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INTERACTIVE DATA CORP/MA/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion should be read in conjunction with our condensed consolidated financial statements for the quarters ended March 31, 2013 and 2012 included herein in Item 1, and our consolidated financial statements for the year ended December 31, 2012, included in our Annual Report on Form 10-K for the year ended December 31, 2012. Amounts in the tables, including footnotes to the tables are shown in thousands. Overview We are a leading provider of financial market data, analytics and related solutions. Thousands of financial institutions, as well as hundreds of software and service providers subscribe to our services. We are one of the world's largest providers of financial data, serving the mutual fund, bank, asset management, hedge fund, securities and financial instrument processing and administration sectors. We distribute our financial data and related offerings directly to customers and indirectly through value-added resellers ("VARs"), including software providers, processors and custodians. We are wholly owned by Igloo Intermediate Corporation ("Intermediate"), which is wholly owned by Igloo Holdings Corporation ("Holdings"). Holdings is owned by investment funds affiliated with, and a co-investment vehicle controlled by, Silver Lake Group, LLC and Warburg Pincus LLC (the "Sponsors"). This Management Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") excludes the accounts of Intermediate and Holdings. The Pricing and Reference Data segment represents our evaluated pricing, reference data and fixed income analytics service areas. The Trading Solutions segment represents our real-time data feeds, trading infrastructure managed services, hosted web applications and workstations. Historical financial results have been reclassified to reflect this change. Please refer to Note 6 "Segment Information" in the Notes to the Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. Pricing and Reference Data Our Pricing and Reference Data segment provides an extensive range of financial market data services and analytics to thousands of customers worldwide including banks, brokerage firms, mutual fund companies, exchange traded fund ("ETF") sponsors, hedge funds, pension funds, insurance companies and asset management firms. In addition, our offerings are also used by financial information providers, information media companies, and VARs such as software providers, processors, custodians and other outsourcing organizations. The Pricing and Reference Data Segment has three core offerings: 1) Evaluated pricing services, which are daily opinions of value, on approximately 2.8 million fixed income securities, international equities and other hard-to-value financial instruments; 2) Reference data, which encompasses listed markets pricing and descriptive information covering over 10 million global financial instruments for use across the securities and financial instrument processing lifecycle; and 3) Fixed income portfolio analytics and fixed income data to help manage risks and analyze the sources of investment risk and return. The Pricing and Reference Data segment accounted for $157.5 million, or 70.5%, of our revenue for the three months ended March 31, 2013. Trading Solutions Our Trading Solutions segment provides thousands of customers worldwide with products and services that support a range of trading, wealth management and other investment applications. The Trading Solutions segment has two primary offerings: 1) Real- time market data feeds and trading infrastructure managed services used by banks, brokerage firms, asset managers, hedge funds and proprietary trading firms in order to facilitate low latency electronic trading as well as support other applications such as portfolio pricing, risk and compliance; and 2) Customized hosted web applications and workstations that are used by financial advisors, energy and commodity professionals, active traders and individual investors, other investment community professionals, and a range of corporate clients. The Trading Solutions segment accounted for $66.0 million, or 29.5%, of our revenue for the three months ended March 31, 2013. Forward-Looking Statements Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), are made throughout this Quarterly Report on Form 10-Q. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include, among other things, the information concerning our possible future results of operations including revenue, costs of goods sold, and gross margin, future profitability, future economic improvement, business and growth strategies, financing plans, our competitive position and the effects of competition, the projected growth of the industries in which we operate, and our ability to consummate strategic acquisitions and other transactions. Forward-looking statements include statements that are not historical facts and can be identified by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "plan," "may," "should," "will," "would," "project," and similar expressions. These forward-looking statements are based upon information currently available to us and are subject to a number of risks, including those detailed under the heading, "Risk Factors" in