NASDAQ, Inc.
NASDAQ OMX GROUP, INC. (Form: 10-Q, Received: 11/06/2009 11:21:12)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 000-32651

 

 

The NASDAQ OMX Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   52-1165937

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

One Liberty Plaza, New York, New York   10006
(Address of Principal Executive Offices)   (Zip Code)

+1 212 401 8700

(Registrant’s telephone number, including area code)

No changes

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if smaller reporting company.)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 30, 2009

Common Stock, $.01 par value per share   211,072,230 shares

 

 

 


Table of Contents

The NASDAQ OMX Group, Inc.

Form 10-Q

For the Quarterly Period Ended September 30, 2009

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements (unaudited)

   2
  

Condensed Consolidated Statements of Income—Three and Nine Months Ended September 30, 2009 and 2008

   2
  

Condensed Consolidated Balance Sheets—September 30, 2009 and December 31, 2008

   3
  

Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2009 and 2008

   4
  

Notes to Condensed Consolidated Financial Statements

   5

Item 2.

  

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

   33

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   54

Item 4.

  

Controls and Procedures

   57

PART II. OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   58

Item 1A.

  

Risk Factors

   58

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   58

Item 3.

  

Defaults upon Senior Securities

   58

Item 4.

  

Submission of Matters to a Vote of Security Holders

   58

Item 5.

  

Other Information

   58

Item 6.

  

Exhibits

   58

SIGNATURES

   59

 

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About This Form 10-Q

The NASDAQ OMX Group, Inc. is a holding company created by the business combination of The Nasdaq Stock Market, Inc. and OMX AB (publ) which was completed on February 27, 2008. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in this business combination. As such, Nasdaq is the predecessor reporting entity of NASDAQ OMX and the results of operations of OMX are only included in NASDAQ OMX’s consolidated results of operations beginning February 27, 2008.

Throughout this Form 10-Q, unless otherwise specified:

 

   

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

 

   

“Nasdaq” refers to The Nasdaq Stock Market, Inc., as that entity operated prior to the business combination with OMX AB.

 

   

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

 

   

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

 

   

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

 

   

“NASDAQ OMX Nordic” refers to collectively, NASDAQ OMX Stockholm, NASDAQ OMX Copenhagen, NASDAQ OMX Helsinki and NASDAQ OMX Iceland.

 

   

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

 

   

“PHLX” refers to the Philadelphia Stock Exchange, Inc. and its subsidiaries, as that entity operated prior to its acquisition by NASDAQ OMX.

 

   

“NASDAQ OMX PHLX” refers to NASDAQ OMX PHLX, Inc. subsequent to its acquisition by NASDAQ OMX.

 

   

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

 

   

“NOK” or “Norwegian Krone” refers to the lawful currency of Norway.

This Quarterly Report on Form 10-Q includes market share and industry data that we obtained from industry publications and surveys, reports of governmental agencies and internal company surveys. Industry publications and surveys generally state that the information they contain has been obtained from sources believed to be reliable, but we cannot assure you that this information is accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on the most currently available market data. For market comparison purposes, The NASDAQ Stock Market data in this Quarterly Report on Form 10-Q for initial public offerings, or IPOs, is based on data provided by Thomson Financial, which does not include best efforts underwritings, and we have chosen to exclude closed-end funds; therefore, the data may not be comparable to other publicly-available IPO data. Data in this Quarterly Report on Form 10-Q for secondary offerings for The NASDAQ Stock Market also is based on data provided by Thomson Financial. Data in this Quarterly Report on Form 10-Q for new listings of equity securities on The NASDAQ Stock Market is based on data generated internally by us, which includes best efforts underwritings and issuers that switched from other listing venues, closed-end funds and exchange traded funds, or ETFs. OMX data in this Quarterly Report on Form 10-Q for IPOs and new listings of equity securities on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic also is based on data generated internally by us. IPOs, secondary offerings and new listings data is presented as of period end. While we are not aware of any misstatements regarding industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors. We undertake no obligation to update any industry data, except as may be required by the federal securities laws. We refer you to the “Risk Factors” section in this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2009 that was filed with the Securities and Exchange Commission, or SEC, on August 7, 2009, our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2009 that was filed with the SEC on May 8, 2009 and our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 that was filed with the SEC on February 27, 2009.

 

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Forward-Looking Statements

The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains these types of statements. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words or terms of similar substance used in connection with any discussion of future operating results or financial performance identify forward-looking statements. These include, among others, statements relating to:

 

   

our 2009 or 2010 outlook;

 

   

the scope, nature or impact of acquisitions, dispositions, investments or other transactional activities;

 

   

the integration of our recently acquired businesses, including accounting decisions relating thereto;

 

   

the effective dates for, and expected benefits of, ongoing initiatives;

 

   

the impact of pricing changes;

 

   

future tax benefits;

 

   

the cost and availability of liquidity; and

 

   

the outcome of any litigation and/or government investigation to which we are a party and other contingencies.

Forward-looking statements involve risks and uncertainties. Factors that could cause actual results to differ materially from those contemplated by the forward-looking statements include, among others, the following:

 

   

that our operating results may be lower than expected;

 

   

our ability to successfully integrate our recently acquired businesses, including the fact that such integration may be more difficult, time consuming or costly than expected, and our ability to realize synergies from business combinations and acquisitions;

 

   

loss of significant trading volume or listed companies;

 

   

covenants in our credit facilities, indentures and other agreements governing our indebtedness which may restrict the operation of our business;

 

   

economic, political and market conditions and fluctuations, including interest rate and foreign currency risks, inherent in U.S. and international operations;

 

   

global economic and credit conditions;

 

   

government and industry regulation; and

 

   

adverse changes that may occur in the securities markets generally.

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the uncertainty and any risk related to forward-looking statements that we make. These risk factors are discussed under the caption “Part II. Item 1A. Risk Factors,” in this Quarterly Report on Form 10-Q, our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2009 that was filed with the SEC on August 7, 2009, our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2009 that was filed with the SEC on May 8, 2009 and more fully described in the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 that was filed with the SEC on February 27, 2009. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. You should carefully read this entire Form 10-Q, including “Part 1. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the condensed consolidated financial statements and the related notes. Except as required by the federal securities laws, we undertake no obligation to update any forward-looking statement, release publicly any revisions to any forward-looking statements, report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 .

 

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The NASDAQ OMX Group, Inc.

PART 1—FINANCIAL INFORMATION

Item 1. Financial Statements.

The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(in millions, except per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Revenues

        

Market Services

   $ 691      $ 869      $ 2,243      $ 2,275   

Issuer Services

     80        89        241        258   

Market Technology

     36        29        100        84   

Other

     3        3        9        8   
                                

Total revenues

     810        990        2,593        2,625   

Cost of revenues

        

Liquidity rebates

     (329     (484     (1,167     (1,216

Brokerage, clearance and exchange fees

     (132     (107     (342     (352
                                

Total cost of revenues

     (461     (591     (1,509     (1,568
                                

Revenues less liquidity rebates, brokerage, clearance and exchange fees

     349        399        1,084        1,057   
                                

Operating expenses

        

Compensation and benefits

     99        106        302        294   

Marketing and advertising

     3        7        7        13   

Depreciation and amortization

     27        28        78        66   

Professional and contract services

     20        17        56        53   

Computer operations and data communications

     14        16        42        42   

Occupancy

     19        19        55        48   

Regulatory

     10        7        29        22   

Merger expenses

     5        9        16        16   

General, administrative and other

     21        18        44        43   
                                

Total operating expenses

     218        227        629        597   
                                

Operating income

     131        172        455        460   

Interest income

     3        9        10        28   

Interest expense

     (26     (29     (77     (63

Dividend and investment income

     1        2        2        5   

Loss on sale of investment security

     —          —          (5     —     

Income (loss) from unconsolidated investees, net

     —          —          (20     27   

Debt conversion expense

     (25     —          (25     —     

Asset impairment charges

     —          (7     —          (7

Loss on foreign currency contracts, net

     —          (51     —          (11
                                

Income before income taxes

     84        96        340        439   

Income tax provision

     25        38        119        159   
                                

Net income

     59        58        221        280   

Net (income) loss attributable to noncontrolling interests

     1        —          2        (1
                                

Net income attributable to NASDAQ OMX

   $ 60      $ 58      $ 223      $ 279   
                                

Basic and diluted earnings per share:

        

Basic

   $ 0.30      $ 0.29      $ 1.10      $ 1.49   
                                

Diluted

   $ 0.28      $ 0.27      $ 1.05      $ 1.40   
                                

See accompanying notes to condensed consolidated financial statements.

 

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The NASDAQ OMX Group, Inc.

Condensed Consolidated Balance Sheets

(in millions, except share and par value amounts)

 

     September 30,
2009
    December 31,
2008
 
     (Unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 311      $ 374   

Restricted cash

     155        141   

Financial investments, at fair value

     257        227   

Receivables, net

     379        339   

Deferred tax assets

     43        27   

Market value, outstanding derivative positions

     3,569        4,122   

Other current assets

     198        198   
                

Total current assets

     4,912        5,428   

Non-current restricted cash

     50        50   

Property and equipment, net

     165        183   

Non-current deferred tax assets

     403        659   

Goodwill

     4,922        4,492   

Intangible assets, net

     1,675        1,583   

Other assets

     215        357   
                

Total assets

   $ 12,342      $ 12,752   
                

Liabilities

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 229      $ 242   

Section 31 fees payable to SEC

     41        49   

Accrued personnel costs

     112        157   

Deferred revenue

     137        98   

Other accrued liabilities

     90        165   

Deferred tax liabilities

     24        19   

Market value, outstanding derivative positions

     3,569        4,122   

Current portion of debt obligations

     169        225   
                

Total current liabilities

     4,371        5,077   

Debt obligations

     1,920        2,299   

Non-current deferred tax liabilities

     726        696   

Non-current deferred revenue

     159        155   

Other liabilities

     180        222   
                

Total liabilities

     7,356        8,449   

Commitments and contingencies

    

Series A convertible preferred stock

     15        —     

Equity

    

NASDAQ OMX stockholders’ equity:

    

Common stock, $0.01 par value, 300,000,000 shares authorized, shares issued: 211,376,687 at September 30, 2009 and 202,188,144 at December 31, 2008; shares outstanding: 211,059,532 at September 30, 2009 and 201,896,700 at December 31, 2008

     2        2   

Preferred stock, 30,000,000 shares authorized, series A convertible preferred stock: shares issued and outstanding: 1,600,000 at September 30, 2009 (classified above as temporary equity) and none at December 31, 2008

     —          —     

Additional paid-in capital

     3,723        3,569   

Common stock in treasury, at cost: 317,155 shares at September 30, 2009 and 291,444 shares at December 31, 2008

     (11     (10

Accumulated other comprehensive loss

     (331     (619

Retained earnings

     1,567        1,344   
                

Total NASDAQ OMX stockholders’ equity

     4,950        4,286   

Noncontrolling interests

     21        17   
                

Total equity

     4,971        4,303   
                

Total liabilities, series A convertible preferred stock and equity

   $ 12,342      $ 12,752   
                

See accompanying notes to condensed consolidated financial statements.

 

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The NASDAQ OMX Group, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(in millions)

 

     Nine Months
Ended September 30,
 
     2009     2008  

Cash flows from operating activities

    

Net income

   $ 221      $ 280   

Net (income) expense attributable to noncontrolling interests

     2        (1
                

Net income attributable to NASDAQ OMX

     223        279   

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

    

Depreciation and amortization

     78        66   

Share-based compensation

     25        18   

Excess tax benefits related to share-based compensation

     (4     (5

Provision for bad debts

     2        (3

Gain on early extinguishment of debt

     (4     —     

Loss on foreign currency contracts, net

     —          11   

Asset retirements and impairment charges

     11        7   

Deferred taxes, net

     3        (65

Loss on sale of investment security

     5        —     

(Income) loss from unconsolidated investees, net

     20        (27

Debt conversion expense

     25        —     

Accretion of 2.50% convertible senior notes

     10        8  

Other non-cash items included in net income

     (1     2   

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

    

Receivables, net

     (40     18   

Other assets

     (8     (412

Accounts payable and accrued expenses

     (3     27   

Section 31 fees payable to SEC

     (8     (89

Accrued personnel costs

     (51     (47

Deferred revenue

     33        34   

Other accrued liabilities

     (73     (2

Other liabilities

     (15     (9
                

Cash provided by (used in) operating activities

     228        (189
                

Cash flows from investing activities

    

Purchases of trading securities

     (307     (72

Proceeds from sales and redemptions of trading securities

     305        —     

Proceeds from sale of available-for-sale investments

     25        14   

Proceeds from sale of equity method investment

     54        —     

Purchases of foreign currency contracts

     —          (13

Settlement of foreign currency contracts

     —          67   

Acquisitions of businesses, net of cash and cash equivalents acquired and purchase accounting adjustments

     (20     (2,740

Purchases of property and equipment

     (46     (39
                

Cash provided by (used in) investing activities

     11        (2,783

Cash flows from financing activities

    

Proceeds from contributions of noncontrolling interests

     7        —     

Proceeds from debt obligations, net of debt issuance costs

     —          2,426   

Payments of debt obligations

     (341     (390

Cash inducement payment

     (9     —     

Issuances of common stock, net of treasury stock purchases

     7        5   

Excess tax benefits related to share-based compensation

     4        5   
                

Cash provided by (used in) financing activities

     (332     2,046   
                

Effect of exchange rate changes on cash and cash equivalents

     30        (17
                

Decrease in cash and cash equivalents

     (63     (943

Cash and cash equivalents at beginning of period

     374        1,325   
                

Cash and cash equivalents at end of period

   $ 311      $ 382   
                

Supplemental Disclosure Cash Flow Information

    

Cash paid for:

    

Interest

   $ 58      $ 37   

Income taxes, net of refund

   $ 154      $ 216   

See accompanying notes to condensed consolidated financial statements.

