to vary the maturity profile of its debt and diversify its
sources of financing. NYSE Euronext anticipates being able to support short-term
liquidity and operating needs primarily through existing cash balances and
financing arrangements, along with future cash flows from operations. If
existing financing arrangements are insufficient to meet the anticipated needs
of its current operations or to refinance existing debt, NYSE Euronext may seek
additional financing in either the debt or equity markets. NYSE Euronext may
also seek equity or debt financing in connection with future acquisitions or
other strategic transactions. While we believe that we generally have access to
debt markets, including bank facilities and publicly and privately issued long
and short term debt, we may not be able to obtain additional financing on
acceptable terms or at all.
Because commercial paper's new issues generally fund the retirement of old
issues, NYSE Euronext is exposed to the rollover risk of not being able to issue
new commercial paper. In order to mitigate the rollover risk, NYSE Euronext
maintains undrawn backstop bank facilities for an aggregate amount exceeding at
any time the amount issued under its commercial paper program. In case we would
not be able to issue new commercial paper, we may draw on these backstop
facilities.
Share Repurchase Program
In 2008, our board of directors authorized the repurchase of up to $1 billion of
our common stock. Under the program, we may repurchase stock from time to time
at the discretion of management in open market or privately negotiated
transactions or otherwise, subject to applicable United States or European laws,
regulations and approvals, strategic considerations, market conditions and other
factors. This stock repurchase plan does not obligate us to repurchase any
dollar amount or number of shares of our common stock and any such repurchases
will be made in compliance with the applicable laws and regulations, including
rules and regulations of the SEC and applicable EU regulations and regulations
of the AMF.
A summary of common stock purchases is as follows:
Issuer Purchases of Equity Securities
(dollars in millions, except per share amounts)
Approximate Dollar
Total Number of Shares Value of Shares that
Average Purchased as Part of May Yet Be
Total Number of Price Paid Publicly Announced Purchased Under the
Period Shares Purchased Per Share Plans or Programs Plans or Programs
2011 17,075,922 $ 26.96 17,075,922 $ 552
January 2012 - - 17,075,922 552
February 2012 2,042,700 29.99 19,118,622 491
March 2012 2,239,000 29.50 21,357,622 425
21,357,622
25
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Critical Accounting Policies and Estimates
The following provides information about NYSE Euronext's critical accounting
policies and estimates. Critical accounting polices reflect significant
judgments and uncertainties, and potentially produce materially different
results, assumptions and conditions.
Revenue Recognition
There are two types of fees applicable to companies listed on the NYSE, NYSE
Arca, NYSE Amex and Euronext - listing fees and annual fees. Listing fees
consist of two components: original listing fees and fees related to other
corporate action. Original listing fees, subject to a minimum and maximum
amount, are based on the number of shares that the company initially lists.
Original listing fees, however, are generally not applicable to companies that
transfer to one of our U.S. securities exchanges from another market, except for
companies transferring to NYSE Amex from the over-the-counter market. Other
corporate action related fees are paid by listed companies in connection with
corporate actions involving the issuance of new shares. Annual fees are
recognized on a pro rata basis over the calendar year. Original listing fees are
recognized on a straight-line basis over their estimated service periods of
10 years for the NYSE and Euronext, and 5 years for NYSE Arca and NYSE Amex.
Unamortized balances are recorded as deferred revenue on the condensed
consolidated statements of financial condition.
In addition, NYSE Euronext licenses software and provides software services
which are accounted for in accordance with Subtopic 605 in the Software Topic of
the FASB Accounting Standards Codification, which involves significant judgment.
The technology services revenues in our condensed consolidated statement of
operations include revenues generated from the sale of software licenses,
software related services as well as hardware components. We enter into
multiple-element sales arrangements to provide technology solutions and services
to our customers. In such arrangements, we first allocate the total arrangement
consideration based on the relative selling prices of the software group of
elements as a whole and to the non-software elements. We then further allocate
consideration within the software group to the respective elements within that
group in accordance with Subtopic 605 in the Software Topic of the FASB
Accounting Standards Codification. We recognize revenues upon delivery of
non-software elements of our technology solutions and services. For software
license arrangements that do not require customization or significant
modification of the underlying software, we recognize revenues when (i) we enter
into a legally binding agreement with a customer for the license of software,
(ii) we deliver the products and (iii) customer payment is determinable and free
of significant uncertainties or contingencies. Most of our arrangements are
recognized in this manner. For software license arrangements that require
customization or significant modification, we generally recognize revenues upon
delivery provided the acceptance terms are perfunctory and all other revenue
recognition criteria have been met. For revenues associated with maintenance and
support, we recognize it ratably over the term of the arrangement, typically one
to two years.