Item 1A in Part II, uncertainties, and other factors that could cause our actual results, performance, prospects, or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. While we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change, and investors should not rely on those forward-looking statements as representing our views as of any date subsequent to the date of the filing of this report. Other than disclosed below, no material changes to important factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements have been identified that differ from those disclosed in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2012 Annual Report on Form 10-K. Business Strategy We are focused on expanding our position as a trusted leader in the financial information services market, and the following key priorities underpin our business strategy: Enhance Breadth and Scope of Product Offerings to Cater to Customers' Needs. A key element of our strategy involves working closely with our largest direct institutional customers and redistributors to better understand and address their current and future financial market data needs. By better understanding customer needs, we believe we can develop enhancements to existing services and introduce new services. We plan to develop new and enhanced services, tools and solutions that further strengthen and expand existing customer relationships, and attract new customers and strategic partners worldwide. As part of our efforts to build strong customer relationships, we continue to invest significant resources to provide high-quality, responsive customer support and service. We believe that our combination of strong account management and responsive customer support has contributed to our high customer retention rates as well as enhanced our ability to attract new customers. 27-------------------------------------------------------------------------------- Table of Contents During the first quarter of 2013, we advanced a number of initiatives aimed at enhancing the breadth and scope of our offerings, accelerating the development of innovative, new products and services, expanding market coverage and enhancing the delivery of our services: • Continued development of our new web-based transparency and workflow solution, Vantage, which offers insight into the fixed income markets and our evaluated pricing services; • Continued development of various delivery capabilities for ApexSM, an innovative suite of pricing and reference data delivery options and managed services aimed at helping firms more easily and rapidly integrate our content across their enterprises while also increasing workflow efficiency and reducing operational costs; • Expanded our evaluated pricing coverage to new asset classes such as collateralized debt obligations and collateralized loan obligations; • Announced the development of real-time fixed income evaluations to further expand our fixed income pricing services; • Announced a new service to support the identification of instruments subject to recently implemented French and Italian Financial Transaction Taxes; • Advanced activities related to substantially enhancing our Consolidated Feed service (also known as PlusFeed) including expanding the number of stock exchanges and other market sources that clients can access, further leveraging our own reference data content, and expanding our technical and support staff to enhance overall quality and services. • Continued to develop additional managed services to help clients better monitor network performance; and • Introduced a new version of our FutureSource workstation that offers new content and functionality. Create a Unified Technology Platform. We continue to maintain a broad range of delivery platforms and legacy technology infrastructures as a result of supporting long-standing client relationships and completing numerous acquisitions over the years. Following our acquisition in 2010 by affiliates of the Sponsors, we have made substantial progress toward developing and deploying a unified technical architecture that will enable us to consolidate our delivery platforms and legacy technology infrastructures, and facilitate cost-effective collection, aggregation and distribution of the content that supports our evaluated pricing, reference data and real-time feed services as well as various other offerings. Improve Cost Structure and Drive Efficiencies. We continue to implement programs that can further improve our technical infrastructure, optimize our cost structure, increase our operational efficiency, and facilitate future revenue growth. Specifically, we focused on: • Technology & Operations: As discussed above, we are reengineering our product technology and replacing legacy product systems with a new unified technical architecture. We believe that this initiative will help us to reduce operating and capital expenses. As we make progress on this initiative, we also are leveraging initiatives to contain data acquisition and communications costs. • Procurement & Vendor Sourcing: We have focused on driving greater efficiencies and lowering or controlling costs in a number of areas such as communications, benefit plans, consulting and travel. • Organizational Optimization: We realigned staffing in various functional areas