 

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The NASDAQ OMX Group, Inc.

Notes to Condensed Consolidated Financial Statements

1. Organization and Nature of Operations

On February 27, 2008, Nasdaq and OMX AB combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc. We are a leading global exchange group that delivers trading, exchange technology, securities listing, and public company services across six continents. Our global offerings are diverse and include trading across multiple asset classes, market data products, financial indexes, capital formation solutions, financial services and market technology products and services. Our technology powers markets across the globe, supporting cash equity trading, derivatives trading, clearing and settlement and many other functions.

In the U.S., we operate The NASDAQ Stock Market, a registered national securities exchange. The NASDAQ Stock Market is the largest electronic cash equity securities market in the world in terms of share value traded. As of September 30, 2009, The NASDAQ Stock Market was home to 2,836 listed companies with a combined market capitalization of approximately $4 trillion. In addition, in the U.S. we operate NASDAQ OMX PHLX, which is the third largest U.S. options market, The NASDAQ Options Market, a second options market, NASDAQ OMX BX, a second cash equities trading market, NASDAQ OMX Futures Exchange, or NFX, a futures market, and International Derivatives Clearing Group, or IDCG, a derivatives clearinghouse.

In Europe, we operate exchanges in Stockholm (Sweden), Copenhagen (Denmark), Helsinki (Finland), and Iceland as NASDAQ OMX Nordic and exchanges in Tallinn (Estonia), Riga (Latvia) and Vilnius (Lithuania) as NASDAQ OMX Baltic. In addition, we operate NASDAQ OMX Europe (London), a marketplace for pan-European blue chip securities trading, NASDAQ OMX Commodities (Norway), an offering for trading and clearing commodities, and the Armenian Stock Exchange.

The exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic offer trading in cash equities, bonds, structured products and ETFs, as well as trading and clearing of derivatives. Our Nordic and Baltic operations also offer alternative marketplaces for smaller companies called NASDAQ OMX First North. As of September 30, 2009, the exchanges within NASDAQ OMX Nordic and NASDAQ OMX Baltic were home to 800 listed companies with a combined market capitalization of approximately $859 billion.

We also operate two registered broker-dealers: Nasdaq Execution Services and NASDAQ Options Services. Nasdaq Execution Services is a wholly-owned subsidiary of The NASDAQ Stock Market. It has no customers, accepts orders from one user, The NASDAQ Stock Market, and currently operates solely as the routing broker for The NASDAQ Stock Market. Nasdaq Execution Services is distinguished from most broker-dealers in that it is a facility of The NASDAQ Stock Market. NASDAQ Options Services is also a wholly-owned subsidiary of The NASDAQ Stock Market. It performs a comparable function to Nasdaq Execution Services with respect to routing of orders from The NASDAQ Options Market.

We manage, operate and provide our products and services in three business segments: Market Services, Issuer Services and Market Technology.

Market Services

Our Market Services segment includes our U.S. and European Transaction Services businesses, as well as our Market Data and Broker Services businesses. We offer trading on multiple exchanges and facilities across several asset classes including equities, derivatives, debt, commodities, structured products and ETFs.

U.S. Transaction Services

In the U.S., we offer trading in equity securities, derivatives and ETFs on The NASDAQ Stock Market, NASDAQ OMX PHLX, The NASDAQ Options Market, NASDAQ OMX BX and NFX. Our transaction-based platforms in the U.S. provide market participants with the ability to access, process, display and integrate orders and quotes for cash equities and derivatives. The platforms allow the routing and execution of buy and sell orders as well as the reporting of transactions for cash equity securities, derivatives and ETFs, providing fee-based revenues.

 

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European Transaction Services

Nordic Transaction Services

The exchanges that comprise NASDAQ OMX Nordic offer trading for equities and bonds and trading and clearing services for derivatives. Our platform allows the exchanges to share the same trading system which enables efficient cross-border trading, cross membership, and one source for Nordic market data.

Cash trading is offered in Nordic securities such as equities and depository receipts, warrants, convertibles, rights, fund units, ETFs, bonds and other interest-related products. NASDAQ OMX Nordic also offers trading in derivatives, such as stock options and futures, index options and futures, fixed-income options and futures and stock loans.

On NASDAQ OMX Stockholm, we offer clearing services for fixed-income options and futures, stock options and futures and index options and futures by serving as the central counterparty, or CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for certain over-the-counter, or OTC, contracts. The transactions are reported electronically prior to CCP clearing and we thereby guarantee the completion of the transaction. Following the completion of a transaction, settlement takes place between parties with the exchange of the securities and funds. The transfer of ownership is registered and the securities are stored on the owner’s behalf. Settlement and registration of cash trading takes place in Sweden, Finland, Denmark and Iceland via the local central securities depositories. Beginning in October 2009, most of our equity trades on the exchanges that comprise NASDAQ OMX Nordic are centrally cleared by European Multilateral Clearing Facility, N.V., or EMCF, a leading European clearinghouse in which we own a 22% equity stake.

Baltic Transaction Services

NASDAQ OMX holds a 62% ownership stake in NASDAQ OMX Tallinn (Estonia) and holds a 93% ownership stake in both NASDAQ OMX Riga (Latvia) and NASDAQ OMX Vilnius (Lithuania). In addition, we own the central securities depositories in Estonia and Latvia, and 40% of the central securities depository in Lithuania.

The exchanges that comprise NASDAQ OMX Baltic offer their members trading, clearing, payment and custody services. Issuers, primarily large companies, are offered listing and a distribution network for their securities. The securities traded are mainly equities, bonds and treasury bills. Clearing, payment and custody services are offered through the central securities depositories in Estonia, Latvia and Lithuania. In addition, in Estonia and Latvia, NASDAQ OMX offers registry maintenance of fund units included in obligatory pension funds, and in Estonia, NASDAQ OMX offers the maintenance of shareholder registers for listed companies. The Baltic central securities depositories offer a complete range of cross-border settlement services.

Pan-European Transaction Services

NASDAQ OMX Europe is a marketplace designed for high performance trading of the most actively traded European stocks. It is the first platform to connect European liquidity pools with pan-European routing. As of September 30, 2009, NASDAQ OMX Europe traded 995 securities including constituents of the main European indices, ETFs and other highly liquid securities.

Commodities Trading and Clearing

NASDAQ OMX Commodities, together with third party partner Nord Pool ASA, or Nord Pool, provides access to the world’s largest power derivatives markets and one of Europe’s largest carbon markets. NASDAQ OMX Commodities offers international derivatives and carbon products, operates a clearing business and offers consulting services to commodities markets globally. Nord Pool is responsible for exchange operations and trading activities, including ownership of Nordic derivatives products. NASDAQ OMX Commodities and Nord Pool have 388 members from 22 countries across a wide range of energy producers and consumers, as well as financial institutions. NASDAQ OMX Commodities’ offering is designed for banks, brokers, hedge funds and other financial institutions, as well as power utilities, industrial, manufacturing and oil companies. NASDAQ OMX Commodities offers clearing services for energy derivative and carbon product contracts by serving as the CCP. In doing so, we guarantee the completion of the transaction and market participants can thereby limit their counterparty risk. We also act as the counterparty for trades on the OTC derivative market subject to our approval on a case-by-case basis. Trading on the contracts can take place up until the delivery period which can occur over a period of up to six years.

Access Services

We provide market participants with several alternatives for accessing our markets for a fee. We also earn revenues from annual and monthly exchange membership and registration fees.

 

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Market Data

Market Data revenues are earned from U.S. tape plans and proprietary U.S. and European market data products.

Net U.S. Tape Plans

The NASDAQ Stock Market operates as the exclusive Securities Information Processor of the Unlisted Trading Privileges Plan, or the UTP Plan, for the collection and dissemination of best bid and offer information and last transaction information from markets that quote and trade in NASDAQ-listed securities. The NASDAQ Stock Market also is a participant in the UTP Plan and shares in the net distribution of revenue according to the plan on the same terms as the other plan participants. In the role as the Securities Information Processor, The NASDAQ Stock Market collects and disseminates quotation and last sale information for all transactions in NASDAQ-listed securities whether on The NASDAQ Stock Market or other exchanges. We sell this information to market participants and to data distributors, who then provide the information to subscribers. After deducting costs associated with our role as an exclusive Securities Information Processor, as permitted under the revenue sharing provision of the UTP Plan, we distribute the tape fees to the respective UTP Plan participants, including The NASDAQ Stock Market, based on a formula required by Regulation NMS that takes into account both trading and quoting activity. In addition, all quotes and trades in New York Stock Exchange, or NYSE-, and NYSE Amex-listed securities are reported and disseminated in real time, and as such, we share in the tape fees for information on NYSE- and NYSE Amex-listed securities.

U.S. Market Data Products

Our market data products enhance transparency and provide critical information to professional and non-professional investors. We collect, process and create information and earn revenues as a distributor of our market data. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Our systems enable distributors to gain direct access to our market depth, index values, mutual fund valuation, order imbalances, market sentiment and other analytical data. We earn revenues primarily based on the number of data subscribers and distributors of our data.

European Market Data Products

European market data products and services provide critical market transparency to professional and non-professional investors who participate in European marketplaces, especially NASDAQ OMX Europe and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and, at the same time, give investors greater insight into these markets.

Information products and services are based on trading information from the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic for three classes of securities: equities, bonds and derivative instruments. We provide varying levels of quote and trade information to market participants and to data distributors, who in turn provide subscriptions for this information. Revenues from European market data are subscription based and are generated primarily based on the number of data subscribers and distributors of our data.

Broker Services

Our Broker Services operations offer technology and customized securities administration solutions to financial participants in the Nordic market and in the United Kingdom. Broker Services provide services through a registered securities company which is regulated by the Swedish and United Kingdom Financial Supervisory Authorities. The primary services include flexible back-office systems, which allow customers to entirely or partly outsource their company’s back-office functions.

We offer customer and account registration, business registration, clearing and settlement, corporate action handling for reconciliations and reporting to authorities. Available services also include direct settlement with the Nordic central securities depositories, real-time updating and communication via the Society for Worldwide Interbank Financial Telecommunication to deposit banks. Revenues are based on a fixed basic fee for back-office brokerage services, such as administration or licensing, maintenance and operations, and a variable portion that depends on the number of transactions completed.

Issuer Services

Our Issuer Services segment includes our Global Listing Services and Global Index Group businesses.

Global Listing Services

Our Global Listing Services business includes our U.S. Listings, European Listings and Corporate Services businesses.

U.S. Listings

In the U.S., companies listed on The NASDAQ Stock Market represent a diverse array of industries including health care, consumer products, telecommunication services, information technology, financial services, industrials and energy. There are three

 

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types of fees applicable to companies that list on The NASDAQ Stock Market: an annual renewal fee, a listing of additional shares fees and an initial listing fee. Annual renewal fees for securities listed on The NASDAQ Stock Market are based on total shares outstanding. The fee for listing of additional shares is also based on the total shares outstanding, which we review quarterly, and the initial listing fee for securities listed on The NASDAQ Stock Market includes a listing application fee and a total shares outstanding fee.

European Listings

We also offer listings on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic. Revenues are generated through annual fees paid by companies listed on these exchanges which are measured in terms of the listed company’s market capitalization on a trailing 12-month basis. Our European listing customers are organizations such as companies, funds or governments and include issuers from a diverse range of industries, including industrials, financial services and consumer products. Customers issue securities in the forms of equities, depository receipts, warrants, ETFs, convertibles, rights, options, bonds and fixed-income related products.

Corporate Services

In addition, our Global Listing Services business includes revenues generated through our Corporate Services business. Our Corporate Services business provides customer support services, products and programs to companies, including companies listed on our exchanges. Through our Corporate Services offerings, companies gain access to innovative products and services that facilitate transparency, mitigate risk, maximize board efficiency and inspire better corporate governance.

Global Index Group

We develop and license NASDAQ OMX branded indexes, associated derivatives and financial products as part of our Global Index Group. These indexes and products leverage, extend and enhance the NASDAQ OMX brand. License fees for our trademark licenses vary by product based on a percentage of underlying assets, dollar value of a product issuance, number of products or number of contracts traded. In addition to generating licensing revenues, these products, particularly mutual funds and ETFs, lead to increased investments in companies listed on our global exchanges, which enhances our ability to attract new listings. We also license cash-settled options, futures and options on futures on our indexes.

Market Technology

The Market Technology segment delivers technology and services to marketplaces throughout the world. Market Technology provides technology solutions for trading, clearing and settlement, and information dissemination, as well as offering facility management integration and advisory services to 70 exchanges in 50 countries across five continents. We serve as a technology partner to some of the world’s most prominent exchanges, and we also provide critical technical support to start-ups and new entrants in the exchange space. Revenues are derived from three primary sources: license, support and project revenues, facility management services revenues and other revenues. License, support and project revenues are derived from the system solutions developed and sold by NASDAQ OMX. After we have developed and sold a system solution, the customer licenses the right to use the software. In addition, license revenues include the amortization of the deferred revenue related to our contribution of technology licenses to NASDAQ Dubai and advisory services. See “The combination with OMX AB and strategic partnership with Borse Dubai Limited,” of Note 4, “Acquisitions and Strategic Initiatives,” for further discussion of our NASDAQ Dubai transaction. Facility management services revenues are derived when NASDAQ OMX assumes responsibility for the continuous operation of a system platform for a customer and receives facility management services revenues. Other revenues include advisory services.