Goodwill and Other Intangible Assets
NYSE Euronext reviews the carrying value of goodwill for impairment at least
annually based upon estimated fair value of NYSE Euronext's reporting units.
Should the review indicate that goodwill is impaired, NYSE Euronext's goodwill
would be reduced by the difference between the carrying value of goodwill and
its fair value.
NYSE Euronext reviews the useful life of its indefinite-lived intangible assets
to determine whether events or circumstances continue to support the indefinite
useful life categorization. In addition, the carrying value of NYSE Euronext's
other intangible assets is reviewed by NYSE Euronext at least annually for
impairment based upon the estimated fair value of the asset.
For purposes of performing the impairment test, fair values are determined using
discounted cash flow methodology. This requires significant judgments including
estimation of future cash flows, which, among other factors, is dependent on
internal forecasts, estimation of the long-term rate of growth for businesses
and determination of weighted average cost of capital. Changes in these
estimates and assumptions could materially affect the determination of fair
value and/or goodwill and other intangible impairment for each reporting unit.
Income Taxes
NYSE Euronext records income taxes using the asset and liability method, under
which current and deferred tax liabilities and assets are recorded in accordance
with enacted tax laws and rates. Under this method, the amounts of deferred tax
liabilities and assets at the end of each period are determined using the tax
rate expected to be in effect when the taxes are actually paid or recovered.
Future tax benefits are recognized to the extent that realization of such
benefits is more likely than not.
Deferred income taxes are provided for the estimated income tax effect of
temporary differences between financial and tax bases in assets and liabilities.
Deferred tax assets are also provided for certain tax carryforwards. A valuation
allowance to reduce deferred tax assets is established when it is more likely
than not that some portion or all of the deferred tax assets will not be
realized.
NYSE Euronext is subject to tax regulations in numerous domestic and foreign
jurisdictions primarily based on its operations in these jurisdictions.
Significant judgment is required in assessing the future tax consequences of
events that have been recognized in NYSE Euronext's financial statements or tax
returns. Fluctuations in the actual outcome of these future tax consequences
could have a material impact on NYSE Euronext's financial position or results of
operations.
26
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Pension and Other Post-Retirement Employee Benefits
Pension and other post-retirement employee benefits costs and liabilities are
dependent on assumptions used in calculating such amounts. These assumptions
include discount rates to measure future obligation and interest expense, health
care cost trend rates, benefits earned, interest cost, expected return on
assets, mortality rates, and other factors. In accordance with U.S. GAAP, actual
results that differ from the assumptions are accumulated and amortized over
future periods and, therefore, generally affect recognized expense and the
recorded obligation in future periods. While management believes that the
assumptions used are appropriate, differences in actual experience or changes in
assumptions may affect NYSE Euronext's pension and other post-retirement
obligations and future expense.
Hedging Activities
NYSE Euronext uses derivative instruments to limit exposure to changes in
foreign currency exchange rates and interest rates. NYSE Euronext accounts for
derivatives pursuant to Derivatives and Hedging Topic of the FASB Accounting
Standards Codification. The Derivatives and Hedging Topic establishes accounting
and reporting standards for derivative instruments and requires that all
derivatives be recorded at fair value on the statement of financial condition.
Changes in the fair value of derivative financial instruments are either
recognized in other comprehensive income or net income depending on whether the
derivative is being used to hedge changes in cash flows or changes in fair
value.
Recently Issued Accounting Guidance
The FASB issued ASU 2011-08, Testing Goodwill for Impairment, which amends
certain provisions in Subtopic 350-20 in the Intangibles - Goodwill and Other
Topic of the Codification. The amendments in ASU 2011-08 provide changes to the
goodwill impairment guidance that are intended to reduce the cost and complexity
of the annual impairment test. The changes allow entities an option to perform a
"qualitative" assessment to determine whether further impairment testing is
necessary. The new qualitative indicators replace those currently used to
determine whether an interim goodwill impairment test is required. In addition,
the indicators will be applicable for assessing whether to perform step two for
reporting units with zero or negative carrying amounts. These amendments will be
effective for annual and interim goodwill impairment tests performed for fiscal
years beginning after December 15, 2011. We do not believe that this will have a
significant impact on our financial statements.
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