including technology, operations, sales, and corporate as well as consolidating certain facilities. • Public Company Costs: We rationalized certain expenses associated with supporting our former status as a company with publicly traded equity. Expand our Business Internationally. The market for financial information services is global and many of our largest clients operate in multiple geographic regions. We are working to generate revenue growth outside of North America by extending our industry-leading capabilities across a wider range of multi-national and international clients and geographic regions. In order to achieve this, we have continued to realign resources to better support sales and product development activities, and direct additional resources in growth-oriented international markets including recruiting local management for certain international markets, advancing the local market relevancy and capabilities of our offerings and continuing to pursue third-party relationships, acquisitions and strategic alliances internationally. Pursue Opportunistic Strategic Acquisitions. In the past, strategic acquisitions have complemented our internal investment activities, and we may elect to pursue certain strategic acquisitions in the future in order to achieve key business objectives. Business and Market Trends The global financial markets have experienced extreme volatility and disruption in recent years. As a result, financial institutions globally have acted to control or reduce operational spending. Nevertheless, during this time, we have maintained positive overall revenue growth, although certain of our business areas have experienced declining revenue. We expect that uncertainty with respect to spending on financial information and related services will persist throughout 2013. While in some areas the anticipated impact of current trends may lead to reduced demand for market data and related services, we believe overall spending on financial information services will grow modestly over the next several years. At this time, however, it remains unclear which segments of the financial market data industry will be most impacted by the current market and regulatory environment and the continued focus on controlling or reducing spending. We believe that the following trends will influence the growth of the financial information services industry in general and certain of our offerings in particular. • Increased U.S. and global regulation, continued changes to accounting standards and growing emphasis on risk management within financial services: We believe that increased regulation, and greater oversight and scrutiny by regulators worldwide, combined with potentially greater use of fair value accounting standards globally and an intensifying focus on risk management and transparency, will increase demand for our Pricing and Reference Data offerings and analytical decision-support tools. However, it is unclear at this time how and to what degree these trends will impact our business. • Increased focus on cost containment and operational efficiency: In recent years, a number of large financial institutions took actions to downsize their organizations and reduce or contain spending. Related to this, there has been and continues to be an industry trend for financial institutions to outsource various financial market data applications and services. In addition to outsourcing specific applications, many North American financial institutions outsource their back-office operations to service bureaus and custodian banks. The cost containment and outsourcing trends, individually or in combination with each other, may impact our business either positively through increased adoption of our products and services as customers seek to consolidate their spending with us or outsource certain operations by leveraging our services; or adversely through longer sales cycles, increased cancellations, service downgrades, reductions in the growth of usage-related revenue, and increased pricing pressure. • Growth in global assets under management: Over the past several years, global assets under management have increased largely due to rising net flow of investment and strong performance in major equity and fixed income markets. Periods of high fund flows and strong market performance typically lead to the creation of new funds and new firms to manage investment demand while low fund flows, poor market performance and net redemptions often result in a reduction in the number of funds and firms that manage investment assets. Although our revenue is not directly linked to assets under management, these trends help highlight the overall health of the global financial markets and the financial health of the participants in those markets. As a result, these trends can be indicative of a firm's overall capacity to purchase market data and related solutions. Despite these trends, we continue to see financial institutions remain cautious about their spending plans. 