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NYSE EURONEXT - 10-K - 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 audited consolidated
financial statements and related notes included in this Annual Report on
Form 10-K. This discussion contains forward-looking statements. Actual results
may differ from such forward-looking statements. See Item 1A - "Risk Factors"
and "Forward-Looking Statements." 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. 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 acquirer 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 MKT.
NYSE Euronext operates 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 5 to the 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 has remained volatile throughout 2012. Economic
uncertainty in the European Union may also continue to negatively affect global
financial markets. In addition, regulatory uncertainty is affecting our clients'
activities, business models and technology spending. 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, many such regulations have not yet
been adopted and there remain significant uncertainties and ambiguities around
those regulations that have been adopted, as well as the way in which market
participants will respond to the regulations. As a result, it is difficult to
predict all of the effects that the legislation and its implementing regulations
will have on us. We do, however, expect it to affect our business in various and
potentially significant ways and possibly 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 and contagion concerns in relation to the sovereign debt
issues faced by some members of the Eurozone, uncertainty as to near term tax,
regulatory, and other government policies, 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 on our company-wide expense reduction initiatives in
order to mitigate these uncertainties.
Recent Acquisitions and Other Transactions
Business Combination
On December 20, 2012, NYSE Euronext announced a definitive agreement for
Intercontinental Exchange Group ("ICE") to acquire NYSE Euronext in a
stock-and-cash transaction. The acquisition combines two leading exchange groups
to create a premier global exchange operator diversified across markets
including agricultural and energy commodities, credit derivatives, equities and
equity derivatives, foreign exchange and interest rates. The combined company
will be well positioned to deliver efficiencies while serving customer demand
for clearing and risk management globally through its leading clearing
capability.
Under the terms of the agreement, which was unanimously approved by the Boards
of both companies, the transaction is currently valued at $33.12 per NYSE
Euronext share, or a total of approximately $8.2 billion, based on the closing
price of ICE's stock on December 19, 2012. NYSE Euronext shareholders will have
the option to elect to receive consideration per NYSE Euronext share of (i)
$33.12 in cash, (ii) 0.2581 IntercontinentalExchange common shares or (iii) a
mix of $11.27 in cash plus 0.1703 ICE common shares, subject to a maximum cash
consideration of approximately $2.7 billion and a maximum aggregate number of
ICE common shares of approximately 42.5 million. The overall mix of the $8.2
billion of merger consideration being paid by ICE is approximately 67% shares
and 33% cash. Subject to regulatory approvals, the transaction is expected to
close in the second half of 2013.
Terminated Business Combination
On February 15, 2011, we entered into a Business Combination Agreement (the
"Business Combination Agreement") with Deutsche Börse AG ("Deutsche Börse"),
pursuant to which the two companies agreed to combine their respective
businesses and become subsidiaries of a newly formed Dutch holding company (the
"Proposed Business Combination"). Completion of the Proposed Business
Combination was subject to the satisfaction of several conditions, including,
among others, approvals by the relevant competition and financial, securities
and other regulatory authorities in the United States and Europe.
On February 1, 2012, the EU Competition Commission issued a formal decision
disapproving the Proposed Business Combination. In light of the EU Commission's
decision, on February 2, 2012, NYSE Euronext and Deutsche Börse announced that
they mutually agreed to terminate the Business Combination Agreement.
NYSE BlueTM
On February 18, 2011, we formed NYSE Blue through the combination of APX, Inc.
and our 60% stake in BlueNext SA ("BlueNext"), with NYSE Euronext as the
majority owner of NYSE Blue. On April 5, 2012, NYSE Blue was unwound, resulting
in NYSE Euronext taking back ownership of its 60% stake in Bluenext and
relinquishing its interest in APX, Inc. We recorded a $2 million net loss on
disposal activities in connection with this transaction.
Prior to the completion of this unwind, NYSE Euronext consolidated the results
of operations and financial condition of NYSE Blue (which included the
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results of BlueNext and APX, Inc.). Following this unwind, NYSE Euronext only
consolidated the results of operations and financial condition of BlueNext.
In October 2012, NYSE Euronext and CDC Climat, a subsidiary of Caisse des
Dépôts, who own 60% and 40% of BlueNext, respectively, voted in favor of the
closure of this entity. Operations of BlueNext have ceased as of December 5,
2012.
Qatar
On June 19, 2009, NYSE Euronext entered into a strategic partnership with the
State of Qatar to establish the Qatar Exchange, the successor to the Doha
Securities Market. Under the terms of the partnership, the Qatar Exchange is
adopting the latest NYSE Euronext trading and network technologies. We are
providing certain management services to the Qatar Exchange at negotiated rates.
In 2009, NYSE Euronext agreed to contribute $200 million in cash to acquire a
20% ownership interest in the Qatar Exchange, $40 million of which was paid upon
closing on June 19, 2009, with two additional $40 million payments made in June
2010 and June 2011. The agreement required the remaining $80 million to be paid
in two equal installments annually in June 2012 and June 2013.
In September 2012, NYSE Euronext and the State of Qatar reached an agreement to
reduce our ownership in the Qatar Exchange in consideration of the termination
of the remaining two $40 million installment payments. As of December 31, 2012,
NYSE Euronext owned 12% of the Qatar Exchange.