For further discussion of our segments, see Note 16, “Segments.”

2. Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The financial statements include the accounts of NASDAQ OMX, its wholly-owned subsidiaries and other entities in which NASDAQ OMX has a controlling financial interest. All significant intercompany accounts and transactions have been eliminated in consolidation. We consolidate those entities in which we are the primary beneficiary of a variable-interest entity, or VIE, and entities where we have a controlling financial interest. As of September 30, 2009 and December 31, 2008, we were not the primary beneficiary of any VIE. When NASDAQ OMX is not the primary beneficiary of a VIE or does not have a controlling interest in an entity but exercises significant influence over the entity’s operating and financial policies, such investment is accounted for under the equity method of accounting. We recognize our share of earnings or losses of an equity method investee based on our ownership percentage. For certain equity method investments for which financial information is not sufficiently timely for us to apply the equity method of accounting currently, we record our share of the earnings or losses of an investee from the most recent available financial statements on a lag. See Note 6, “Equity Method Investments,” for further discussion of our equity method investments.

As permitted under U.S. GAAP, certain footnotes or other financial information can be condensed or omitted in the interim condensed consolidated financial statements. The information included in this Quarterly Report on Form 10-Q should be read in

 

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conjunction with the consolidated financial statements and accompanying notes included in NASDAQ OMX’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Certain prior year amounts have been reclassified to conform to the current year presentation.

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Income Taxes

In order to recognize and measure our unrecognized tax benefits, management determines whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Once it is determined that a position meets the recognition thresholds, the position is measured to determine the amount of benefit to be recognized in the condensed consolidated financial statements. Interest and/or penalties related to income tax matters are recognized in income tax expense.

In June 2009, NASDAQ OMX filed an application for an advance tax ruling with the Swedish Tax Council for Advanced Tax Rulings. The application was filed to confirm whether certain interest expense is deductible for Swedish tax purposes under legislation that became effective on January 1, 2009. We expect to receive a favorable response from the Swedish Tax Council for Advance Tax Rulings by the end of the first quarter of 2010. We recorded the Swedish tax benefit as described above in our condensed consolidated financial statements. In the third quarter of 2009, we recorded a tax benefit of $5 million. For the first nine months of 2009, we recorded a tax benefit of $14 million. We expect to record recurring quarterly tax benefits of $4 million to $5 million with respect to this issue for the foreseeable future.

3. Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

ASC Topic 105 - In June 2009, the Financial Accounting Standards Board, or FASB, issued the FASB Accounting Standards Codification, or ASC, Topic 105, “Generally Accepted Accounting Principles,” as the single source of authoritative nongovernmental U.S. GAAP. The provisions in this guidance do not change current U.S. GAAP, but are intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents were superseded and all other accounting literature that is not included in the FASB Codification is considered non-authoritative. This guidance is effective for interim and annual periods ending after September 15, 2009 and, accordingly, was effective for our interim period ended September 30, 2009. The adoption of this guidance did not have an impact on our financial condition or results of operations but will impact our financial reporting process by eliminating all references to pre-codification standards.

ASC Topic 805 - On January 1, 2009, we adopted on a prospective basis ASC Topic 805, “Business Combinations.” This recently issued guidance significantly changed how business acquisitions were accounted for and will impact financial statements both on the acquisition date and in subsequent periods requiring:

 

   

More assets acquired and liabilities assumed to be measured at fair value as of the acquisition date;

 

   

Liabilities related to contingent consideration to be remeasured at fair value in each subsequent reporting period; and

 

   

An acquirer to expense acquisition-related costs (e.g., deal fees for attorneys, accountants, investment bankers).

The adoption of this guidance did not have a material impact on our condensed consolidated financial statements as of September 30, 2009.

ASC Topic 810 - On January 1, 2009, we adopted recently issued accounting guidance contained within ASC Topic 810, “Consolidations,” which changed the accounting and reporting for minority interests, which are now characterized as noncontrolling interests and classified as a component of equity. This recently issued guidance requires retroactive adoption of the presentation and disclosure requirements for existing noncontrolling interests. All other requirements under the new guidance have been applied prospectively. Noncontrolling interests were $21 million as of September 30, 2009 and $17 million as of December 31, 2008.

ASC Topic 815 - On January 1, 2009, we adopted recently issued accounting guidance contained within ASC Topic 815 “Derivatives and Hedging,” which enhanced the disclosure requirements about our derivative instruments and hedging activities, thereby improving the transparency of financial reporting. The adoption of this guidance did not have an impact on our financial condition or results of operations but will impact disclosures of our derivative instruments and hedging activities. The additional disclosures required under this guidance are included in Note 14, “Derivative Financial Instruments and Hedging Activities.”

 

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ASC Topic 470.20 - On January 1, 2009, we adopted ASC Topic 470.20, “Debt: Debt with Conversion and Other Options,” which is applicable to our 2.50% convertible senior notes due 2013. This guidance requires us to separately account for the liability and equity components of a convertible debt instrument in a manner that reflects our nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The guidance also requires bifurcation of a component of the debt, classification of that component in equity and then accretion of the resulting discount on the debt as part of interest expense being reflected in the income statement.

We have adjusted all periods presented to reflect the reclassification of a portion of the carrying value of the 2.50% convertible senior notes from debt to equity and the accretion of the debt discount as part of interest expense. The incremental effect of adopting the provisions under this guidance on our Condensed Consolidated Statements of Income was additional interest expense of $3 million for the three months ended September 30, 2008 and $8 million for the nine months ended September 30, 2008. The resulting tax benefit was $1 million for the three months ended September 30, 2008 and $3 million for the nine months ended September 30, 2008. The incremental effects of adopting the provisions under this guidance on our Condensed Consolidated Balance Sheets at December 31, 2008 are presented in the following table (in millions).

 

     Before Adoption of
ASC 470.20
   Effect of Adopting
ASC 470.20
    After Adoption of
ASC 470.20

Deferred tax liabilities

   $ 14    $ 5      $ 19

Non-current deferred tax liabilities

     672      24        696

Total debt obligations

     2,598      (74 ) (1)       2,524

Total liabilities

     8,494      (45     8,449

Additional paid-in capital

     3,518      51 (2)       3,569

Retained earnings

     1,350      (6     1,344

Total NASDAQ OMX stockholders’ equity

     4,241      45        4,286

 

(1)

As of December 31, 2008, the unamortized debt discount on the 2.50% convertible senior notes included in debt obligations in the Condensed Consolidated Balance Sheets was $74 million. This amount will be accreted as part of interest expense through the maturity date of the convertible debt of August 15, 2013.

(2)

As of December 31, 2008, the equity component of the 2.50% convertible senior notes included in additional paid-in capital in the Condensed Consolidated Balance Sheets was $51 million. This amount is calculated as follows: $85 million of excess principal of the 2.50% convertible senior notes over the carrying amount less $34 million of deferred taxes. The deferred tax liability is determined by multiplying the $85 million of excess principal of the 2.50% convertible senior notes over the carrying amount by the U.S. marginal tax rate of 39.55%.

See Note 8, “Debt Obligations,” for further discussion of our 2.50% convertible senior notes.

ASC Topic 825 - On April 1, 2009, we adopted recently issued accounting guidance contained within ASC Topic 825, “Financial Instruments,” which requires disclosure about fair value of financial instruments in interim as well as in annual financial statements. This recently issued guidance, which was effective for us in our interim financial reporting period ended June 30, 2009, did not have a material impact on our financial position, results of operations, and disclosures. The additional disclosures required by this guidance are included in Note 13, “Fair Value of Financial Instruments.”

ASC Topic 855 - In June 2009, we adopted ASC Topic 855, “Subsequent Events,” which provides guidance to establish general standards of accounting for, and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance requires entities to disclose the date through which subsequent events were evaluated as well as the basis for why that date was selected. The guidance, which was effective for us in our interim financial reporting period ended June 30, 2009, did not have a material impact on our financial position, results of operations, and disclosures. See Note 18, “Subsequent Events,” for further discussion of subsequent events that occurred after September 30, 2009.

Recently Issued Accounting Pronouncements

ASC Topic 715 - In December 2008, the FASB issued new accounting guidance contained within ASC Topic 715, “Compensation—Retirement Benefits.” This guidance requires that information about pension and other post-retirement benefit plan assets be disclosed, on an annual basis, based on the fair value disclosure requirements of ASC Topic 820, “Fair Value Measurements and Disclosures.” We will be required to separate plan assets into three fair value hierarchy levels and provide a rollforward of the changes in fair value of plan assets classified as Level 3, if any. For further information on the three fair value hierarchy levels, see Note 13, “Fair Value of Financial Instruments.” This guidance will be effective for NASDAQ OMX’s fiscal year end 2009. Since the new provisions of this guidance require only additional disclosures about our pension and other post-retirement benefit plan assets, the adoption of the new provisions will not affect our financial position or results of operations.

 

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4. Acquisitions and Strategic Initiatives

During 2008, we completed the following acquisitions and strategic initiatives:

The combination with OMX AB and strategic partnership with Borse Dubai Limited. On February 27, 2008, Nasdaq and OMX AB combined their businesses pursuant to an agreement with Borse Dubai Limited, a Dubai company, or Borse Dubai. The purchase price of OMX AB was $4.4 billion, consisting of an equity component and a cash component. Our business combination with OMX AB created a premier global exchange company, bringing together complementary businesses, diversifying our operations, enhancing our existing product offerings and solidifying our leadership in global exchange technology.

Concurrently with the business combination with OMX AB, we also acquired 33   1 /3% of the equity of the Dubai International Financial Exchange, or DIFX, in exchange for a contribution of $50 million in cash and the entry into certain technology and trademark licensing agreements. DIFX, which has been renamed NASDAQ Dubai, is an international financial exchange serving the region between Western Europe and East Asia. In November 2008, we listed our common stock on NASDAQ Dubai.

The acquisition of the Philadelphia Stock Exchange. In July 2008, we completed our acquisition of PHLX, expanding our presence in the derivatives market. The acquisition of PHLX provided us with the third largest options market in the U.S. and with increased exposure to a fast growing asset class and diversification into an area adjacent to our core equity trading business. PHLX, renamed NASDAQ OMX PHLX, Inc., operates as a distinct market alongside The NASDAQ Options Market, our options platform that was launched in March 2008. With the acquisition of PHLX and the launch of The NASDAQ Options Market, we have substantially increased our footprint in global derivatives.

The acquisition of the Boston Stock Exchange. We completed our acquisition of the Boston Stock Exchange, Incorporated, or BSX, in August 2008. The BSX acquisition provided us with an additional license for trading both equities and options and a clearing license. We used the BSX license to create a second U.S. cash equities market, called NASDAQ OMX BX, which was launched in January 2009. With NASDAQ OMX BX, we offer a second quote within the U.S. equities marketplace, providing our customers enhanced trading choices and price flexibility. We have been able to leverage our INET trading system, which runs The NASDAQ Stock Market, to operate NASDAQ OMX BX, providing customers an additional fast and efficient cash equities market.

The acquisition of certain businesses from Nord Pool. In October 2008, we acquired Nord Pool’s clearing, international derivatives and consulting subsidiaries. As a result of the acquisition, we launched NASDAQ OMX Commodities, which offers energy and carbon derivatives products. NASDAQ OMX Commodities, together with third party partner Nord Pool, provides access to the world’s largest power derivatives markets and one of Europe’s largest carbon markets.

The acquisition of a majority interest in International Derivatives Clearing Group. In December 2008, we acquired a majority interest in IDCG, and IDCG became an independently operated subsidiary of NASDAQ OMX. IDCG, through its clearinghouse subsidiary, International Derivatives Clearinghouse, LLC, operates a central clearinghouse that has been granted approval by the U.S. Commodity Futures Trading Commission to clear and settle interest rate swap futures contracts and other fixed income derivatives contracts. NFX is serving as the designated contract market for trading of these interest rate swap futures products. In June 2009, The Bank of New York Mellon Corporation made a strategic noncontrolling investment in IDCG.

Investment in Agora-X. During 2008, we acquired a 20% aggregate equity interest in Agora-X, LLC (13.3% in March 2008 and an additional 6.7% in December 2008) which is accounted for under the equity method of accounting. Agora-X has launched an electronic communications network designed to enable institutional traders to efficiently negotiate OTC transactions in agricultural swaps and swaptions, as well as swaps and options on ethanol. The platform provides a more liquid and transparent marketplace for price discovery and negotiation.

The financial results of each acquisition and strategic initiative are included in our condensed consolidated financial statements from the date of each acquisition and strategic initiative.

 

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Pro Forma Results

The condensed consolidated financial statements for the three and nine months ended September 30, 2009 include the financial results of OMX AB, PHLX, BSX, certain businesses of Nord Pool, IDCG and Agora-X. Unaudited pro forma combined historical results for the three and nine months ended September 30, 2008 are included in the table below. The unaudited pro forma combined results for the three months ended September 30, 2008 include the historical Condensed Consolidated Statements of Income of NASDAQ OMX and PHLX giving effect to the PHLX acquisition as if it had occurred at the beginning of the period presented. The historical results for the three months ended September 30, 2008 have not been adjusted for the OMX AB business combination as this transaction occurred on February 27, 2008, and therefore, is already included in the financial results. The unaudited pro forma combined results for the nine months ended September 30, 2008 include the historical Condensed Consolidated Statements of Income of Nasdaq, OMX AB and PHLX giving effect to the OMX AB business combination and PHLX acquisition as if they had occurred at the beginning of the period presented. As stated above, we also acquired BSX in August 2008, certain businesses of Nord Pool in October 2008, IDCG in December 2008 and a 20% equity interest in Agora-X during 2008, but have not included their results prior to their respective acquisition dates in these pro forma results as these acquisitions were not considered significant.