28 -------------------------------------------------------------------------------- Table of Contents • Continued innovation in electronic trading systems: Financial institutions are increasingly deploying automated algorithmic and electronic trading applications to more efficiently execute their trading strategies. These applications require connectivity to stock exchanges and trading venues with minimal latency. In addition, the trend toward algorithmic and other electronic trading programs is contributing to significant growth in market data volumes, thereby requiring both market data suppliers like ourselves and financial institutions to increase network capacity to address these volume issues. Our January 2010 acquisition of 7ticks, a provider of trading infrastructure managed services, combined with our consolidated real-time data feed offerings, enhanced our ability to satisfy demand for services that support electronic trading applications. • Consolidation within and across the financial services industry: Over the past decade, there have been a considerable number of merger and acquisition ("M&A") transactions involving financial institutions of varying sizes. The merger of two or more financial institutions can often lead to the elimination of redundant data sources. Our experience is that the integration of two or more financial institutions that merge may take up to two or more years, and can present us with both opportunity and risk for our future revenue as a result. The opportunity is that we may gain a larger customer that may seek to spend more with us across their consolidated operations. The risk is that we may lose revenue if the combined entity either elects to consolidate data services with another vendor or eliminates data sourcing that is redundant. We deliver market data services to a number of customers involved in recent M&A activity. It remains unclear how our customers' recent M&A activity will affect their near and long-term spending on our offerings. M&A activity within the financial services industry may adversely impact our future revenue. • Confluence of dynamics within the wealth management sector: We believe that there are a myriad of changes that have occurred to influence how financial services companies manage their global wealth management capabilities, including the ways in which they utilize market data and related solutions. Among the key demographic trends are the long-term growth in savings and investments related to the population born in the years following World War II (referred to as the baby boom generation), the privatization of various pension programs, and significant wealth accumulation in certain emerging markets. Key sector specific trends within wealth management include significant market volatility, increased and evolving regulation, consolidation among broker workstation vendors, consolidation of broker-dealers and clearing firms that typically service smaller retail and regional brokerage firms, increasing client asset shifts toward independent registered investment advisors and online brokers, downsizing and other cost-reduction initiatives by brokerage firms, and intensified competition for active trader subscribers. Overall, we expect the combination of these trends to have a favorable impact on our offerings for the wealth management sector, although certain aforementioned trends such as downsizing and cost reduction initiatives, and intensified competition for active trader subscribers have potential to adversely impact our future revenue. • Recent and anticipated innovation in structuring financial instruments: The complexity of financial instruments has escalated in recent years, although new issuances of certain asset classes slowed significantly in the wake of the recent financial crisis. Despite the recent slowdown, we believe that there will be continued innovation in the types of financial instruments being issued and we expect that this will provide us with additional growth opportunities. Determining the fair value of highly complex instruments requires specialized expertise, and the firms trading these instruments often seek to leverage efficiencies by obtaining data and services from independent third-party providers like ourselves to assist them in their valuation of these instruments. Furthermore, while there has been a recovery in the new issuance of certain fixed income financial instruments, it is unclear whether such recovery and the continued innovation in financial instruments will be sustained or extended across other fixed income asset classes. Our Pricing and Reference Data segment continued to grow throughout the first quarter of 2013 primarily due to expansion within our evaluated pricing and reference data product areas in North America. Key drivers within these product areas were strong revenue retention rates; increased demand from existing customers and, to a lesser extent, new customers; improving usage revenue; and the effect of annual price increases. Maintaining existing business and closing new sales are dependent on our ability to meet the current and evolving needs of our customers, particularly as regulatory changes occur and as financial instruments become more numerous. We have historically achieved high revenue retention rates within our Pricing and Reference Data segment due primarily to the strength of our offerings, the way in which our services often support workflow-centric applications, as well our responsive account management and support. We measure revenue retention rates for this segment by using the following formula: we divide the dollar magnitude of cancellations (including service downgrades and renegotiations) we received during the prior 12 months by the annualized quarterly revenue entering that same 12-month period. We then subtract this percentage from 100% to derive the annualized quarterly revenue retention rate. Our annualized quarterly revenue retention rate for our Pricing and Reference Data segment has averaged approximately 94% since 2007, and it was approximately 94% as of each quarter ended March 31, 2013 and March 31, 2012. In filings from prior years, our annualized quarterly revenue retention rates, which were calculated for the former Institutional Services segment, excluded service downgrades and renegotiations. We have revised our calculation for all periods presented to now include service downgrades and renegotiations. The timing and magnitude of cancellations (including service downgrades and renegotiations) have the potential to distort annualized revenue retention rates in any segment or product area for any given period. The revenue performance within our Trading Solutions segment during the first quarter of 2013 was impacted by the challenging market conditions which have continued to affect the segment's new sales and cancellation levels. While we continued to generate revenue growth within our real-time feed and trading infrastructure managed services area in the first quarter of 2013, this progress was more than offset by lower hosted web application and workstation revenue. Growth in our Trading Solutions segment is dependent, in large part, on a combination of the following: increasing real-time feeds sales, driving continued adoption of our infrastructure services, expanding our presence in the wealth management sector, attracting new subscribers for our active trader, and energy and commodity workstations, and strengthening overall customer retention. Within our Trading Solutions segment, we report the total number of global subscribers across our range of workstations. As of March 31, 2013, our workstations and related services supported approximately 85,400 total subscribers worldwide, compared with approximately 86,800 total subscribers as of March 31, 2012. Please note that the total number of subscribers now includes certain subscribers who use modified versions of our workstations that offer fewer features and limited content (these subscribers had not been included in prior quarterly or annual filings during 2011 or 2012). In our filings prior to 2011, the number of subscribers we reported was limited to direct subscription terminals within our historical Active Trader segment. The total number of subscribers as of March 31, 2012 was updated so as to be comparable to March 31, 2013. Period-to-period changes in the total number of global subscribers, as well as shifts in the mix of subscribers by service type can also impact future revenue. Across each of our businesses, regardless of business segment, we contract with customers through fixed fee subscriptions (on either a multi-year, annual, quarterly or monthly basis), variable fees based on usage or a combination of fixed fee subscription and usage-based fees. In addition, some of our services generate one-time or non-recurring revenue, such as one time purchases of historical data or installations (including installations of product upgrades or infrastructure). Our contracts typically renew automatically unless canceled by one of the parties. 29 -------------------------------------------------------------------------------- Table of Contents Results of Operations Selected Financial Data (In thousands) For the Three For the Three Months Ended Months Ended March 31, 2013 March 31, 2012 % Change REVENUE $ 223,504 $ 216,532 3.2 % COSTS AND EXPENSES: Cost of services 73,890 74,674 (1.0 )% Selling, general and administrative 63,733 68,608 (7.1 )% Depreciation 11,046 9,644 14.5 % Amortization 31,430 34,557 (9.0 )% Total costs and expenses 180,099 187,483 (3.9 )% INCOME FROM OPERATIONS 43,405 29,049 49.4 % Interest expense, net (35,209 ) (37,824 ) (6.9 )% Other income, net 333 247 34.8 % Loss on extinguishment of debt (10,213 ) - 100 % LOSS BEFORE INCOME TAXES (1,684 ) (8,528 ) (80.3 )% Income tax (benefit) expense (816 ) 264 (409.1 )% NET LOSS $ (868 ) $ (8,792 ) (90.1 )% Impact of Foreign Exchange On a quarterly and annual basis, we calculate the impact of the change in foreign exchange rates between the current reporting period and the respective prior year reporting period. We provide the U.S. dollar impact resulting from the change in foreign exchange rates on current period revenue, cost of services, selling, general and administrative, depreciation, and amortization expenses. We calculate this impact by comparing the average foreign exchange rates for each operating currency for the current reporting period to the average foreign exchange rates for such operating currency for the respective year-ago reporting period. We believe that by providing this information, we are facilitating period-to-period comparisons of our underlying business. When presenting our results, we use constant foreign exchange rates in order to view business results without the impact of changing foreign exchange rates. Foreign currency fluctuations are outside our control and