Corpedia
On June 22, 2012, NYSE Euronext completed the acquisition of Corpedia, a
U.S.-based provider of ethics and compliance e-learning and consultative
services.
Fixnetix
On March 7, 2012, NYSE Euronext acquired approximately 25% of the outstanding
shares of Fixnetix Limited, a U.K.-based service provider of ultra-low latency
data provision, co-location, trading services and risk controls for more than 50
markets worldwide.
NYSE Amex Options
On June 29, 2011, NYSE Euronext completed the sale of a significant equity
interest in NYSE Amex Options, one of our two U.S. options exchanges, to seven
external investors, BofA Merrill Lynch, Barclays Capital, Citadel Securities,
Citi, Goldman Sachs, TD AMERITRADE and UBS. NYSE Euronext remains the largest
shareholder in the entity and manages the day-to-day operations of NYSE Amex
Options, which operates under the supervision of a separate board of directors
and a dedicated chief executive officer. NYSE Euronext consolidates this entity
for financial reporting purposes.
As part of the agreement, the external investors have received an equity
instrument which is tied to their individual contribution to the options
exchange's success. Under the terms of the agreement, the external investors
have the option to require NYSE Euronext to repurchase a portion of the
instruments on an annual basis over the course of five years starting in 2011.
The amount NYSE Euronext is required to purchase under this arrangement is
capped each year at between approximately 5% and 15% of the total outstanding
shares of NYSE Amex Options. On September 16, 2011, the external investors put
back approximately 5% of the total outstanding shares of NYSE Amex Options to
NYSE Euronext. In October 2012, the external investors put another 5% of the
total outstanding shares of NYSE Amex Options back to NYSE Euronext. NYSE
Euronext recognized the full redemption value, i.e. fair value, of this
instrument as mezzanine equity and classified the related balance as "Redeemable
noncontrolling interest" in the consolidated statement of financial condition as
of December 31, 2012.
New York Portfolio Clearing
NYPC, NYSE Euronext's joint venture with The Depository Trust & Clearing
Corporation ("DTCC"), became operational in the first quarter of 2011. NYPC
currently clears fixed income futures traded on NYSE Liffe US and will have the
ability to provide clearing services for other exchanges and Derivatives
Clearing Organizations in the future. NYPC uses NYSE Euronext's clearing
technology, TRS/CPS, to process and manage cleared positions and post-trade
position transfers. DTCC's Fixed Income Clearing Corporation provides
capabilities in risk management, settlement, banking and reference data systems.
As of December 31, 2012, NYSE Euronext had a minority ownership interest in, and
board representation on, DTCC. NYSE Euronext's investment in NYPC is treated as
an equity method investment.
Impairment of Goodwill, Intangible Assets and Other Assets
Testing Methodology and Valuation Considerations
Goodwill represents the excess of purchase price and related costs over the
value assigned to the net tangible and identifiable assets of a business
acquired. In accordance with the Intangibles - Goodwill and Other Topic of the
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("Codification"), we test goodwill of our reporting units (which is generally
one level below our three reportable segments) and intangible assets deemed to
have indefinite lives for impairment at least annually and more frequently if
events or circumstances, such as adverse changes in the business climate,
indicate that there may be justification for conducting an interim test. We
perform our annual impairment test of goodwill and indefinite-lived intangible
assets during the fourth quarter.
The impairment test of goodwill is performed in two steps. The first step
compares the fair value of the reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit exceeds its carrying
amount, goodwill of the reporting unit is considered not impaired; however, if
the carrying amount of the reporting unit exceeds its fair value, the second
step must be performed. The second step compares the implied fair value of the
reporting unit's goodwill with the carrying amount of that goodwill. An
impairment loss is recorded to the extent that the carrying amount of goodwill
exceeds its implied fair value.
In determining the fair value of our reporting units in step one of the goodwill
impairment test, we compute the present value of discounted cash flows and
terminal value projected for the reporting unit. The rate used to discount cash
flows represents the weighted average cost of capital that we believe is
reflective of the relevant risk associated with the projected cash flows.
To validate the reasonableness of the reporting unit fair values, we reconcile
the aggregate fair values of the reporting units determined in step one of the
goodwill impairment test to the enterprise value of NYSE Euronext to derive the
implied control premium. In performing this reconciliation, we may, depending on
the volatility of our stock price, use either the stock price on the valuation
date or the average stock price over a range of dates around the valuation date,
generally 30 days. We compare the implied control premium to premiums paid in
observable recent transactions of comparable companies to determine if the fair
value of the reporting units estimated in step one of the goodwill impairment
test is reasonable.
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In accordance with Subtopic 10 in the Property, Plant, and Equipment Topic of
the Codification, impairment exists when the carrying amount of an amortizable
intangible asset exceeds its fair value. The carrying amount of an amortizable
intangible asset is not recoverable if it exceeds the sum of the undiscounted
cash flows expected to result from it. An intangible asset subject to
amortization shall be tested for recoverability whenever events or changes in
circumstances, such as a significant or adverse change in the business climate
that could affect the value of the intangible asset, indicate that its carrying
amount may not be recoverable. An impairment loss is recorded to the extent the
carrying amount of the intangible asset exceeds its fair value.