 

     Three Months Ended
September 30, 2008
   Nine Months Ended
September 30, 2008
     (in millions, except per share amounts)

Revenues

   $ 1,003    $ 2,828

Revenues less liquidity rebates, brokerage, clearance and exchange fees

     411      1,250

Net income

     59      272

Net income attributable to NASDAQ OMX

     59      271

Basic earnings per share

   $ 0.29    $ 1.36

Diluted earnings per share

   $ 0.28    $ 1.27

The pro forma results for the three months ended September 30, 2008 primarily include adjustments for amortization of the intangible assets acquired in the acquisition of PHLX, the elimination of PHLX’s non-recurring expenses related to the acquisition, additional interest expense on our credit facilities and related tax adjustments.

The pro forma results for the nine months ended September 30, 2008 primarily include adjustments for amortization of the intangible assets acquired in the business combination with OMX AB, the elimination of OMX AB’s historical amortization expense, additional interest expense on our credit facilities and the 2.50% convertible senior notes, elimination of OMX AB’s historical interest expense related to OMX AB’s debt that was refinanced, elimination of interest income related to the net cash received from the sale of our investment in the London Stock Exchange Group plc, elimination of the non-recurring gain on the contribution of the Nasdaq trade name in the NASDAQ Dubai transaction discussed above, the adjustments related to the PHLX acquisition described above and related tax adjustments.

5. Goodwill and Purchased Intangible Assets

Goodwill

The following table presents the changes in goodwill by business segment during the nine months ended September 30, 2009:

 

 

     Market
Services
   Issuer
Services
   Market
Technology
   Total
     (in millions)

Balance at December 31, 2008

   $ 4,159    $ 255    $ 78    $ 4,492

Purchase accounting adjustments

     38      1      9      48

Foreign currency translation adjustment

     343      24      15      382
                           

Balance at September 30, 2009

   $ 4,540    $ 280    $ 102    $ 4,922
                           

The purchase accounting adjustments for Market Services primarily consist of a reduction in the fair value of certain assets acquired, additional working capital adjustments, severance costs and additional sublease loss reserves related to the PHLX acquisition. The purchase accounting adjustments for Market Technology, which were made in the first quarter of 2009, consist of changes in estimates of customer contracts and technology write-downs related to the business combination with OMX AB. Goodwill is allocated to the reporting units based on the assignment of the fair values of each reporting unit of the acquired company. In the first quarter of 2009, we finalized the allocation of the purchase price for the OMX AB business combination and in the third quarter of 2009, we finalized the allocation of the purchase price for the PHLX and BSX acquisitions. The purchase price allocation for our other 2008 acquisitions discussed in Note 4, “Acquisitions and Strategic Initiatives,” will be finalized within one year from the acquisition dates.

 

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As of September 30, 2009, the amount of goodwill that is expected to be deductible for tax purposes in future periods is $122 million. Our methodology for allocating the purchase price relating to purchase acquisitions is determined through established valuation techniques. Goodwill is measured as the excess of the cost of an acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. We perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances for each reporting period. We considered the need to update our most recent annual goodwill impairment test as of September 30, 2009 and concluded that none of the impairment indicators triggered a revised impairment analysis. As such, we concluded the assumptions used during the year end assessment remained appropriate. There was no impairment of goodwill for the nine months ended September 30, 2009 and 2008. Although there is no impairment as of September 30, 2009, events such as continued economic weakness and unexpected significant declines in operating results of reporting units, may result in our having to perform a goodwill impairment test for some or all of our reporting units prior to the required annual assessment. These types of events and the resulting analysis could result in goodwill impairment charges in the future. We have elected to make the first day of the fourth quarter the annual impairment assessment date for goodwill, and we are currently in the process of performing our annual test.

Purchased Intangible Assets

The following table presents details of our total purchased intangible assets, both finite- and indefinite-lived:

 

     September 30, 2009    December 31, 2008
     Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Intangible
Assets
    Weighted-
Average
Useful
Life (in
Years)
   Gross
Carrying
Amount
    Accumulated
Amortization
    Net
Intangible
Assets
    Weighted-
Average
Useful
Life (in
Years)
     (in millions)    (in millions)

Finite-Lived Intangible Assets

                 

Technology

   $ 65      $ (35   $ 30      4    $ 82      $ (37   $ 45      4

Customer relationships

     814        (100     714      21      818        (76     742      22

Other

     5        (2     3      9      7        (3     4      7

Foreign currency translation adjustment

     (44     4        (40        (94     —          (94  
                                                     

Total finite-lived intangible assets

   $ 840      $ (133   $ 707         $ 813      $ (116   $ 697     
                                                     

Indefinite-Lived Intangible Assets

                 

Exchange and clearing registrations

   $ 790      $ —        $ 790         $ 790      $ —        $ 790     

Trade names

     173        —          173           173        —          173     

Licenses

     76        —          76           76        —          76     

Foreign currency translation adjustment

     (71     —          (71        (153     —          (153  
                                                     

Total indefinite-lived intangible assets

   $ 968      $ —        $ 968         $ 886      $ —        $ 886     
                                                     

Total intangible assets

   $ 1,808      $ (133   $ 1,675         $ 1,699      $ (116   $ 1,583     
                                                     

Amortization expense for purchased finite-lived intangible assets was $17 million for the three months ended September 30, 2009 and $44 million for the nine months ended September 30, 2009 compared to $14 million for the three months ended September 30, 2008 and $34 million for the nine months ended September 30, 2008. The increase from the three months ended September 30, 2008 to the three months ended September 30, 2009 was primarily due to intangible asset amortization expense on identifiable finite-lived intangible assets purchased in connection with the acquisitions of PHLX and certain businesses of Nord Pool from the date of each acquisition. The increase from the nine months ended September 30, 2008 to the nine months ended September 30, 2009 was primarily due to intangible asset amortization expense on identifiable finite-lived intangible assets purchased in connection with the OMX AB business combination and the acquisitions of PHLX and certain businesses of Nord Pool from the date of each acquisition.

In the third quarter 2008, due to a current period operating loss and a projection of future cash flow losses due to lower contract rates for Carpenter Moore, our insurance agency business, which was part of Corporate Services within our Issuer Services segment, we evaluated the ongoing value of the intangible assets associated with this business. Based on this evaluation, we determined that

 

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finite-lived intangible assets, consisting primarily of customer relationships and technology, with a carrying value of approximately $7 million, were no longer recoverable and were in fact impaired, and wrote them down to their estimated fair value of zero. The risk-adjusted discount rates used to compute the present value of the expected net cash flows of individual intangible assets were based on Carpenter Moore’s weighted average cost of capital, which ranged from 14.5% to 16.9%. These discount rates were determined after consideration of Carpenter Moore’s rate of return on debt and equity and the weighted-average return on invested capital. We recorded the impairment loss in asset impairment charges in the Condensed Consolidated Statements of Income for the three months and nine months ended September 30, 2008.

The estimated future amortization expense (excluding the impact of future foreign exchange rate changes) of purchased intangible assets as of September 30, 2009 is as follows:

 

     (in millions)

2009 (1)

   $ 16

2010

     58

2011

     45

2012

     43

2013

     43

2014 and thereafter

     542
      

Total

   $ 747
      

 

(1)       Represents the estimated amortization to be recognized for the remaining three months of 2009.

6. Equity Method Investments

The equity method of accounting is used when we own less than 50% of the outstanding voting stock, but exercise significant influence over the operating and financial policies of a company.

We have $152 million of equity interest in our equity method investments, which consists primarily of an equity interest in NASDAQ Dubai, included in other assets in the Condensed Consolidated Balance Sheets as of September 30, 2009. NASDAQ Dubai is a related party, as NASDAQ Dubai is primarily owned by Borse Dubai, our largest stockholder.

During the second quarter of 2009, we made a strategic decision to sell our investment in Orc Software AB, or Orc, demonstrating our intent to no longer hold this investment. We sold our shares in Orc, representing 25.25% of the share capital of Orc, to a group of Swedish and other international investors for $54 million in cash. As a result of the sale, we recognized a $19 million loss, which is net of costs directly related to the sale, primarily broker fees. The loss is included in income (loss) from unconsolidated investees, net for the nine months ended September 30, 2009 in the Condensed Consolidated Statements of Income.

Income (loss) from unconsolidated investees, net was a net loss of $20 million for the nine months ended September 30, 2009 primarily due to the sale of Orc shares. Income from unconsolidated investees, net was $27 million for the nine months ended September 30, 2008 primarily due to the NASDAQ Dubai transaction. We contributed intangible assets and $50 million in cash to NASDAQ Dubai in exchange for a 33   1 /3% equity ownership in NASDAQ Dubai. One of the intangible assets contributed was the Nasdaq trade name, which had a zero carrying value on Nasdaq’s books and records prior to the transfer. As a result, we recognized a $26 million gain for the difference between Nasdaq’s carrying value and the fair value of the contributed asset on this non-monetary exchange. Income (loss) recognized from our equity method investments is included in income (loss) from unconsolidated investees, net in the Condensed Consolidated Statements of Income.

 

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7. Deferred Revenue

At September 30, 2009, we have estimated that our deferred revenue, primarily related to Global Listing Services and Market Technology fees, will be recognized in the following years:

 

     Initial
Listing
Fees
   Listing of
Additional
Shares Fees
   Annual
Renewal Fees
and Other
   Market
Technology (2)
   Total
     (in millions)

Fiscal year ended:

              

2009 (1)

   $ 5    $ 9    $ 51    $ 17    $ 82

2010

     16      30      1      23      70

2011

     12      20      —        22      54

2012

     8      10      —        22      40

2013

     4      3      —        22      29

2014 and thereafter

     2      —        —        19      21
                                  
   $ 47    $ 72    $ 52    $ 125    $ 296
                                  

 

(1)

Represents deferred revenue that is anticipated to be recognized over the remaining three months of 2009.

(2)

The timing of recognition of our deferred Market Technology revenues is dependent upon when significant modifications are made pursuant to existing contracts. As such, as it relates to these fees, the timing represents our best estimate.

Our deferred revenue for the nine months ended September 30, 2009 and 2008 is reflected in the following table.

 

     Initial
Listing
Fees
    Listing of
Additional
Shares Fees
    Annual
Renewal Fees
and Other
    Market
Technology (3)
    Total  
                 (in millions)              

Balance at January 1, 2009

   $ 57      $ 74      $ 22      $ 100      $ 253   

Additions (1)

     5        26        169        92        292   

Amortization (1)

     (15     (28     (139     (68     (250

Translation adjustment

     —          —          —          1        1   
                                        

Balance at September 30, 2009

   $ 47      $ 72      $ 52      $ 125      $ 296   
                                        

Balance at January 1, 2008

   $ 71      $ 79      $ 4      $ —        $ 154   

Additions (1) (2)

     7        29        184        138        358   

Amortization (1)

     (17     (31     (135     (21     (204
                                        

Balance at September 30, 2008

   $ 61      $ 77      $ 53      $ 117      $ 308   
                                        

 

(1)

The additions and amortization for initial listing fees, listing of additional shares fees and annual renewal fees and other primarily reflect Issuer Services revenues from U.S. listing fees.

(2)

Includes OMX’s beginning balances since the date of the business combination, as well as Market Technology deferred revenue related to the contribution of technology licenses to NASDAQ Dubai. See “The combination with OMX AB and strategic partnership with Borse Dubai Limited,” of Note 4, “Acquisitions and Strategic Initiatives,” for further discussion of our NASDAQ Dubai transaction.

(3 )

Market Technology deferred revenues include revenues from delivered client contracts in the support phase charged during the period. Under contract accounting, where customization and significant modifications to the software are made to meet the needs of our customers, total revenues as well as costs incurred, are deferred until significant modifications are completed and delivered. Once delivered, deferred revenue and the related deferred costs are recognized over the post contract support period. We have included the deferral of costs in other assets in the Condensed Consolidated Balance Sheets. The amortization of Market Technology deferred revenue includes revenues earned from client contracts recognized during the period and from the technology licenses contributed to NASDAQ Dubai.

 

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8. Debt Obligations

The following table presents the changes in our debt obligations during the nine months ended September 30, 2009:

 

     December 31,
2008
    Additions    Payments,
Conversions,
Accretion and Other
    September 30,
2009
 
     (in millions)  

3.75% convertible notes due October 22, 2012 (net of discount) (1)

   $ 119      $ —      $ (119   $ —     

2.50% convertible senior notes due August 15, 2013 (2) (3)

     401        —        (30     371   

$2,000 million senior secured term loan facility credit agreement due February 27, 2013 (average interest rate of 3.05% (4) for the nine months ended September 30, 2009)

     1,925        —        (225     1,700   

Debt obligations assumed from the Nord Pool transaction (5)

     79        —        (61     18   
                               

Total debt obligations

     2,524        —        (435     2,089   

Less current portion

     (225     —        56        (169
                               

Total long-term debt obligations

   $ 2,299      $ —      $ (379   $ 1,920   
                               

 

(1)

In September 2009, most holders of our outstanding 3.75% convertible notes converted their outstanding positions into common stock. As of September 30, 2009, approximately $0.5 million aggregate principal amount of the 3.75% convertible notes remains outstanding. For further discussion, see “Conversion of 3.75% Convertible Notes,” of “3.75% Convertible Notes” below.