the impact on results of operations of currency fluctuations may not be indicative of the underlying performance of the business. Management believes that providing this information to investors facilitates period-to-period comparisons of our underlying business and results of operations. Generally, when the U.S. Dollar either strengthens or weakens against other currencies, the growth at constant foreign exchange rates will be higher or lower than growth reported at actual exchange rates. Use of this constant exchange rate is considered Non-GAAP. In the first quarter of 2013, the value of the U.S. Dollar generally strengthened against the Euro and the British Pound. Three Months Ended March 31, 2013 versus Three Months Ended March 31, 2012 2013 Adjusted 2013 2013 Adjusted Revenue Foreign Revenue (Non-GAAP) % (In thousands) 2013 2012 % Change Exchange (Non-GAAP) ChangeTotal Pricing and Reference Data $ 157,476 $ 149,660 5.2 % $ 712 $ 158,188 5.7 % Trading Solutions: Real-Time Feeds and Trading Infrastructure $ 27,603 $ 27,226 1.4 % $ 146 $ 27,749 1.9 % Hosted Web Applications and Workstations 38,425 39,646 (3.1 )% 35 38,460 (3.0 )% Total Trading Solutions $ 66,028 $ 66,872 (1.3 )% $ 181 $ 66,209 (1.0 )% TOTAL REVENUE $ 223,504 $ 216,532 3.2 % $ 893 $ 224,397 3.6 % Total revenue for the three months ended March 31, 2013 increased $7.0 million, or 3.2%, to $223.5 million compared with the three months ended March 31, 2012. The change in foreign exchange rates decreased total revenue by $0.9 million in the three months ended March 31, 2013. Excluding the impact of foreign exchange, total revenue increased by $7.9 million, or 3.6% to $224.4 million. The impact of foreign exchange is primarily related to fluctuations of the U.S. dollar against the British Pound and the Euro. Pricing and Reference Data Revenue within the Pricing and Reference Data segment increased by $7.8 million, or 5.2%, to $157.5 million in the three months ended March 31, 2013 compared with the three months ended March 31, 2012. The change in foreign exchange rates decreased Pricing and Reference Data revenue by $0.7 million in the three months ended March 31, 2013. Excluding the impact of foreign exchange, Pricing and Reference Data revenue increased by $8.5 million, or 5.7%, to $158.2 million. This growth was primarily due to expansion within our evaluated pricing and reference data product areas in North America as a result of new sales closed in the past several quarters, steady retention levels, increased usage by clients and the effect of an annual price increase. 30-------------------------------------------------------------------------------- Table of Contents Trading Solutions Revenue within the Trading Solutions segment decreased by $0.8 million, or 1.3%, to $66.0 million in the three months ended March 31, 2013 compared with the three months ended March 31, 2012. The change in foreign exchange rates decreased Trading Solutions revenue by $0.2 million in the three months ended March 31, 2013. Excluding the impact of foreign exchange, Trading Solutions revenue decreased by $0.6 million, or 1.0%, to $66.2 million. This decrease was primarily due to a decline in revenues from our Hosted Web Applications and Workstation product area being partially offset by an increase in revenue from out Real-Time Feeds and Trading Infrastructure product area. Cost of Services Cost of services expenses are composed mainly of personnel-related expenses, communication, data acquisition, outside professional services and expenditures associated with software and hardware maintenance agreements. Three Months Ended March 31, 2013 2013 Adjusted 2013 Adjusted COS Foreign COS (Non-GAAP) (In Thousands) 2013 2012 % Change Exchange (Non-GAAP) % Change COST OF SERVICES $ 73,890 $ 74,674 (1.0 )% $ 402 $ 74,292 (0.5 )% Cost of services expenses decreased by $0.8 million, or 1.0%, to $73.9 million during the three months ended March 31, 2013 compared with the three months ended March 31, 2012. The change in foreign exchange rates decreased cost of services expense by $0.4 million. Excluding the impact of foreign exchange, cost of services expenses decreased by $0.4 million, or 0.5%. The decrease to expense is primarily related to (1) a decrease in data acquisition costs of approximately $0.7 million; (2) a decrease in consulting expenses of $0.3 million; and (3) a decrease in facilities expenses of $0.3 million being partially offset by an increase in communication expenses of $0.8 million due to increased costs related to internal development projects. Cost of services expense as a percentage of revenue was 33.1% in the three months ended March 31, 2013 compared with 34.5% in the three months ended March 31, 2012. Selling, General and Administrative Expenses Selling, general and administrative expenses are composed mainly of personnel-related expense, outside professional services, advertising and marketing expenses, occupancy-related expenses, and commissions paid to third parties for distribution of our data to customers. Three Months Ended March 31, 2013 2013 Adjusted 2013 Adjusted SGA Foreign SGA (Non-GAAP) (In Thousands) 2013 2012 % Change Exchange (Non-GAAP) % Change SELLING, GENERAL and ADMINISTRATIVE $ 63,733 $ 68,608 (7.1 )% $ 347 $ 64,080 (6.6 )% During the three months ended March 