The process of evaluating the potential impairment of goodwill and other
intangible assets is subjective and requires significant judgment on matters
such as, but not limited to, the reporting unit at which goodwill should be
measured for impairment, future operating performance and cash flows, cost of
capital, terminal values, control premiums, remaining economic lives of assets,
and the allocation of shared assets and liabilities to determine the carrying
values for each of our reporting units. We use our internal forecasts to
estimate future cash flows and actual future results may differ from those
estimates.
In addition, in order to determine whether a decline in the value of certain
securities and other investments is other-than-temporary, we evaluate, among
other factors, the length of time and the extent to which the market value has
been less than cost. In particular, we consider the impact of duration and
severity on the period of time expected for recovery to occur. If we determine
that the decline in value is other-than-temporary, we write down the carrying
value of the related asset to its estimated fair value.
For the years ended December 31, 2012, 2011 and 2010, we did not record any
material impairment charge.
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
Options. 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" above.
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 MKT-listed, and NYSE Arca-listed
securities are disseminated through "Tape A" and "Tape B," which constitute the
majority of 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 a 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 MKT 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
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new shares to be listed, such as stock splits, rights issues and 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 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 U.S. 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 MKT. Unamortized balances are recorded as
deferred revenue on the consolidated statements of financial condition.
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 securities in IPOs and tender offers. Original listing
fees, subject to a minimum and maximum amount, are based on a company's
(estimated) market capitalization at the time of its IPO. Revenues from annual
listing fees essentially 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 and LIFFE Administration and Management (Euronext London) 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 their respective market capitalizations. 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 included
in the Euronext 100 index are treated as domestic for purposes of their listing
fees and their annual fees. Non-domestic companies eligible to the Euronext 100
index based on their market capitalization are also treated as domestic issuers
for purpose of their sole listing fees. 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 on 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 U.S. (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 from
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, fees for
servicing existing listed companies (including fees from the recent acquisition
of Corpedia) 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 former NYSE Blue joint venture (our results for the
current quarter include only BlueNext) 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
Year Ended December 31, 2012 Versus Year Ended December 31, 2011
The following table sets forth NYSE Euronext's consolidated statements of
operations for the years ended December 31, 2012 and 2011, as well as the
percentage increase or decrease for each item for the year ended December 31,
2012, as compared to such item for the year ended December 31, 2011.
Year Ended December 31, Percent
(Dollars in Millions) 2012 2011 Increase (Decrease)
Revenues
Transaction and clearing fees $ 2,393 $ 3,162 (24 )%
Market data 348 371 (6 )%
Listing 448 446 - %
Technology services 341 358 (5 )%
Other revenues 219 215 2 %
Total revenues 3,749 4,552 (18 )%
Transaction-based expenses:
Section 31 fees 301 371 (19 )%
Liquidity payments, routing and clearing 1,124 1,509 (26 )%
Total revenues, less transaction-based
expenses 2,324 2,672 (13 )%
Other operating expenses:
Compensation 601 638 (6 )%
Depreciation and amortization 260 280 (7 )%
Systems and communications 176 188 (6 )%
Professional services 299 299 - %
Selling, general and administrative 245 303 (19 )%
Merger expenses and exit costs 134 114 18 %
Total other operating expenses 1,715 1,822 (6 )%
Operating income 609 850 (28 )%
Interest expense (140 ) (123 ) 14 %
Interest and investment income 4 7 (43 )%
Loss from associates (8 ) (9 ) (11 )%
Other income 5 - 100 %
Income before income taxes 470 725 (35 )%
Income tax provision (105 ) (122 ) (14 )%
Net income 365 603 (39 )%
Net (income) loss attributable to
noncontrolling interest (17 ) 16 (206 )%
Net income attributable to NYSE Euronext $ 348 $ 619
(44 )%
43
--------------------------------------------------------------------------------Highlights
For the year ended December 31, 2012, NYSE Euronext reported total revenues,
less transaction-based expenses, operating income and net income attributable to
NYSE Euronext of $2,324 million, $609 million and $348 million, respectively.
This compares to total revenues, less transaction-based expenses, operating
income and net income attributable to NYSE Euronext of $2,672 million, $850
million and $619 million, respectively, for the year ended December 31, 2011.
The $348 million decrease in total revenues, less transaction-based expenses,
$241 million decrease in operating income and $271 million decrease in net
income attributable to NYSE Euronext for the period reflect the following
principal factors:
Decreased total revenues, less transaction-based expenses - The
period-over-period decrease in total revenues, less transaction-based expenses
was primarily due to lower volumes across most of our trading venues and
negative foreign currency impact of $55 million.
Decreased operating income - The period-over-period decrease in operating income
of $241 million was primarily due to lower total revenues, less
transaction-based expenses, partially offset by reduced operating expenses.
Excluding the net impact of merger and exit activities, foreign currency
($27 million), new business initiatives ($42 million) and a tax settlement
related to BlueNext ($42 million) recorded in 2011, our other operating expenses
for the year ended December 31, 2012 decreased $100 million or 6% as compared to
the year ended December 31, 2011.
Decreased net income attributable to NYSE Euronext - As compared to the year
ended December 31, 2011, the period-over-period decrease in net income
attributable to NYSE Euronext of $271 million was mainly due to (i) decreased
operating income, (ii) $24 million of debt financing costs consisting primarily
of the premium paid to former bondholders to tender previously issued notes, and
(iii) 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 5 to the consolidated financial
statements and "- Overview" above.