(2)

As adjusted for ASC 470.20. For further discussion, see “Adoption of ASC 470.20,” of “2.50% Convertible Senior Notes” below.

(3)

The decrease of $30 million is comprised of the repurchase of $47 million principal amount of the notes (cash payment of $40 million), offset by accretion of debt discount of $10 million, as well as a $7 million reduction in the unamortized debt discount due to the early extinguishment of these notes. For further discussion, see “Adoption of ASC 470.20” and “Early Extinguishment of Debt,” of “2.50% Convertible Senior Notes” below.

(4)

In 2008, $200 million was swapped to a fixed rate using float-to-fixed interest rate swaps. For the nine months ended September 30, 2009, taking into account these swaps, the average effective interest rate on this debt was 3.05%. For further discussion, see “Interest Rate Swaps,” of “Credit Facilities” below.

(5)

Our debt obligations assumed in the Nord Pool transaction are denominated in NOK and totaled 550 million NOK at December 31, 2008, of which 450 million NOK was a vendor note issued to the previous owners of Nord Pool and 100 million NOK was subordinated debt. In the second quarter of 2009, we paid in full the vendor note of 450 million NOK, or $71 million. The decrease of $61 million is comprised of the $71 million payment, partially offset by foreign currency translation adjustments.

3.75% Convertible Notes

The 3.75% convertible notes were originally issued to Hellman & Friedman, or H&F, ($300 million), Silver Lake Partners, or SLP, ($141 million) and other holders ($4 million) in order to finance the acquisition of INET. These notes were convertible into our common stock at a price of $14.50 per share, representing 30,689,655 shares subject to adjustment, in general for any stock split, dividend, combination, recapitalization or similar event. We also issued warrants to purchase shares of our common stock at a price of $14.50 per share to H&F (3,400,000 shares), SLP (1,523,325 shares) and other holders (39,175 shares). The warrants became exercisable on April 22, 2006 and expired on December 8, 2008. During 2007, H&F converted all of their 3.75% convertible notes into common stock and exercised all of their outstanding warrants prior to expiration. During 2007 and 2008, SLP and other holders converted a portion of their 3.75% convertible notes into common stock and exercised all of their outstanding warrants prior to expiration. As of December 31, 2008, approximately $120 million ($119 million related to SLP and $1 million related to other holders) in aggregate principal amount of the 3.75% convertible notes remained outstanding. In September 2009, SLP and another holder, or Holders, converted their remaining outstanding 3.75% convertible notes into common stock in accordance with the terms of the notes. See “Conversion of 3.75% Convertible Notes” below for further discussion.

Conversion of 3.75% Convertible Notes

In September 2009, we entered into a conversion agreement with the Holders relating to approximately $120 million aggregate principal amount of our outstanding 3.75% convertible notes. The Holders agreed to convert their remaining outstanding 3.75%

 

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convertible notes into common stock in accordance with the terms of the notes, which resulted in the issuance of an aggregate of 8,246,680 shares of our common stock.

As an inducement for conversion of the 3.75% convertible notes, we agreed to pay the Holders and certain of their affiliates an aggregate amount of $9 million in cash and issue to the Holders shares of our series A convertible preferred stock, with an aggregate initial liquidation preference amount of $16 million. See Note 17, “Series A Convertible Preferred Stock,” for further discussion.

In the third quarter of 2009, as a result of the conversion, we recognized debt conversion expense of $25 million in the Condensed Consolidated Statements of Income, which included the cash inducement of $9 million, the present value of the series A convertible preferred stock of $15 million, and debt issuance and other costs of $1 million. We also paid the Holders $0.8 million in accrued interest payments on the 3.75% convertible notes through September 30, 2009.

2.50% Convertible Senior Notes

During the first quarter of 2008, in connection with the business combination with OMX AB, we completed the offering of $475 million aggregate principal amount of 2.50% convertible senior notes due 2013. The interest rate on the notes is 2.50% per annum payable semi-annually in arrears on February 15 and August 15, beginning August 15, 2008. The notes will mature on August 15, 2013.

The notes are convertible in certain circumstances specified in the indenture for the notes. Upon conversion, holders will receive, at the election of NASDAQ OMX, cash, common stock or a combination of cash and common stock. It is our current intent and policy to settle the principal amount of the notes in cash. The conversion rate will initially be 18.1386 shares of common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $55.13 per share of common stock. At September 30, 2009, the 2.50% convertible senior notes are convertible into 7,757,283 shares of our common stock, subject to adjustment upon the occurrence of specified events. Subject to certain exceptions, if we undergo a “fundamental change” as described in the indenture, holders may require us to purchase their notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.

Adoption of ASC 470.20

On January 1, 2009, we adopted ASC 470.20 which is applicable to our 2.50% convertible senior notes since the settlement structure of the notes permits settlement in cash upon conversion. The guidance requires us to separately account for the liability and equity components of the convertible debt in a manner that reflects our nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The guidance requires bifurcation of a component of the debt, classification of that component in equity and then accretion of the resulting discount on the debt as part of interest expense being reflected in the income statement. The guidance requires retrospective application to all periods presented. See “ASC Topic 470.20,” of Note 3, “Recent Accounting Pronouncements,” for the incremental effects of adopting ASC 470.20.

The changes in the liability and equity components of our 2.50% convertible senior notes during the nine months ended September 30, 2009 are as follows:

 

     Liability Component     Equity Component  
     (in millions)     (in millions)  
     Principal
Balance
    Unamortized Debt
Discount
    Net Carrying
Amount
    Gross Equity
Component
    Deferred
Taxes
    Net Equity
Component
 

December 31, 2008

   $ 475      $ 74      $ 401      $ 85      $ 34      $ 51   

Accretion of debt discount

     —          (10     10        —          —          —     

Early extinguishment of debt

     (47     (7     (40     (4     (2     (2
                                                

September 30, 2009

   $ 428      $ 57      $ 371      $ 81      $ 32      $ 49   
                                                

The unamortized debt discount on the convertible debt as of September 30, 2009 was $57 million and is included in debt obligations in the Condensed Consolidated Balance Sheets. This amount will be accreted as part of interest expense through the maturity date of the convertible debt of August 15, 2013. Interest expense recognized in the Condensed Consolidated Statements of Income for the three months ended September 30, 2009 was $6 million and is comprised of $3 million of accretion of debt discount and $3 million of contractual interest. Interest expense recognized in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2009 was $19 million and is comprised of $10 million of accretion of debt discount and $9 million of contractual interest. The effective annual interest rate on the 2.50% convertible senior notes was 6.53% for the three and nine months ended September 30, 2009, which includes the accretion of the debt discount in addition to the annual contractual interest rate of 2.50%.

As of September 30, 2009, the equity component of the convertible debt included in additional paid-in capital in the Condensed Consolidated Balance Sheets was $49 million. This amount is calculated as follows: $81 million of excess principal of the convertible debt over the carrying amount less $32 million of deferred taxes. The deferred tax liability is determined by multiplying the $81 million of excess principal of the convertible debt over the carrying amount by the U.S. marginal tax rate of 39.55%.

 

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Early Extinguishment of Debt

In 2009, we repurchased $47 million principal amount of the 2.50% convertible senior notes for a cash payment of $40 million. For the first nine months of 2009, we recognized a pre-tax gain on the early extinguishment of debt of $4 million (net of debt issuance and other costs of $0.8 million) which is recorded in general, administrative and other expense in the Condensed Consolidated Statements of Income. The aggregate principal amount outstanding on these notes as of December 31, 2008 was $475 million, excluding the unamortized debt discount of $74 million. As a result of the $47 million repurchase, the remaining aggregate principal amount outstanding on these notes as of September 30, 2009 was $428 million. See “Adoption of ASC 470.20” above for further discussion.

Debt Issuance Costs

In 2008, in conjunction with the issuance of the 2.50% convertible senior notes, we incurred debt issuance costs of $10 million. These costs, which are capitalized and included in other assets in the Condensed Consolidated Balance Sheets, are being amortized over the life of the debt obligation. In connection with the early extinguishment of a portion of these notes, we recorded a pre-tax charge of $0.8 million in the first nine months of 2009 for debt issuance costs. See “Early Extinguishment of Debt” above for further discussion. Amortization expense, which is recorded as additional interest expense for these costs, was immaterial for the three and nine months ended September 30, 2009 and 2008.

Credit Facilities

In connection with the business combination with OMX AB, on February 27, 2008, NASDAQ OMX entered into a credit agreement which provides for up to $2,075 million of senior secured loans, which include (i) a five-year, $2,000 million senior secured term loan facility, or the Term Loan Facility, which consists of (a) a $1,050 million term loan facility allocated to the OMX AB business combination; (b) a $650 million term loan facility allocated to the acquisition of PHLX, and (c) a $300 million term loan facility allocated to the Nord Pool transaction, and (ii) a five-year, $75 million senior secured revolving credit facility, with a letter of credit subfacility and swingline loan subfacility, or the Revolving Credit Facility, and together with the Term Loan Facility, the Credit Facilities. The Revolving Credit Facility was undrawn as of September 30, 2009.

In addition, NASDAQ OMX may request that prospective additional lenders under the Credit Facilities agree to make available incremental term loans and incremental revolving commitments from time to time in an aggregate amount not to exceed $200 million.

In addition to financing the business combination with OMX AB, the acquisition of PHLX and the Nord Pool transaction, we used the debt financing under the Credit Facilities to pay fees and expenses incurred in connection with such transactions and repay certain indebtedness of OMX AB.

Borrowings under the Credit Facilities (other than swingline loans) bear interest at (i) the base rate (the higher of the prime rate announced by the Bank of America, N.A, and the federal funds effective rate plus 0.50%), plus an applicable margin, or (ii) the LIBO rate (set by the British Bankers Association LIBOR Rate), plus an applicable margin. The interest rate on swingline loans made under the Credit Facilities is the base rate, plus an applicable margin.

NASDAQ OMX’s obligations under the Credit Facilities (i) are guaranteed by each of the existing and future direct and indirect material wholly-owned domestic subsidiaries of NASDAQ OMX, subject to certain exceptions, and (ii) are secured, subject to certain exceptions, by all the capital stock of each of our present and future subsidiaries (limited, in the case of foreign subsidiaries, to 65.0% of the voting stock of such subsidiaries) and all of the present and future property and assets (real and personal) of NASDAQ OMX and the guarantors.

The Credit Facilities contain customary negative covenants applicable to NASDAQ OMX and its subsidiaries, including the following:

 

   

limitations on the payment of dividends and redemptions of NASDAQ OMX’s capital stock;

 

   

limitations on changes in NASDAQ OMX’s business;

 

   

limitations on amendment of subordinated debt agreements;

 

   

limitations on prepayments, redemptions and repurchases of debt;

 

   

limitations on liens and sale-leaseback transactions;

 

   

limitations on business combinations, recapitalizations, acquisitions and asset sales;

 

   

limitations on transactions with affiliates;

 

   

limitations on restrictions on liens and other restrictive agreements; and

 

   

limitations on loans, guarantees, investments, incurrence of debt and hedging arrangements.

In addition, the Credit Facilities contain financial covenants, specifically, maintenance of a minimum interest expense coverage ratio and a maximum total leverage ratio, as defined in the Credit Facilities.

 

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The Credit Facilities also contain customary affirmative covenants, including access to financial statements, notice of defaults and certain other material events, maintenance of business and insurance, and events of default, including cross-defaults to our material indebtedness.

NASDAQ OMX is permitted to repay borrowings under the Credit Facilities at any time in whole or in part, without penalty. We also are required to repay loans outstanding under the Credit Facilities (i) with net cash proceeds from sales of property and assets of NASDAQ OMX and its subsidiaries (excluding inventory sales and other sales in the ordinary course of business) and casualty and condemnation proceeds, in each case subject to exceptions and thresholds to be agreed and subject to reinvestment rights; (ii) with net cash proceeds from the issuance or incurrence of additional indebtedness other than indebtedness permitted by the Credit Facilities; and (iii) with a percentage of our excess cash flow, and the percentage of such excess cash flow required to be used for repayments varies depending on our leverage ratio at the end of the year for which cash flow is calculated, with the maximum repayment percentage set at 50.0% of excess cash flow.

Principal Amortization Payment

During 2009, we repaid $225 million of principal on our Credit Facility. This amount includes payments required under our Credit Facility agreement of $169 million through September 30, 2009, as well as a prepayment of our fourth quarter principal amortization payment of $56 million.

Interest Rate Swaps

Under the provisions of our Credit Facilities, we are required to maintain approximately 30% of our debt structure on a fixed rate basis for two years from the date of the credit agreement. As such, in August 2008, we entered into interest rate swap agreements that effectively converted $200 million of funds borrowed under our Credit Facilities, which is floating rate debt, to a fixed rate basis through August 2011. The interest rate swaps were fixed to a base rate of 3.73% plus the current credit spread of 200 basis points as of September 30, 2009. The credit spread (not to exceed 200 basis points) is subject to change based upon the leverage ratio in accordance with the Credit Facilities.

Debt Issuance Costs

In 2008, in conjunction with our Credit Facilities, we incurred debt issuance costs of $44 million. These costs, which are capitalized and included in other assets in the Condensed Consolidated Balance Sheets, are being amortized over the life of the debt obligation. Amortization expense, which is recorded as additional interest expense for these costs, was $2 million for both the three months ended September 30, 2009 and 2008, $7 million for the nine months ended September 30, 2009 and $5 million for the nine months ended September 30, 2008.