31, 2013, selling, general and administrative expenses decreased by $4.9 million, or 7.1%, to $63.7 million compared with the three months ended March 31, 2012. The change in foreign exchange rates decreased selling, general, and administrative expenses by $0.3 million. Excluding the impact of foreign exchange, selling, general and administrative expenses decreased by $4.5 million, or 6.6%. The decrease is primarily related to (1) a $5.0 million decrease in transactional foreign exchange losses on operating activities; (2) receipt of insurance proceeds of $0.8 million related to our 2012 claim associated with losses due to the impacts of Hurricane Sandy; and (3) a $0.7 million decrease in consulting services due to the completion of certain business development projects in 2012. These decreases in expense in the three months ended March 31, 2013, were partially offset by an increase in personnel expense of $1.0 million primarily related to increased stock-based compensation expense, and an increase in bad debt expense of $0.7 million. Selling, general, and administrative expenses as a percentage of revenue was 28.5% in the three months ended March 31, 2013 compared with 31.7% for the three months ended March 31, 2012. Depreciation Three Months Ended March 31, 2013 2013 Adjusted 2013 Adjusted Depreciation Foreign Depreciation (Non-GAAP) (In Thousands) 2013 2012 % Change Exchange (Non-GAAP) % Change DEPRECIATION $ 11,046 $ 9,644 14.5 % $ 45 $ 11,091 15.0 % During the three months ended March 31, 2013, depreciation expense increased by $1.4 million, or 14.5%, to $11.0 million compared with the three months ended March 31, 2012. The change in foreign exchange rates decreased depreciation expense by less than $0.1 million. Excluding the impact of foreign exchange, depreciation expense increased by $1.4 million, or 15%. The increase is primarily related to the impact of the change in the useful lives of certain information technology assets which occurred in October 2012 and the normal depreciation of assets placed into service or purchased after the first quarter of 2012. The majority of capital expenditures since the first quarter of 2012 related to internal technology improvement initiatives. 31-------------------------------------------------------------------------------- Table of Contents Amortization Three Months Ended March 31, 2013 2013 Adjusted 2013 Adjusted Amortization Foreign Amortization (Non-GAAP) (In Thousands) 2013 2012 % Change Exchange (Non-GAAP) % Change AMORTIZATION $ 31,430 $ 34,557 (9.0 )% $ 171 $ 31,601 (8.6 )% During the three months ended March 31, 2013, amortization expense decreased by $3.1 million, or 9.0%, to $31.4 million compared with the three months ended March 31, 2012. The change in foreign exchange rates decreased amortization expense by $0.2 million. Excluding the impact of foreign exchange, amortization expense decreased by $2.9 million, or 8.6%. The decrease in amortization is the result of the continuing impact of the change in October 2011 of the amortization method from the straight-line method to the economic benefit method. In addition, the decrease reflects the impact of several assets nearing the end of their useful lives, and therefore having smaller amortization rates than in prior years. For further information on the extension of the useful lives see Note 6 "Intangible Assets and Goodwill" in the Notes to the Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2012. Interest Expense Net interest expense was $35.2 million for the three months ended March 31, 2013 compared with $37.8 million for the three months ended March 31, 2012. The period-over-period difference results from lower interest expense related to a decrease in the interest rate on our Term Loan Facility as a result of the second amendment to the Senior Secured Credit Facilities that occurred in February 2013, with the lower rate realized for two months of the first quarter of 2013 and not during the same period in 2012, as well as a decrease due to the write-off in connection with the February 2013 amendment of a portion of the Term Loan original issue discount (OID) and deferred financing costs related to the debt extinguishment as part of the loss on extinguishment of debt instead of as a component of interest expense for the three months ended March 31, 2013. For further information on our Term Loan Facility, see Note 13 to the Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q. Loss on Extinguishment of Debt A loss on extinguishment of debt of $10.2 million was realized during the three months ended March 31, 2013, with no such activity in the three months ended March 31, 2012. The 2013 loss on extinguishment related to the February 2013 refinancing of our Term Loan. Income Taxes We determine our periodic income tax expense based on our current forecast of annual income or loss in the respective countries in which we operate and our estimated annual effective tax rate in each tax jurisdiction. The rate is revised, if necessary, at the end of each successive interim period during the fiscal year to our best current estimate of our expected annual effective tax rate. For the three months ended March 31, 2013, our quarterly effective tax rate after discrete items was a 48.4% benefit as compared to a 3.1% expense for the