% of Total Revenues
Segment Revenues (in millions) 2012 2011 2012 2011
Derivatives $ 910 $ 1,135 24 % 25 %
Cash Trading and Listings 2,365 2,929 63 % 64 %Information Services and Technology Solutions 473 490
13 % 11 %
Total segment revenues $ 3,748 $ 4,554 100 % 100 %
Derivatives
Year Ended December 31,
(in millions)
Increase % of Revenues
2012 2011 (Decrease) 2012 2011
Transaction and clearing fees $ 821 $ 1,046 (22 )% 90 % 92 %
Market data 43 48 (10 )% 5 % 4 %
Other revenues 46 41 12 % 5 % 4 %
Total revenues 910 1,135 (20 )% 100 % 100 %Transaction-based expenses:
Liquidity payments, routing and clearing 228 274 (17 )%
25 % 24 %
Total revenues, less transaction-based
expenses 682 861 (21 )% 75 % 76 %
Merger expenses and exit costs 33 3 NM 4 % 1 %
Other operating expenses 387 388 - % 43 % 34 %
Operating income $ 262 $ 470 (44 )% 28 % 41 %
NM = Not Meaningful.
For the year ended December 31, 2012, Derivatives operating income decreased
$208 million to $262 million, and operating income as a percentage of revenues
decreased 13 percentage points to 28%. The decrease was primarily due to a 17%
decrease in average daily volume in our European derivative trading venues and a
12% decrease in average daily volume in our U.S. equity option contracts coupled
with higher merger expenses and exit costs and the negative impact of foreign
currency translation (approximately $3 million).
44
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Cash Trading and Listings
Year Ended December 31,
(in millions)
Increase % of Revenues
2012 2011 (Decrease) 2012 2011
Transaction and clearing fees $ 1,572 $ 2,116 (26 )% 67 % 72 %
Market data 173 193 (10 )% 7 % 7 %
Listing 448 446 - % 19 % 15 %
Other revenues 172 174 (1 )% 7 % 6 %
Total revenues 2,365 2,929 (19 )% 100 % 100 %
Transaction-based expenses:
Section 31 fees 301 371 (19 )% 13 % 13 %
Liquidity payments, routing and clearing 896 1,235 (27 )% 38 % 42 %
Total revenues, less transaction-based expenses 1,168 1,323
(12 )% 49 % 45 %
Merger expenses and exit costs 28 19 47 % 1 % 1 %
Other operating expenses 718 832 (14 )% 30 % 28 %
Operating income $ 422 $ 472 (11 )% 18 % 16 %
For the year ended December 31, 2012, Cash Trading and Listings operating income
as a percentage of revenues increased 2 percentage points to 18% despite a $50
million decrease in operating income to $422 million. The decrease in operating
income was primarily due to a decrease in our total revenues, less
transaction-based expenses of $155 million driven by (i) a decrease in our
European cash average daily volume of 16% and in our U.S. cash average daily
volume of 27% and (ii) the negative impact of foreign currency translation
(approximately $17 million), partially offset by (iii) a $114 million decrease
in other operating expenses. Other operating expenses for the year ended
December 31, 2011 included a $42 million charge incurred in connection with
BlueNext's settlement of a tax matter with the French tax authorities of which
40%, or $17 million, was contributed by Caisse des Dépôts (see "Noncontrolling
Interest"). Excluding the 2011 impact of the BlueNext tax matter, Cash Trading
and Listings other operating expenses decreased $72 million as part of our cost
containment initiatives.
Information Services and Technology Solutions
Year Ended December 31,
(in millions)
% of Revenues
2012 2011 Increase (Decrease) 2012 2011
Market data $ 132 $ 130 2 % 28 % 27 %
Technology services 341 360 (5 )% 72 % 73 %
Total revenues 473 490 (3 )% 100 % 100 %
Merger expenses and exit costs 18 4 350 % 4 % 1 %
Other operating expenses 360 364 (1 )% 76 % 74 %
Operating income $ 95 $ 122 (22 )% 20 % 25 %
For the year ended December 31, 2012, Information Services and Technology
Solutions operating income decreased $27 million to $95 million, and operating
income as a percentage of revenues decreased 5 percentage points to 20%. The
decrease was primarily due to (i) a $17 million decrease in total revenues
(including a $14 million negative impact of foreign currency) as a result of
weak market conditions and the reduction of our customers technology
expenditures and (ii) higher severance charges incurred in the 2012 period as we
begin to realize operating efficiencies in this reportable segment.
Corporate/Eliminations
Year Ended December 31,
(in millions)
Increase
2012 2011 (Decrease)
Other revenues $ 1 $ (2 ) 150 %
Total revenues 1 (2 ) 150 %
Merger expenses and exit costs 55 88 (38 )%
Other operating expenses 116 124 (6 )%
Operating (loss) income $ (170 ) $ (214 ) (21 )%
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 as well as intercompany
eliminations of revenues and expenses. The decrease in merger expenses and exit
costs was mainly due to (i) lower legal, investment banking and other
professional fees and costs incurred in connection with the terminated Proposed
Business Combination with Deutsche Börse in 2012 ($11 million) compared to 2011
($85 million), partially offset by (ii) legal and investment banking fees
incurred in connection with the December 2012 business combination with ICE ($8
million), and (iii) the decision to discontinue our clearing house build out and
related exit costs following the December 2012 signing of a clearing agreement
with ICE under which ICE Clear will provide LIFFE Administration and Management
central counterparty clearing services beginning July 1, 2013 ($38 million).