Other Credit Facilities

We have other credit facilities related to our clearinghouses in order to meet liquidity and regulatory requirements. These credit facilities, which are available in multiple currencies, primarily Swedish Krona and U.S. dollar, totaled $538 million ($260 million which is available to be pledged as collateral and $278 million to satisfy regulatory requirements), of which $0.1 million was drawn at September 30, 2009. At December 31, 2008, these facilities totaled $246 million, of which $4 million was drawn. Amounts drawn are included in other accrued liabilities in the Condensed Consolidated Balance Sheets.

Debt Covenants

At September 30, 2009, we were in compliance with the covenants of all of our debt obligations.

9. Employee Benefits

We maintain a non-contributory, defined-benefit pension plan named The NASDAQ OMX Group, Inc. Pension Plan, or Pension Plan, and a non-qualified supplemental executive retirement plan, or SERP, for certain senior executives and other benefit plans for eligible employees in the U.S., or collectively, the NASDAQ OMX Benefit Plans.

We also provide subsidized medical benefits to a closed group of retirees and their eligible dependents, as well as life insurance in the fixed amount of $5,000, to all retirees who meet eligibility requirements through our post-retirement benefit plans.

Benefit Plans Assumed from PHLX

Upon completion of our acquisition of PHLX on July 24, 2008, we assumed the obligations related to a non-contributory, defined-benefit pension plan, named the NASDAQ OMX PHLX, Inc. Employees’ Pension Plan, or the NASDAQ OMX PHLX Pension Plan, a supplemental executive retirement plan named the NASDAQ OMX PHLX, Inc. SERP, or the NASDAQ OMX PHLX SERP, for certain key executives and a post-retirement benefit plan, which provides certain health care and life insurance benefits for retired employees, referred to collectively as the NASDAQ OMX PHLX Benefit Plans.

 

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The NASDAQ OMX PHLX SERP, which is an unfunded, non-qualified plan, was frozen on July 24, 2008. Future service and salary for the NASDAQ OMX PHLX SERP plan participants do not count toward an accrual of benefits under the NASDAQ OMX PHLX SERP after July 24, 2008. In addition, effective December 31, 2008, the NASDAQ OMX PHLX Pension Plan was frozen. Future service and salary for all participants will not count toward an accrual of benefits under the NASDAQ OMX PHLX Pension Plan after December 31, 2008.

Components of Net Periodic Benefit Cost

The following table sets forth the components of net periodic pension, SERP and post-retirement benefits cost for both the NASDAQ OMX Benefit Plans and the NASDAQ OMX PHLX Benefit Plans recognized in compensation and benefits expense in the Condensed Consolidated Statements of Income. The NASDAQ OMX PHLX benefit costs are reflected in the three and nine months ended September 30, 2008 from the date of acquisition:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (in millions)  

Components of net periodic benefit cost

        

Service cost

   $ 0.2      $ 1.0      $ 0.5      $ 1.0   

Interest cost

     1.7        1.4        5.1        3.0   

Expected return on plan assets

     (1.0     (1.0     (2.7     (2.3

Recognized net actuarial (gain) loss

     (0.4     0.2        0.1        0.4   

Prior service cost recognized

     —          0.1        —          0.1   
                                

Benefit cost

   $ 0.5      $ 1.7      $ 3.0      $ 2.2   
                                

Non-U.S. Benefit Plans

Most employees outside the U.S. are covered by local retirement plans or by applicable social laws. Benefits under social laws are generally expensed in the periods in which the costs are incurred. These costs are included in compensation and benefits expense in the Condensed Consolidated Statements of Income.

As part of the Nord Pool transaction, we assumed the obligation for several pension plans providing benefits for their employees. The benefit cost for these plans included in compensation and benefits expense in the Condensed Consolidated Statements of Income was $2 million for the nine months ended September 30, 2009.

Defined Contribution Savings Plan

We sponsor a voluntary defined contribution savings plan, or 401(k) Plan, for U.S. employees. Employees are immediately eligible to make contributions to the plan and are also eligible for an employer contribution match at an amount equal to 100.0% of the first 4.0% of eligible employee contributions. Savings plan expense included in compensation and benefits expense in the Condensed Consolidated Statements of Income was $1 million for both the three months ended September 30, 2009 and 2008, and $3 million for both the nine months ended September 30, 2009 and 2008.

PHLX also sponsored a voluntary defined contribution savings plan for former PHLX employees. This plan was merged into the NASDAQ OMX 401(k) Plan effective January 1, 2009.

We have a profit-sharing contribution feature to our 401(k) plan which allows eligible U.S. employees to receive employer retirement contributions, or ERCs, when we meet our annual corporate goals. In addition, we have a supplemental ERC for select highly compensated employees whose ERCs are limited by the annual Internal Revenue Service compensation limit. Included in compensation and benefits expense in the Condensed Consolidated Statements of Income was ERC expense of $1 million for both the three months ended September 30, 2009 and 2008, and $3 million for both the nine months ended September 30, 2009 and 2008.

10. Share-Based Compensation

We have a share-based compensation program that provides our board of directors broad discretion in creating employee equity incentives. Grants of stock options, restricted stock, which includes awards and units, and performance share units, or PSUs, are designed to reward employees for their long-term contributions to us and provide incentives for them to remain with us. For accounting purposes, we consider PSUs to be a form of restricted stock. Restricted stock is generally time-based and vests over two to five-year periods beginning on the date of the grant. Stock options are also generally time-based. Stock option awards granted prior to January 1, 2005 generally vested 33% on each annual anniversary of the grant date over three years and expire ten years from the grant date. Stock option awards granted after January 1, 2005 generally included performance based accelerated vesting features based on us achieving specific levels of performance and expire ten years from the grant date. If we achieve the applicable performance parameters, 100% of the grant would vest on the fourth anniversary of the grant date. If we exceed the applicable performance

 

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parameters, the grant would vest on the third anniversary of the grant date and if we did not meet the applicable performance parameters, the grant would be extended to vest on the fifth anniversary of the grant date.

The following table shows the total share-based compensation expense resulting from equity awards and the 15.0% discount provided to employees under the NASDAQ OMX 2000 Employee Stock Purchase Plan, or ESPP, for the three and nine months ended September 30, 2009 and 2008 in the Condensed Consolidated Statements of Income:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (in millions)  

Total share-based compensation expense before income taxes

   $ 8      $ 7      $ 25      $ 18   

Income tax benefit

     (3     (3     (10     (7
                                

Total share-based compensation expense after income taxes

   $ 5      $ 4      $ 15      $ 11   
                                

We estimated the fair value of share-based option awards using the Black-Scholes valuation model with the following weighted-average assumptions:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Expected life (in years)

     5        5        5        5   

Weighted-average risk free interest rate

     2.39     3.23     2.53     2.73

Expected volatility

     36.0     35.0     36.0     35.0

Dividend yield

     —          —          —          —     

Weighted-average fair value at grant date

   $ 6.93      $ 9.61      $ 7.41      $ 13.42   

Our computation of expected life is based on historical exercise patterns. The interest rate for periods within the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. Our computation of expected volatility is based on a combination of historical and market-based implied volatility. Our Credit Facilities restrict our ability to pay dividends. Before our Credit Facilities were in place, it was not our policy to declare or pay cash dividends on our common stock.

A summary of stock option activity for the nine months ended September 30, 2009 is as follows:

 

     Stock
Options
    Weighted-
Average
Exercise Price
   Weighted-
Average
Remaining
Contractual Term
   Aggregate
Intrinsic Value
                (in years)    (in millions)

Outstanding at January 1, 2009

   10,726,905      $ 18.08    6.5    $ 109
                

Grants (1)

   1,005,964        21.14      

Exercises

   (727,927     7.89      

Forfeitures or expirations

   (629,897     32.23      
              

Outstanding at September 30, 2009

   10,375,045      $ 18.23    6.2    $ 76
                        

Exercisable at September 30, 2009

   6,278,604      $ 10.34    4.6    $ 76
                        

 

(1)

In June 2009, our chief executive officer received a grant of 900,000 non-qualified stock options, which will vest 50% on December 31, 2011 and 50% on December 31, 2012.

We received net cash proceeds of $1 million from the exercise of approximately 0.1 million stock options for the three months ended September 30, 2009 and received net cash proceeds of $6 million from the exercise of approximately 0.7 million stock options for the nine months ended September 30, 2009. We received net cash proceeds of $3 million from the exercise of approximately 0.3 million stock options for the three months ended September 30, 2008 and received net cash proceeds of $6 million from the exercise of approximately 0.5 million stock options for the nine months ended September 30, 2008. We present excess tax benefits from the exercise of stock options, if any, as financing cash flows.

The September 30, 2009 aggregate intrinsic value in the above table represents the total pre-tax intrinsic value (i.e., the difference between our closing stock price on September 30, 2009 of $21.05 and the exercise price, times the number of shares) based on stock options with an exercise price less than NASDAQ OMX’s closing price of $21.05 as of September 30, 2009, which would have been received by the option holders had the option holders exercised their stock options on that date. This amount changes based on the fair market value of our common stock. The total number of in-the-money stock options exercisable as of September 30, 2009 was 5.7 million.

 

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Total fair value of stock options vested was immaterial for both the three months ended September 30, 2009 and 2008, $4 million for the nine months ended September 30, 2009 and $5 million for the nine months ended September 30, 2008. The total pre-tax intrinsic value of stock options exercised was $1 million for the three months ended September 30, 2009, $9 million for the nine months ended September 30, 2009, $6 million for the three months ended September 30, 2008 and $14 million for the nine months ended September 30, 2008.

At September 30, 2009, $24 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 1.83 years.

A summary of restricted stock and PSU activity for the nine months ended September 30, 2009 is as follows:

 

     Restricted
Stock
    Weighted-
Average
Grant Date
Fair Value
   PSUs     Weighted-
Average
Grant Date
Fair Value

Unvested at January 1, 2009

   1,884,472      $ 32.23    631,968      $ 33.87

Granted (1) (2)

   800,593        20.85    105,641        22.77

Vested

   (80,037     31.38    —          —  

Forfeited

   (198,473     33.22    (184,927     34.37
                 

Unvested at September 30, 2009

   2,406,555      $ 28.39    552,682      $ 31.59
                         

 

(1)

In March 2009, our chief executive officer received a grant of PSUs under the terms of his employment agreement with a target amount of 80,000 shares. These PSUs are subject to a three year performance period and vest at the end of the period.

(2)

In June 2009, a total of 650,000 restricted stock units were granted to certain executive officers, which will vest 30% on the second anniversary of the grant date and 70% on the third anniversary of the grant date.

At September 30, 2009, $44 million of total unrecognized compensation cost related to restricted stock and PSUs is expected to be recognized over a weighted-average period of 1.74 years.

As of September 30, 2009, we had approximately 7.1 million shares of common stock reserved for future issuance under our equity award plan and ESPP. Shares issued as a result of equity awards and our ESPP are generally issued out of common stock as newly issued shares.

11. Comprehensive Income (Loss)

The following outlines the components of comprehensive income (loss), net of tax:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009     2008  
     (in millions)  

Net income

   $ 59    $ 58      $ 221      $ 280   
                               

Other comprehensive income (loss):

         

Change in unrealized losses on available-for-sale investment (1)

     —        (18     (5     (25

Reclassification adjustment for loss realized in net income on available-for-sale investment (2)

     —        —          5        —     

Change in unrealized gains and losses on derivative financial instruments that qualify as cash flow hedges, net of tax (3)

     —        (1     1        (1

Change in foreign currency translation adjustments, net of tax (4)

     269      (13     287        (6
                               

Total other comprehensive income (loss)

     269      (32     288        (32
                               

Total comprehensive income

     328      26        509        248   

Total comprehensive (income) loss attributable to noncontrolling interests

     1      —          2        (1
                               

Total comprehensive income attributable to NASDAQ OMX

   $ 329    $ 26      $ 511      $ 247   
                               

 

(1)

The amounts represent unrealized losses on our long-term available-for-sale investment in the Oslo Børs exchange, or Oslo. During the second quarter of 2009, we made a strategic decision to sell this investment demonstrating our intent to no longer hold this investment. This investment was held by a non-U.S. subsidiary and the losses were not deductible for tax purposes.

(2)

As indicated in footnote 1 above, in the second quarter of 2009, we sold our available-for-sale investment in Oslo and reclassified the holding loss associated with this investment into earnings. See “Reclassification From Accumulated Other Comprehensive Income to Earnings” below for further discussion. This investment was held by a non-U.S. subsidiary and the loss was not deductible for tax purposes.

 

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(3)

The amounts represent the change in fair value of our cash flow hedge, net of tax, which we entered into in the third quarter of 2008 to effectively convert a portion of our floating rate debt to a fixed rate basis. See Note 8, “Debt Obligations,” and Note 14, “Derivative Financial Instruments and Hedging Activities,” for further discussion.

(4)

The amounts include gains and losses on foreign currency translation adjustments from non-U.S. subsidiaries for which the functional currency is other than the U.S. dollar, net of deferred tax liability of $170 million for the third quarter of 2009 and $227 million for the first nine months of 2009.

Reclassification From Accumulated Other Comprehensive Income to Earnings

In connection with our business combination with OMX AB, we acquired a long-term available-for-sale investment in Oslo. In the second quarter of 2009, we sold this investment and recognized a $5 million loss which is recorded in loss on sale of investment security in the Condensed Consolidated Statements of Income. The unrealized holding loss associated with this investment, which was recorded in other comprehensive income (loss), has been reclassified into earnings.

