NASDAQ OMX Group, Inc. — 2012 Form 10-K
Business context and reporting period. The company reported its fiscal year ended December 31, 2012. NASDAQ OMX operated U.S. and European exchanges and clearing services, market data, listings and index products, corporate solutions, and exchange technology. Its 2012 reporting segments were Market Services, Issuer Services, and Market Technology; the company announced a segment realignment effective January 1, 2013.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $3.119 billion | $3.430 billion |
| Revenue less transaction rebates, brokerage, clearance and exchange fees | $1.663 billion | $1.682 billion |
| Operating expenses | $973 million | $986 million |
| Operating income | $690 million | $696 million |
| Net income attributable to NASDAQ OMX | $352 million | $387 million |
| Diluted EPS | $2.04 | $2.15 |
| Cash from operating activities | $594 million | $669 million |
| Cash and cash equivalents | $497 million | $506 million |
| Total debt obligations | $1.976 billion | $2.117 billion |
- Net revenue declined 1.1%; operating income declined 0.9%, while attributable net income fell 9.0%. Operating margin on net revenue was approximately 41.5% in 2012 versus 41.4% in 2011.
- Cash and cash equivalents plus financial investments totaled $720 million at year-end. Working capital was $565 million. The company had $624 million available under its revolving credit commitment and reported compliance with debt covenants.
- Net cash used in investing activities was $128 million; net cash used in financing activities was $485 million. Capital expenditures were $87 million. Operating cash flow less capital expenditures was approximately $507 million, a simple calculated measure.
- Year-end total assets fell to $9.132 billion from $14.091 billion, primarily because a new clearing structure meant derivative positions and resale/repurchase agreements were no longer recorded gross on the balance sheet; this was not described as a comparable operating-asset decline.
Material changes versus prior period
- Lower U.S. cash-equity and derivatives activity weighed on Market Services: net cash-equity trading revenue fell 19.4% overall, and net derivatives trading and clearing revenue fell 7.3%. U.S. matched share volume declined 20.4%; total U.S. market share edged down to 20.8% from 21.2%.
- Issuer Services revenue increased 3.9% to $375 million, led by 27.6% growth in Corporate Solutions and 9.6% growth in Global Index Group. Market Technology revenue was nearly flat at $184 million.
- Access Services and Market Data revenues increased 6.7% and 3.3%, respectively, partly offsetting trading-related declines. Foreign-exchange movements reduced 2012 net revenue by $27 million.
- Operating expenses included $44 million of restructuring charges. The company reported approximately $60 million of 2012 pre-tax savings from restructuring and expected annualized savings of about $60 million beginning in 2013.
- Interest expense decreased $22 million to $97 million. The effective tax rate rose to 36.3% from 33.2%. Asset impairment charges were $40 million, including $28 million of acquired intangible impairments and a $12 million impairment of the EMCF investment; the IDCG sale generated a $14 million loss.
Fourth-quarter detail: Unaudited Q4 2012 net revenue was $419 million, operating income $175 million, attributable net income $85 million, and diluted EPS $0.50. Q4 2011 figures were $420 million, $161 million, $82 million, and $0.45, respectively.
Outlook, commentary, risks and unusual items
- Management expected 2013 business drivers to improve if the global economy continued recovering, while cautioning that markets remained uncertain and the exchange business was cyclical. The filing provides no quantified 2013 earnings or revenue guidance.
- The company planned to acquire Thomson Reuters’ Investor Relations, Public Relations and Multimedia Solutions businesses for $390 million, subject to approvals and then expected to close in the first half of 2013. It also agreed to acquire a 25% stake in Dutch venue TOM, subject to regulatory approval.
- Key risks include intense exchange and market-data price competition, declining trading volumes or market share, regulatory changes, foreign-exchange exposure, technology outages and cyberattacks, and clearing-counterparty defaults. The company cited substantial goodwill and intangible assets—$5.335 billion and $1.650 billion, respectively—and noted Market Services goodwill fair value exceeded carrying value by less than 10% in its impairment test.
- Facebook IPO trading-system issues prompted an accommodation program of up to $62 million, subject to SEC approval; no liability was recorded for the program. Related investor lawsuits and an SEC investigation were ongoing, and the company said outcomes could not be predicted.
- A Finnish tax appeal could result in approximately $20 million of additional tax and penalties for 2008–2012 if the company loses; management said it considered an assessment unlikely. The filing also reports ongoing tax examinations and litigation-related uncertainty.
- NASDAQ OMX paid $0.39 per share in dividends in 2012 and repurchased $275 million of stock. A further $225 million remained under the 2012 repurchase authorization at year-end. Management’s stated outlook and future dividends were not assurances of results or payment.
Important facts for investors to verify
- Whether trading volumes and market share stabilized or recovered after their 2012 declines, and how this affected transaction revenues and rebates.
- Actual integration costs, approvals, funding, and expected contribution from the proposed Thomson Reuters and TOM transactions.
- Resolution and total cost of the Facebook accommodation program, lawsuits, and SEC investigation.
- Realization of restructuring savings and whether additional impairments affect goodwill or acquired intangible assets.
- Debt repayment and refinancing needs, covenant headroom, liquidity available after planned acquisitions and capital returns, and the outcome of the Finnish tax appeal.