45
--------------------------------------------------------------------------------
Non-Operating Income and Expenses
Interest Expense
Interest expense is primarily attributable to the interest expense on the debt
incurred in connection with our senior notes. The $17 million year-over-year
increase is primarily due to $24 million of debt refinancing costs consisting
primarily of the premium paid to former bondholders in connection with the
tender of previously issued notes. (See "Liquidity and Capital Resources").
Interest and Investment Income
The decrease in our average cash and investment balances, reduction of interest
rates and foreign currency rates were the primary drivers of the $3 million
decrease in investment income.
Loss From Associates
For the years ended December 31, 2012 and 2011, the loss primarily includes the
impact of the investment in NYPC which is still in development stage.
Other Income
For the year ended December 31, 2012, other income was $5 million, compared to
$0 million for the year ended December 31, 2011. Other income consists primarily
of foreign exchange gains and losses and dividends on certain investments, which
may vary period-over-period. In 2012, other income included a net loss on
disposal activities of $2 million reflecting the impact of unwinding the NYSE
Blue joint venture.
Noncontrolling Interest
For the years ended December 31, 2012 and 2011, NYSE Euronext recorded
noncontrolling interest income of $17 million compared to a loss of $16 million
in 2011. This reflects the operating income generated by NYSE Amex Options,
partially offset by the operating losses of NYSE Liffe U.S. In 2011, we also
recorded a $42 million charge incurred in connection with BlueNext's settlement
of a tax matter with the French tax authorities of which 40%, or $17 million,
was contributed by Caisse des Dépôts and reflected as noncontrolling interest.
Income Taxes
For the years ended December 31, 2012 and 2011, NYSE Euronext provided for
income taxes at an estimated tax rate of 22.3% and 16.8%, respectively. For the
year ended December 31, 2012, NYSE Euronext's effective tax rate reflected (i) a
discrete deferred tax benefit related to an enacted reduction in the corporate
tax rate from 25% to 23% in the United Kingdom, and (ii) the release of reserves
following a favorable settlement reached with the tax authorities in the United
Kingdom regarding an uncertain tax position, which were more than offset by
(iii) a discrete deferred tax expense related to the reorganization of certain
of our U.S. businesses.
46
--------------------------------------------------------------------------------
Results of Operations
Year Ended December 31, 2011 Versus Year Ended December 31, 2010
The following table sets forth NYSE Euronext's consolidated statements of
operations for the years ended December 31, 2011 and 2010, as well as the
percentage increase or decrease for each item for the year ended December 31,
2011, as compared to such item for the year ended December 31, 2010.
Year Ended December 31, Percent
(Dollars in Millions) 2011 2010 Increase (Decrease)
Revenues
Transaction and clearing fees $ 3,162 $ 3,128 1 %
Market data 371 373 (1 )%
Listing 446 422 6 %
Technology services 358 318 13 %
Other revenues 215 184 17 %
Total revenues 4,552 4,425 3 %
Transaction-based expenses:
Section 31 fees 371 315 18 %
Liquidity payments, routing and clearing 1,509 1,599 (6 )%
Total revenues, less transaction-based
expenses 2,672 2,511 6 %
Other operating expenses:
Compensation 638 613 4 %
Depreciation and amortization 280 281 - %
Systems and communications 188 206 (9 )%
Professional services 299 282 6 %
Selling, general and administrative 303 296 2 %
Merger expenses and exit costs 114 88 30 %
Total other operating expenses 1,822 1,766 3 %
Operating income 850 745 14 %
Interest expense (123 ) (111 ) 11 %
Interest and investment income 7 3
Loss from associates (9 ) (6 ) 50 %
Other income - 55 (100 )%
Income before income taxes 725 686 6 %
Income tax provision (122 ) (128 ) (5 )%
Net income 603 558 8 %
Net (income) loss attributable to
noncontrolling interest 16 19 (16 )%
Net income attributable to NYSE Euronext $ 619 $ 577
7 %
Highlights
For the year ended December 31, 2011, NYSE Euronext reported total revenues,
less transaction-based expenses, operating income and net income attributable to
NYSE Euronext of $2,672 million, $850 million and $619 million, respectively.
This compares to total revenues, less transaction-based expenses, operating
income and net income attributable to NYSE Euronext of $2,511 million,
$745 million and $577 million, respectively, for the year ended December 31,
2010.
The $161 million increase in total revenues, less transaction-based expenses,
$105 million increase in operating income and $42 million increase in net income
attributable to NYSE Euronext for the period reflect the following principal
factors:
Increased total revenues, less transaction-based expenses - Total revenues, less
transaction-based expenses increased primarily due to growth in technology
services revenue, strong trading volumes in our European cash and U.S.
derivatives businesses and positive foreign currency impact of $56 million.