12. Earnings Per Common Share

The following table sets forth the computation of basic and diluted earnings per share:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008
     (in millions, except share and per share amounts)

Numerator:

           

Net income attributable to NASDAQ OMX:

           

Net income for basic earnings per share

   $ 60    $ 58    $ 223    $ 279

Interest impact of 3.75% convertible notes, net of tax

     1      1      2      2
                           

Net income for diluted earnings per share

   $ 61    $ 59    $ 225    $ 281
                           

Denominator:

           

Weighted-average common shares outstanding for basic earnings per share (1)

     203,311,334      199,977,325      202,526,588      186,940,225
                           

Weighted-average effect of dilutive securities:

           

Employee stock options and awards

     3,886,753      5,102,123      3,991,080      4,926,016

3.75% convertible notes assumed converted into common stock

     7,832,973      8,281,162      8,099,916      8,281,169

Warrants

     —        791,143      —        913,421
                           

Denominator for diluted earnings per share

     215,031,060      214,151,753      214,617,584      201,060,831
                           

Basic and diluted earnings per share:

           

Basic earnings per share

   $ 0.30    $ 0.29    $ 1.10    $ 1.49
                           

Diluted earnings per share

   $ 0.28    $ 0.27    $ 1.05    $ 1.40
                           

 

(1)

The nine months ended September 30, 2008 amount includes 60,561,515 shares of common stock issued to Borse Dubai and the Borse Dubai Nasdaq Share Trust in conjunction with the business combination with OMX AB on a weighted-average basis from the closing date of the business combination.

Options to purchase 10,375,045 shares of common stock and 2,959,237 shares of restricted stock and PSUs were outstanding at September 30, 2009. For the three months ended September 30, 2009, we included 5,688,572 of the outstanding options and 1,315,648 shares of restricted stock and PSUs in the computation of diluted earnings per share, on a weighted-average basis, as their inclusion was dilutive. The remaining options and shares of restricted stock and PSUs are antidilutive, and as such, they were properly excluded. For the nine months ended September 30, 2009, we also included 5,688,572 of the outstanding options and 1,235,648 shares of restricted stock and PSUs in the computation of diluted earnings per share, on a weighted-average basis, as their inclusion was dilutive. The remaining options and shares of restricted stock and PSUs are antidilutive, and as such, they were properly excluded.

In September 2009, most of the holders of our outstanding 3.75% convertible notes converted their remaining outstanding notes into common stock in accordance with the terms of the notes, which resulted in the issuance of an aggregate of 8,246,680 shares of our common stock. The 3.75% convertible notes were accounted for under the if-converted method, as we settled the convertible notes in shares of our common stock. For the three and nine months ended September 30, 2009, all of the shares underlying the outstanding 3.75% convertible notes, including the notes that were converted into shares of common stock in September 2009, were included in the computation of diluted earnings per share, on a weighted-average basis, as their inclusion was dilutive. See Note 8, “Debt Obligations,” and Note 17, “Series A Convertible Preferred Stock,” for further discussion of the conversion of our 3.75% convertible notes.

 

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The 2.50% convertible senior notes are accounted for under the treasury stock method as it is our intent and policy to settle the principal amount of the notes in cash. Based on the settlement structure of the 2.50% convertible senior notes, which permits the principal amount to be settled in cash and the conversion premium to be settled in shares of our common stock or cash, we will reflect the impact of the convertible spread portion of the convertible notes in the diluted calculation using the treasury stock method. For the three and nine months ended September 30, 2009, the conversion spread of our 2.50% convertible senior notes was out of the money, and as such, they were properly excluded from the computation of diluted earnings per share.

Options to purchase 9,573,859 shares of common stock, 1,449,497 shares of restricted stock and PSUs, 3.75% convertible notes convertible into 8,281,162 shares of common stock and warrants exercisable into 1,539,489 shares of common stock were outstanding at September 30, 2008. For the three months ended September 30, 2008, we included 6,610,129 of the outstanding options, 629,952 shares of restricted stock and PSUs, all of the shares underlying the 3.75% convertible notes and all of the shares underlying the warrants in the computation of diluted earnings per share, on a weighted-average basis, as their inclusion was dilutive. The remaining options and shares of restricted stock and PSUs were antidilutive, and the conversion spread of our 2.50% convertible senior notes was out of the money, and as such, they were properly excluded. For the nine months ended September 30, 2008, we included 6,705,089 of the outstanding options, 1,002,201 shares of restricted stock and PSUs, all of the shares underlying the 3.75% convertible notes, including the 3.75% convertible notes that were converted into 2,000 shares of common stock during the first nine months of 2008, and all of the shares underlying the warrants in the computation of diluted earnings per share, on a weighted-average basis, as their inclusion was dilutive. The remaining options and shares of restricted stock and PSUs were antidilutive, and the conversion spread of our 2.50% convertible senior notes was out of the money, and as such, they were properly excluded.

13. Fair Value of Financial Instruments

Fair Value Measurement—Definition and Hierarchy

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants at the measurement date. Fair value measurement establishes a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect NASDAQ OMX’s market assumptions. These two types of inputs create the following fair value hierarchy:

 

   

Level 1—Quoted prices for identical instruments in active markets.

 

   

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

   

Level 3—Instruments whose significant value drivers are unobservable.

This hierarchy requires the use of observable market data when available.

The following table presents for each of the above hierarchy levels, our financial assets and liabilities that are measured at fair value on a recurring basis at September 30, 2009.

 

     Balance as of
September 30, 2009
   Fair Value Measurements
          (Level 1)    (Level 2)    (Level 3)
          (in millions)

Financial Assets Measured at Fair Value on a Recurring Basis

           

Market value, outstanding derivative positions (1)

   $ 3,569    $ —      $ 3,569    $ —  
                           

Financial investments, at fair value (2)

     257      257      —        —  
                           

Total

   $ 3,826    $ 257    $ 3,569    $ —  

Financial Liabilities Measured at Fair Value on a Recurring Basis

           

Market value, outstanding derivative positions (1)

   $ 3,569    $ —      $ 3,569    $ —  

Other liabilities (3)

     11      —        11      —  
                           

Total

   $ 3,580    $ —      $ 3,580    $ —  
                           

 

(1)

Represents net amounts associated with our clearing operations in the derivatives markets of NASDAQ OMX Commodities and NASDAQ OMX Stockholm. See “Market Value, Outstanding Derivative Positions,” of Note 14, “Derivative Financial Instruments and Hedging Activities,” for further discussion.

(2)

Primarily comprised of Swedish government debt securities. These securities are classified as trading securities and $140 million are restricted assets to meet regulatory capital requirements for NASDAQ OMX Stockholm’s clearing operations.

(3)

Primarily includes our interest rate swaps included in other liabilities in the Condensed Consolidated Balance Sheets. See “Cash Flow Hedges,” of Note 14, “Derivative Financial Instruments and Hedging Activities,” for further discussion.

 

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The following table presents for each of the above hierarchy levels, our financial assets and liabilities that are measured at fair value on a recurring basis at December 31, 2008.

 

     Balance as of
December 31, 2008
   Fair Value Measurements
          (Level 1)    (Level 2)    (Level 3)
          (in millions)

Financial Assets Measured at Fair Value on a Recurring Basis

           

Market value, outstanding derivative positions (1)

   $ 4,122    $ —      $ 4,122    $ —  

Financial investments, at fair value (2)

     227      227      —        —  

Other assets (3)

     33      29      4      —  
                           

Total

   $ 4,382    $ 256    $ 4,126    $ —  
                           

Financial Liabilities Measured at Fair Value on a Recurring Basis

           

Market value, outstanding derivative positions (1)

   $ 4,122    $ —      $ 4,122    $ —  

Other liabilities (4)

     24      3      21      —  
                           

Total

   $ 4,146    $ 3    $ 4,143    $ —  
                           

 

(1)

Represents net amounts associated with our clearing operations in the derivatives markets of NASDAQ OMX Commodities and NASDAQ OMX Stockholm. See “Market Value, Outstanding Derivative Positions,” of Note 14, “Derivative Financial Instruments and Hedging Activities,” for further discussion.

(2)

Financial investments, at fair value are primarily comprised of Swedish government debt securities. These securities, which are classified as trading securities, are restricted assets to meet regulatory capital requirements for NASDAQ OMX Stockholm’s clearing operations.

(3)

Primarily includes our long-term available-for-sale investment securities included in other assets in the Condensed Consolidated Balance Sheets.

(4)

Primarily includes our interest rate swaps included in other liabilities in the Consolidated Balance Sheets and our foreign currency option and forward contracts used to partially or fully economically hedge our Market Technology contracts included in other accrued liabilities in the Condensed Consolidated Balance Sheets. See “Cash Flow Hedges” and “Derivatives Not Designated as Hedges,” of Note 14, “Derivative Financial Instruments and Hedging Activities,” for further discussion.

We also consider our debt obligations to be financial instruments. The fair value of our debt obligations was estimated using discounted cash flow analyses based on our assumed incremental borrowing rates for similar types of borrowing arrangements and a Black-Scholes valuation technique that is utilized to calculate the convertible option value for the 3.75% convertible notes and the 2.50% convertible senior notes. At September 30, 2009, the carrying value of our debt obligations, before the $57 million unamortized debt discount resulting from the adoption of ASC 470.20, was approximately $39 million more than fair value, primarily due to a decrease in fair value on the 2.50% convertible senior notes that have a convertible option feature equivalent to a conversion price of approximately $55.13 as compared to the closing price of $21.05 at September 30, 2009. At December 31, 2008, the carrying value of our debt obligations was approximately $13 million more than fair value primarily due to a decrease in fair value on the 2.50% convertible senior notes that have a convertible option feature equivalent to a conversion price of approximately $55.13 as compared to the closing price of $24.71 at December 31, 2008, partially offset by stock appreciation on the 3.75% convertible notes’ convertible option feature from $14.50 at the time of issuance to $24.71 at December 31, 2008. For further discussion of our debt obligations, see Note 8, “Debt Obligations.”

Financial Instruments Not Measured at Fair Value on a Recurring Basis

Some of our financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature. Such financial assets and financial liabilities include: cash and cash equivalents, restricted cash, receivables, net, certain other current assets, accounts payable and accrued expenses, Section 31 fees payable to SEC, accrued personnel costs, and certain other current liabilities.

14. Derivative Financial Instruments and Hedging Activities

In the ordinary course of business, we may enter into various types of derivative transactions. These derivative transactions include:

 

   

Futures and foreign currency forward contracts which are commitments to buy or sell at a future date a financial instrument, commodity or currency at a contracted price and may be settled in cash or through delivery.

 

   

Interest rate swap contracts which are agreements between two parties to exchange one stream of future interest payments for another based on a specified principal amount over a set period of time.

 

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Foreign currency option contracts which give the purchaser, for a fee, the right, but not the obligation, to buy or sell within a limited time a financial instrument or currency at a contracted price that may also be settled in cash, based on differentials between specified indices or prices.

NASDAQ OMX may use these derivative financial instruments to manage exposure to various market risks, primarily foreign currency exchange rate fluctuations and changes in interest rates on our variable rate debt, and are an integral component of our market risk and related asset/liability management strategy and processes.

Fair Value Hedges

Depending on market conditions, we may use foreign currency future, forward and option contracts to limit our exposure to foreign currency exchange rate fluctuations on contracted revenue streams (hedged item) relating to our Market Technology sales. When the contracted revenue streams meet the definition of a firm commitment, these derivative contracts may be designated as fair value hedges if the applicable hedge criteria is met. Changes in fair value on the derivatives and the related hedged items are recognized in the Condensed Consolidated Statements of Income. As of September 30, 2009, there were no outstanding fair value hedges.

Cash Flow Hedges

In the third quarter of 2008, we entered into interest rate swap agreements that effectively converted $200 million of our Credit Facilities, which is floating rate debt, to a fixed rate basis through August 2011, thus reducing the impact of interest rate changes on future interest expense.

All derivative contracts used to manage interest rate risk are measured at fair value and reported in other current assets or other accrued liabilities as appropriate with the offset in accumulated other comprehensive income (loss) within NASDAQ OMX stockholders’ equity in the Condensed Consolidated Balance Sheets. Any ineffectiveness would impact earnings through interest expense. There was no material ineffectiveness recorded in earnings for the three and nine months ended September 30, 2009 and 2008.

Net Investment Hedges

Net assets of our foreign subsidiaries are exposed to volatility in foreign currency exchange rates. We may utilize net investment hedges to offset the translation adjustment arising from remeasuring our investment in foreign subsidiaries. As of September 30, 2009, there were no outstanding net investment hedges.

Derivatives Not Designated as Hedges

NASDAQ OMX may also enter into economic hedges that either do not qualify or are not designated for hedge accounting treatment. This type of hedge is undertaken when hedge accounting requirements cannot be achieved or management decides not to apply hedge accounting.

In order to economically hedge the foreign currency exposure on our business combination with OMX AB, we entered into foreign currency option and forward contracts beginning at the time of the announcement of the proposed combination. A derivative used to hedge exposure related to an anticipated business combination does not qualify for specialized hedge accounting, and as such, was marked to market through the income statement in gain (loss) on foreign currency contracts each reporting period. In the first quarter of 2008, we entered into a forward contract for the Nord Pool transaction. See below for further discussion of these contracts. For additional discussion of the business combination with OMX AB and the Nord Pool transaction, see “The combination with OMX AB and strategic partnership with Borse Dubai Limited,” and “The acquisition of certain businesses from Nord Pool,” of Note 4, “Acquisitions and Strategic Initiatives.”

In 2008, we also entered into foreign currency contracts, primarily foreign currency option and forward contracts, to partially or fully economically hedge foreign currency transactions and non-U.S. dollar cash flow exposures on our Market Technology contracts. These hedges generally matured within one year and changes in fair value of these derivatives were recognized in gain (loss) on foreign currency contracts, net in the Condensed Consolidated Statements of Income.