three months ended March 31, 2012. The estimated annual effective tax rate for the year ending March 31, 2013 excluding discrete items is a 46.9% expense. During the quarter ended March 31, 2013, we recorded a net discrete tax benefit of $1.6 million which was primarily attributable to the 2012 US Research and Development Credit which was extended by The American Taxpayer Relief Act of 2012 ("ATRA") on January 3, 2013 that could not be recorded as a benefit until its enactment in the first quarter of 2013, and the release of a foreign tax reserve, offset by an interest expense charge on tax reserves for unrecognized tax benefits. The change in the first quarter estimated annual effective tax rate in relation to the prior year first quarter estimated annual effective tax rate is primarily related to an expected increase in the full year taxable income in foreign jurisdictions in 2013 when compared with 2012 coupled with reductions in certain foreign statutory rates and lower losses in the U.S. in 2013 when compared with 2012. As of March 31, 2013, we had approximately $11.6 million of net unrecognized tax benefits which would affect our effective tax rate if recognized. We believe that it is reasonably possible that approximately $0.3 million of our current remaining net unrecognized tax positions may be recognized within the next twelve months as a result of the lapse of the statute of limitations in various tax jurisdictions. We recognize net interest and penalties related to uncertain tax positions in income tax expense. Net interest and penalties of $0.1 million and less than $0.2 million were provided in income tax expense for uncertain tax positions for the three months ended March 31, 2013 and 2012, respectively. Gross reserves for interest and penalties of $1.1 million and $1.0 million have been provided at March 31, 2013 and December 31, 2012, respectively. We file federal, state, and foreign income tax returns in jurisdictions with varying statutes of limitations. In the normal course of business, we are subject to examination by taxing authorities in various jurisdictions. Our federal tax returns for the tax years 2008 through 2010 are currently under examination by the Internal Revenue Service. Our state tax returns, for certain states, remain subject to examination for tax years 2006 through 2010. We recognize future tax benefits or expenses attributable to our taxable temporary differences and net operating loss carry forwards. Recognition of deferred tax assets is subject to our determination that realization is more likely than not. Based on taxable income projections, we believe that the recorded deferred tax assets will be realized. Liquidity and Capital Resources As of March 31, 2013, we had cash and cash equivalents of $223.2 million, liquid short-term investments of $12.7 million, and had $155.5 million available under our Revolving Credit Facility. Of these balances, $134.7 million and $12.7 million of our cash and cash equivalents and short-term investments, respectively, were held by our foreign subsidiaries. Our cash needs arise from our debt obligations, the purchase of equipment, improvements of facilities (including investments in our underlying infrastructure to increase the efficiency and capacity of business operations as well as the technology platforms that support our services such as our data centers and ticker plants), working capital requirements, and certain acquisitions. Management believes that our cash and cash equivalents, combined with expected cash flows generated by operating activities, will be sufficient to meet our operating cash needs for the next several years. Subject to the limitations placed upon us by the covenants under the Senior Secured Credit Facilities and the Indenture governing our Senior Notes due 2018, we will provide Holdings, through the payment of cash dividends, the funds required by Holdings to service the Toggle Notes. 32-------------------------------------------------------------------------------- Table of Contents The following table shows our level of indebtedness and certain other information as of March 31, 2013: (in thousands) As of March 31, 2013 Revolving Credit Facility(1) $ - Term Loan Facility(2) 1,301,351 Senior Notes(3) 700,000 Total indebtedness $ 2,001,351 (1) Our Revolving Credit Facility, which has a 5-year maturity, provides for borrowing up to $160.0 million aggregate principal amount (without giving effect to $4.5 million of letters of credit that were outstanding as of March 31, 2013). (2) In February 2013, we refinanced our Term Loan Facility resulting in a decrease of the applicable margin to (i) 1.75% with respect to term loans bearing interest at ABR (with a minimum ABR "floor" of 2.00%) and (ii) 2.75% with respect to term loans bearing interest at LIBOR (with a minimum LIBOR "floor" of 1.00%). Based upon these changes, our interest rate on our Term Loan Facility is currently 3.75%. Upon consummation of the refinancing, our outstanding principal on our Term Loan Facility was increased from $1.303 billion to $1.305 billion. The maturity date of February 11, 2018 was not changed as part of the refinancing. (3) Our Senior Notes have a maturity date of August 1, 2018. Three months ended March 31, 2013 versus three months ended March 31, 2012 |