Increased operating income - The period-over-period increase in operating income
of $105 million was primarily due to an increase in total revenues, less
transaction-based expenses partially offset by an increase in other operating
expenses of $56 million primarily related to legal, investment banking and other
professional fees and costs incurred in connection with the terminated Proposed
Business Combination with Deutsche Börse. Excluding the net impact of merger and
exit activities, a tax settlement related to BlueNext ($42 million), the impact
of foreign currency ($27 million) and new business initiatives ($31 million),
our other operating expenses decreased $70 million or 4% as compared to the year
ended December 31, 2010.
Increased net income attributable to NYSE Euronext - As compared to the year
ended December 31, 2010, the period-over-period increase in net income
attributable to NYSE Euronext of $42 million was mainly due to increased
operating income and slightly lower 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 5 to the consolidated financial
47
--------------------------------------------------------------------------------statements and "- Overview" above.
% of Total Revenues
Segment Revenues (in millions) 2011 2010 2011 2010
Derivatives $ 1,135 $ 1,088 25 % 25 %
Cash Trading and Listings 2,929 2,893 64 % 65 %Information Services and Technology Solutions 490 444
11 % 10 %
Total segment revenues $ 4,554 $ 4,425 100 % 100 %
Derivatives
Year Ended December 31,
(in millions)
Increase % of Revenues
2011 2010 (Decrease) 2011 2010
Transaction and clearing fees $ 1,046 $ 1,005 4 % 92 % 93 %
Market data 48 47 2 % 4 % 4 %
Other revenues 41 36 14 % 4 % 3 %
Total revenues 1,135 1,088 4 % 100 % 100 %
Transaction-based expenses:
Liquidity payments, routing and clearing 274 262 5 % 24 % 24 %
Total revenues, less transaction-based expenses 861 826
4 % 76 % 76 %
Merger expenses and exit costs 3 15 (80 )% 1 % 2 %
Other operating expenses 388 372 4 % 34 % 34 %
Operating income $ 470 $ 439 7 % 41 % 40 %
For the year ended December 31, 2011, Derivatives operating income increased
$31 million to $470 million. The increase was primarily due to an increase in
our U.S. options trading volume of 20%, improved non-transaction-based revenues,
reduced merger expenses and exit costs and the favorable impact of foreign
currency translation (approximately $16 million), partially offset by an
increase in other operating expenses.
Cash Trading and Listings
Year Ended December 31,
(in millions)
Increase % of Revenues
2011 2010 (Decrease) 2011 2010
Transaction and clearing fees $ 2,116 $ 2,123 - % 72 % 73 %
Market data 193 200 (4 )% 7 % 7 %
Listing 446 422 6 % 15 % 15 %
Other revenues 174 148 18 % 6 % 5 %
Total revenues 2,929 2,893 1 % 100 % 100 %
Transaction-based expenses:
Section 31 fees 371 315 18 % 13 % 11 %
Liquidity payments, routing and clearing 1,235 1,337
(8 )% 42 % 46 %
Total revenues, less transaction-based expenses 1,323 1,241
7 % 45 % 43 %
Merger expenses and exit costs 19 56 (66 )% 1 % 2 %
Other operating expenses 832 809 3 % 28 % 28 %
Operating income $ 472 $ 376 26 % 16 % 13 %
For the year ended December 31, 2011, Cash Trading and Listings operating income
increased $96 million to $472 million. This was primarily due to an increase in
total revenues, less transaction-based expenses reflecting improved listing
fees, an increase in our European cash trading volumes, higher average net
revenue capture for U.S. cash equity, and the favorable impact of foreign
currency translation (approximately $10 million). Other operating expenses for
the year ended December 31, 2011 included a $42 million charge incurred in
connection with BlueNext's settlement of a tax matter with the French tax
authorities of which 40% or $17 million was contributed by Caisse des Dépôts
(see "Noncontrolling Interest"). Excluding the impact of the BlueNext tax
matter, Cash Trading and Listings other operating expenses decreased $19 million
as part of our cost containment initiatives.
48
--------------------------------------------------------------------------------Information Services and Technology Solutions
Year Ended December 31,
(in millions)
% of Revenues
2011 2010 Increase (Decrease) 2011 2010
Market data $ 130 $ 126 3 % 27 % 28 %
Technology services 360 318 13 % 73 % 72 %
Total revenues 490 444 10 % 100 % 100 %
Merger expenses and exit costs 4 17 (76 )% 1 % 4 %
Other operating expenses 364 355 3 % 74 % 80 %
Operating income $ 122 $ 72 69 % 25 % 16 %
For the year ended December 31, 2011, Information Services and Technology
Solutions operating income increased $50 million to $122 million. The increase
was primarily due to the growth of our software business and the increase in our
global connectivity fees related to the new data centers in Mahwah and Basildon
as well as the favorable impact of foreign currency translation (approximately
$4 million), partially offset by an increase in other operating expenses in
connection with the run of our data centers, as well as new personnel and
consultants to support the growth of our Information Services and Technology
Solutions revenues.
Corporate/Eliminations
Year Ended December 31,
(in millions)
Increase
2011 2010 (Decrease)
Other revenues $ (2 ) $ - (100 )%
Total revenues (2 ) - (100 )%
Merger expenses and exit costs 88 - 100 %
Other operating expenses 124 142 (13 )%
Operating (loss) income $ (214 ) $ (142 ) 51 %
Corporate and eliminations include unallocated costs primarily related to
corporate governance, public company expenses, duplicate costs associated with
migrating our data centers and costs associated with our pension, SERP and
postretirement benefit plans as well as intercompany eliminations of revenues
and expenses. The increase in merger expenses and exit costs was mainly due to
legal, investment banking and other professional fees and costs incurred in
connection with the terminated Proposed Business Combination with Deutsche
Börse.
Non-Operating Income and Expenses
Interest Expense
Interest expense is primarily attributable to the interest expense on the debt
incurred in connection with our senior notes. The increase is primarily a result
of the fact that we no longer capitalize a portion of our interest expense for
the development of our Mahwah and Basildon data centers which became operational
in the second half of 2010. (See "Liquidity and Capital Resources").
Interest and Investment Income
The increase in our average cash and investment balances, reduction of interest
rates and foreign currency rates were the primary drivers of the $4 million
increase in investment income.
Loss From Associates
For the year ended December 31, 2011, the increase in loss from associates is
primarily due to the impact of the investment in NYPC which was in development
stage.
Other Income
For the year ended December 31, 2010, we recognized a $56 million one-time gain
on the sale of our equity investment in the National Stock Exchange of India. We
did not record any material other income or expense items in the 2011 period.
Noncontrolling Interest
For the years ended December 31, 2011 and 2010, NYSE Euronext recorded
noncontrolling interest loss of $16 million and $19 million, respectively. In
2011, noncontrolling interest loss consisted primarily of (i) the portion of the
NYSE Liffe U.S. and NYSE Blue losses not owned by NYSE Euronext, (ii) the
noncontrolling interest portion of the BlueNext tax settlement corresponding to
Caisse des Dépôts' 40% pro rata share of such charge, partially offset by
(iii) the noncontrolling interest income reflecting the profitability
attributable to NYSE Amex Options. In June 2011, we completed the sale of a
significant equity interest in NYSE Amex Options to seven external investors.
Income Taxes
For the years ended December 31, 2011 and 2010, NYSE Euronext provided for
income taxes at an estimated tax rate of 16.8% and 18.7%, respectively. For the
year ended December 31, 2011, NYSE Euronext's overall effective tax rate was
lower than the statutory rate primarily due to a discrete deferred tax benefit
related to an enacted reduction in the corporate tax rate in the United Kingdom
and higher earnings generated from foreign operations, where the applicable
foreign jurisdictions tax rate is lower than the statutory rate.
49
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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
For the year ended December 31, 2012, net cash provided by operating activities
was $635 million, representing primarily net income of $365 million and
depreciation and amortization of $261 million.
Capital expenditures for the year ended December 31, 2012 were $191 million.
During the year ended December 31, 2012, we repurchased 17.0 million shares of
our common stock for approximately $452 million and paid $297 million in
dividends to our shareholders.
Under the terms of the operating agreement of the NYSE, no regulatory fees,
fines or penalties collected by NYSE Regulation may be distributed to NYSE
Euronext or any entity other than NYSE Regulation. As a result, the use of
regulatory fees, fines and penalties collected by NYSE Regulation may be
considered restricted. As of December 31, 2012, NYSE Euronext did not have
significant restricted cash balances.
As of December 31, 2012, approximately $208 million of cash and cash equivalents
was held by NYSE Euronext's foreign subsidiaries. If these funds were
repatriated to the U.S., NYSE Euronext would be required to accrue and pay U.S.
taxes except for the amount of cash, if any, that would be treated as a return
of capital for U.S. tax purposes.
Net financial indebtedness
As of December 31, 2012, NYSE Euronext had approximately $2.5 billion in debt
outstanding and $0.4 billion of cash, cash equivalents and financial
investments, resulting in $2.1 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):
December 31, December 31,
2012 2011
Cash and cash equivalents $ 337 $ 396
Financial investments 43 36
Cash, cash equivalents and financial investments 380 432
Short term debt 454 39
Long term debt 2,055 2,036
Total debt 2,509 2,075
Net indebtedness $ 2,129 $ 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 December 31, 2012, NYSE Euronext's main debt instruments were as follows
(in millions):
Principal amount as of
December 31, 2012 Maturity
4.8% senior unsecured notes in U.S. dollar $ 414 June 28, 2013
5.375% senior unsecured notes in Euro €920 ($1,214) June 30, 2015
2.0% senior unsecured notes in U.S. dollar $ 850 October 5, 2017
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 December 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 $1.0 billion syndicated revolving
bank facility maturing on June 15, 2015. This bank facility is available for
general corporate purposes and was not drawn on as of December 31, 2012. This
bank facility was entered into on June 15, 2012 to refinance the bank facility
entered into in 2007 for an amount of $2.0 billion and subsequently amended and
reduced to an amount of $1.2 billion in 2011. 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 and 2009, NYSE Euronext issued $750 million of 4.8% fixed rate bonds due
in June 2013 and €1 billion 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. On October 5, 2012, NYSE Euronext issued $850
million of 2.0% senior unsecured notes due in October 2017. The net proceeds
from the offering were used, in part, to purchase approximately $336 million of
the outstanding 4.8% notes due in June 2013 and approximately €80 million of the
outstanding 5.375% notes due in June 2015 in concurrent cash tender offers. As
of December 31, 2012, the outstanding principal amount under the 4.8% notes due
in June 2013 and the outstanding 5.375% notes due in June 2015 were $414 million
and €920 million, respectively. 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.
50
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As of December 31, 2012, we were in compliance with all of our debt instruments
covenants in all material respects.
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 U.S. 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
Total Number of Dollar Value of
Shares Purchased as Shares that May
Average Part of Publicly Yet Be Purchased
Total Number of Price Paid Announced Plans or Under the Plans
Period Shares Purchased Per Share Programs or Programs
At 9/30/2012 32,955,333 $ 129
10/1/2012 thru 10/30/2012 1,037,500 $ 24.63 33,992,833 102
11/1/2012 thru 11/30/2012 98,500 $ 25.16 34,091,333 100
12/1/2012 thru 12/31/2012 - $ - - 100
1,136,000
Summary Disclosures About Contractual Obligations
The table below summarizes NYSE Euronext's debt, future minimum lease
obligations on its operating leases and other commitments as of December 31,
2012
(in millions):
Payments Due by Year(1)
Total 2013 2014 2015 2016 2017 Thereafter
Debt (principal and accrued interest
obligations) $ 2,509 $ 454 $ - $ 1,208 $ - $ 847 $ -
Debt (future interest obligations) 255 47 92 82 17 17 -
Operating lease obligations 313 60 56 48 30 21 98
Other commitments 3 1 2 - - - -
$ 3,080 $ 562 $ 150 $ 1,338 $ 47 $ 885 $ 98
(1 ) As of December 31, 2012, obligations under capital leases were not
significant. NYSE Euronext also has obligations related to other
post-retirement benefits, deferred compensation and unrecognized tax
positions. The date of payment under these obligations cannot be determined.
See Notes 7 - "Pension and Other Benefit Programs," 9 - "Stock Based
Compensation," and 15 - "Income Taxes" to the consolidated financial
statements. In addition, the external investors in our NYSE Amex Options
market have received an equity instrument which is tied to their individual
contribution to the options exchange's success and have the option to
require NYSE Euronext to repurchase a portion of the instruments on an
annual basis over the course of five years starting in 2011. The amount NYSE
Euronext is required to purchase under this arrangement is capped each year
at between 5% and 15% of the total outstanding shares of NYSE Amex Options.
NYSE Euronext recognized the full redemption value, i.e. fair value, of this
instrument as mezzanine equity and classified the related balance as
"Redeemable noncontrolling interest" in the consolidated statement of
financial condition as of December 31, 2012. However, NYSE Euronext cannot
predict whether the external investors will elect to exercise their
remaining put option.
51--------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
The following provides information about NYSE Euronext's critical accounting
policies and estimates. Critical accounting policies 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 MKT 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 MKT 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 MKT. Unamortized balances
are recorded as deferred revenue on the 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 Codification, which involves significant judgment. The technology services
revenues in our 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 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.
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 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
52
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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 2012-02, Testing Indefinite-Lived Intangible Assets for
Impairment, which amends certain provisions in the Subtopic 350-30 in the
Intangibles - Goodwill and Other Topic of the Codification. The FASB issued ASU
2012-02 in response to feedback on ASU 2011-08 which amended the goodwill
impairment testing requirements by allowing an entity to perform a qualitative
impairment assessment before proceeding to the two-step impairment test.
Similarly, under ASU 2012-02, an entity testing an indefinite-lived intangible
asset for impairment has the option of performing a qualitative assessment
before calculating the fair value of the asset. If the entity determines, on the
basis of qualitative factors, that the fair value of the indefinite-lived
intangible asset is not more likely than not (i.e., a likelihood of more than 50
percent) impaired, the entity would not need to calculate the fair value of the
asset. This ASU does not revise the requirement to test indefinite-lived
intangible assets annually for impairment. In addition, this ASU does not amend
the requirement to test these assets for impairment between annual tests if
there is a change in events or circumstances; however, it does revise the
examples of events and circumstances that an entity should consider in interim
periods. ASU 2012-02 is effective for annual and interim impairment tests
performed for fiscal years beginning after September 15, 2012. We do not believe
that this will have a significant impact on our financial statements.
On February 5, 2013, the FASB issued ASU 2013-02, Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income, which amends certain
provisions in the Subtopic 220-10 in the Comprehensive Income Topic of the
Codification. The amendments in ASU 2013-02 add new disclosure requirements for
items reclassified out of accumulated other comprehensive income ("AOCI"). The
ASU 2013-02 requires entities to disclose additional information about
reclassification adjustments, including (1) changes in AOCI balances by
components and (2) significant items reclassified out of AOCI. These
reclassifications can be presented in either before tax or net-of-tax as long as
an entity presents the income tax benefit or expense attributable to each
component of other comprehensive income ("OCI") and reclassification adjustments
in either the financial statements or the notes to the financial statements as
required by ASC 220-10-45-12. The ASU 2013-02 is intended to help entities
improve the transparency of changes in OCI and items reclassified out of AOCI in
the financial statements. It does not amend any existing requirements for
reporting net income or OCI in the financial statements. These new disclosure
requirements are effective for fiscal years, and interim periods within those
years, beginning after December 15, 2012. The adoption of ASU 2013-02 will not
have a significant impact on our financial statements.
53--------------------------------------------------------------------------------
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