The following table presents the realized and unrealized gain/(loss) on each forward contract recognized in the Condensed Consolidated Statements of Income for three months ended September 30, 2008 related to our foreign currency forward contracts .

 

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     Realized
Gain
(Loss)
    Unrealized
Loss
    Total
Loss for
the Three
Months Ended
September 30,
2008
 
     (in millions)  

NOK 2008 Forward Contract

   $ 2      $ (47   $ (45

Other (1)

     (2     (4     (6
                        

Total

   $ —        $ (51   $ (51
                        

 

(1)

Primarily represents market technology forward currency contracts used to limit our exposure to foreign currency exchange rate fluctuations on contracted revenue streams which do not qualify for hedge accounting.

In the first quarter of 2008 we entered into a forward contract to hedge the NOK cash payment for the Nord Pool transaction. We agreed to purchase certain businesses of Nord Pool for approximately $320 million. We entered into a forward contract to buy NOK and sell U.S. dollars at an exchange rate of 5.2129. The closing of the Nord Pool transaction occurred on October 21, 2008 and this contract was settled at closing. As shown in the table above, in the third quarter of 2008 we recorded an unrealized loss of approximately $45 million related to the NOK forward contract.

In addition, as shown in the below two tables, for the nine months ended September 30, 2008 we recognized a loss of $4 million related to forward contracts and recognized a loss of $7 million related to option contracts for a net loss of $11 million.

The following table presents the realized and unrealized gain/(loss) recognized in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2008 related to our foreign currency forward contracts.

 

     Realized
Gain
   Unrealized
Loss
    Total
Gain/(loss)

for the Nine
Months Ended
September 30,
2008
 
     (in millions)  

SEK 2008 Forward Contracts

   $ 34    $ —        $ 34  

NOK 2008 Forward Contract

     1      (40     (39

Other (1)

     8      (7     1  
                       

Total

   $ 43    $ (47   $ (4
                       

 

(1)

Represents Market Technology forward currency contracts used to limit our exposure to foreign currency exchange rate fluctuations on contracted revenue streams which do not qualify for hedge accounting.

In the first quarter of 2008, we entered into forward contracts to hedge the SEK cash payment made in connection with the business combination with OMX AB and recorded a gain of $34 million at the closing of the business combination relating to the cash payments for the SEK forward contracts.

Also, as discussed above, in the first quarter of 2008 we entered into a forward contract to hedge the NOK cash payment for the Nord Pool transaction and recorded a net loss of $39 million for the nine months ended September 30, 2008.

The following table presents the cumulative realized gain/(loss) on each option contract and the total loss recognized in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2008 related to our foreign currency option contracts.

 

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     Purchase    Sale/
Expiration
   Cumulative
Realized
Gain (Loss)
    Change in
Unrealized
(Loss)
    Total Gain/
(Loss) for
the Nine
Months
Ended
September 30,
2008
 
     (in millions)  

SEK 2007 Option Contract (1)

   $ 39    $ 67    $ 28      $ (22   $ 6   

SEK 2008 Option Contract (2)

     13      —        (13     —          (13
                                      

Total

   $ 52    $ 67    $ 15      $ (22   $ (7
                                      

 

(1)

This contract, which was originally purchased in October 2007 to economically hedge the foreign currency exposure on our business combination with OMX AB, had a fair value at December 31, 2007 of $61 million. On January 7, 2008, we sold the SEK 2007 option contract for $67 million and recorded a gain of $6 million.

(2)

On January 7, 2008, we purchased a new contract for $13 million which expired out-of-the-money in February 2008 and we recorded a loss for the purchase amount of $13 million.

The following table presents the fair value amounts and balance sheet location of our derivative instruments prior to netting:

 

     September 30, 2009
Fair Value
    December 31, 2008
Fair Value
 
     Asset    Liability     Asset     Liability  
     (in millions)  

Derivatives Designated as Hedging Instruments

         

Cash flow hedges

         

Interest rate swaps

   $ —      $ 10 (1)     $ —        $ 11 (1)  
                               

Derivatives Not Designated as Hedging Instruments

         

Foreign exchange contracts

     —        1 (2)       1 (3)       10 (2)  

Interest rate futures

     —        —          —          3 (2)  
                               

Total derivatives not designated as hedging instruments

     —        1        1        13   
                               

Total derivatives

   $ —      $ 11      $ 1      $ 24   
                               

 

(1)

Included in other liabilities in the Condensed Consolidated Balance Sheets.

(2)

Included in other accrued liabilities in the Condensed Consolidated Balance Sheets.

(3)

Included in other current assets in the Condensed Consolidated Balance Sheets.

Other Derivative Positions at NASDAQ OMX Commodities and NASDAQ OMX Stockholm

NASDAQ OMX Commodities

NASDAQ OMX Commodities enters into energy derivative and carbon product contracts as the contractual counterparty. In doing so, NASDAQ OMX Commodities guarantees the completion of the transaction and market participants can thereby limit their counterparty risk. Market participants must provide collateral to cover the daily margin call, which is in addition to the initial collateral placed when signing the clearing membership agreement. Acceptable collateral is cash on a pledged bank account and/or an on-demand guarantee. We also act as the counterparty for trades on the OTC derivative market subject to our approval on a case-by-case basis. Trading on the contracts can take place up until the delivery period which can occur over a period of up to six years.

NASDAQ OMX Stockholm

On NASDAQ OMX Stockholm, we offer clearing services for fixed-income options and futures, stock options and futures and index options and futures by serving as the CCP. In doing so, we guarantee the completion of the transaction, exposing us to counterparty risk. We also act as the counterparty for certain OTC contracts. The transactions are reported electronically prior to CCP clearing and we thereby guarantee the completion of the transaction. Following the completion of a transaction, settlement takes place between parties with the exchange of the securities and funds. The transfer of ownership is registered and the securities are stored on the owner’s behalf. Settlement and registration of cash trading takes place in Sweden and Finland via the local central securities depositories.

The counterparty risks are measured using models that are agreed with the financial inspection authority of the country in question which requires us to provide minimum guarantees and maintain certain levels of regulatory capital.

 

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Market Value, Outstanding Derivative Positions

Through our clearing operations in the derivative markets with NASDAQ OMX Commodities and NASDAQ OMX Stockholm, we are the legal counterparty for each derivative position traded and thereby guarantee the fulfillment of each contract. The derivatives are not used by NASDAQ OMX Commodities or NASDAQ OMX Stockholm for the purpose of trading on their own behalf. As a legal counterparty of each transaction, NASDAQ OMX Commodities and NASDAQ OMX Stockholm bear the counterparty risk.

The structure and operations of NASDAQ OMX Commodities and NASDAQ OMX Stockholm differ from other clearinghouses. NASDAQ OMX Commodities and NASDAQ OMX Stockholm are not member owned organizations, do not maintain a guarantee fund to which members contribute and do not enforce loss sharing assessments amongst members. In addition, unlike other clearinghouses, they do not record any margin deposits and guarantee funds on the Condensed Consolidated Balance Sheets, as all risks and rewards of collateral ownership, including interest, belongs to the counterparty.

As such, the market value of the above mentioned derivative contracts for NASDAQ OMX Commodities and NASDAQ OMX Stockholm are reported gross on the balance sheet as a receivable pertaining to the purchasing party and a payable pertaining to the selling party. Such receivables and liabilities attributable to outstanding derivative positions have been netted to the extent that such a legal offset right exists and, at the same time, that it is our intention to settle these items. At September 30, 2009, our market value of outstanding derivative positions in the Condensed Consolidated Balance Sheets was $3.6 billion. See “Guarantees Issued, Credit Facilities Available and Collateral Received for Clearing Operations” of Note 15, “Commitments, Contingencies and Guarantees,” for further discussion of our guarantees on the fulfillment of these contracts and collateral received.

The following table presents the fair value of our outstanding derivative positions at September 30, 2009 and December 31, 2008 prior to netting.

 

     September 30, 2009    December 31, 2008
     Asset    Liability    Asset    Liability
     (in millions)

Forwards and options

   $ 3,116    $ 3,116    $ 3,306    $ 3,306

Stock options and futures

     208      208      515      515

Index options and futures

     207      207      239      239

Fixed-income options and futures

     192      192      460      460
                           

Total

   $ 3,723    $ 3,723    $ 4,520    $ 4,520
                           

15. Commitments, Contingencies and Guarantees

Brokerage Activities

Nasdaq Execution Services and NASDAQ Options Services provide guarantees to securities clearinghouses and exchanges under their standard membership agreements, which require members to guarantee the performance of other members. If a member becomes unable to satisfy its obligations to the clearinghouses, other members would be required to meet its shortfalls. To mitigate these performance risks, the exchanges and clearinghouses often require members to post collateral as well as meet certain minimum financial standards. Nasdaq Execution Services’ and NASDAQ Options Services’ maximum potential liability under these arrangements cannot be quantified. However, we believe that the potential for Nasdaq Execution Services and NASDAQ Options Services to be required to make payments under these arrangements is unlikely. Accordingly, no contingent liability is recorded in the Condensed Consolidated Balance Sheets for these arrangements.

Guarantees Issued, Credit Facilities Available and Collateral Received for Clearing Operations

Through our clearing operations in the derivative markets with NASDAQ OMX Commodities, NASDAQ OMX Stockholm and IDCG, we are the legal counterparty for each derivative position traded and thereby guarantee the fulfillment of each contract. We are required to pledge collateral for commitments with other clearinghouses. The amount of these commitments is calculated on the gross exposure between the clearinghouses. As collateral for these obligations, we have obtained financial guarantees and credit facilities which are guaranteed by us through counter indemnities. At September 30, 2009, financial guarantees pledged as collateral totaled $482 million. Credit facilities available to be pledged as collateral totaled $260 million, of which $0.1 million was utilized as of September 30, 2009.

In addition, we obtained credit facilities to satisfy regulatory requirements totaling $278 million, none of which was utilized as of September 30, 2009. See “Other Credit Facilities,” of Note 8, “Debt Obligations,” for further discussion.

We require our customers to pledge collateral and meet certain minimum financial standards to mitigate the risk if they become unable to satisfy their obligations. At September 30, 2009, total customer pledged collateral with NASDAQ OMX Commodities and NASDAQ OMX Stockholm was $6.6 billion. This pledged collateral is held by a custodian bank. Since these funds are not held by NASDAQ OMX Commodities and NASDAQ OMX Stockholm and they are not available for our use, we do not receive any interest income on these funds. Customer pledged cash collateral held by IDCG was $3 million at September 30, 2009 and is included in

 

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restricted cash with an offsetting liability included in other accrued liabilities in the Condensed Consolidated Balance Sheets, as the risks and rewards of collateral ownership, including interest, belongs to IDCG. Non-cash margin and guaranty fund deposits pledged to IDCG are not reflected in the Condensed Consolidated Balance Sheets as IDCG does not take legal ownership.

We believe that the potential for us to be required to make payments under these arrangements is mitigated through the pledged collateral, our risk management policies and, in the case of NASDAQ OMX Commodities, a default insurance policy. Accordingly, no contingent liability is recorded in the Condensed Consolidated Balance Sheets for these arrangements.

Other Guarantees

We have provided other guarantees as of September 30, 2009 of $31 million, primarily related to obligations for our rental and leasing contracts. In addition, for certain Market Technology contracts, we have provided performance guarantees of $10 million related to the delivery of software technology and support services. We have received financial guarantees from various financial institutions to support the above guarantees.

Leases

We lease some of our office space and equipment under non-cancelable operating leases with third parties and sublease office space to third parties. Some of our leases contain renewal options and escalation clauses based on increases in property taxes and building operating costs.

Litigation

We may be subject to claims arising out of the conduct of our business. We are not currently a party to any litigation that we believe could have a material adverse effect on our business, financial condition, or operating results. However, from time to time, we have been threatened with, or named as a defendant in, lawsuits, or involved in regulatory proceedings.

16. Segments

We manage, operate and provide our products and services in three business segments, our Market Services segment, our Issuer Services segment and our Market Technology segment.

Our Market Services segment includes our U.S. and European Transaction Services businesses and our Market Data business, which are interrelated because the Transaction Services businesses generate the quote and trade information that we sell to market participants and data distributors. Market Services also includes our Broker Services business.

Our Issuer Services segment includes our Global Listing Services and Global Index Group businesses. The companies listed on The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic represent a diverse array of industries. This diversity of companies listed on NASDAQ OMX markets allows us to develop industry-specific and other indexes that we use to develop and license NASDAQ OMX branded indexes, associated derivatives and index products as part of our Global Index Group. The Global Listing Services business also includes our Corporate Services business, which generates revenues through our insurance agency business, shareholder, directors, newswire and other services. Our Corporate Services business provides customer support services, products and programs to companies, including companies listed on our exchanges. In October 2009, we entered into agreements to sell substantially all of our insurance agency business. See Note 18, “Subsequent Events,” for further discussion.

Through our Market Technology segment, we provide technology solutions for trading, clearing and settlement, and information dissemination, and also offer facility management integration and advisory services. Our management allocates resources, assesses performance and manages these businesses as three separate segments.

We evaluate the performance of our segments based on several factors, of which the primary financial measure is income before income taxes. Results of individual businesses are presented based on our management accounting practices and our management structure. Certain amounts are allocated to corporate items in our management reports based on the decision that those activities should not be used to evaluate the segment’s operating performance, including amounts related to the business combination with OMX AB and the Nord Pool transaction. See below for further discussion. The following table presents certain information regarding these operating segments for the three and nine months ended September 30, 2009 and 2008.

 

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     Market
Services
    Issuer
Services
   Market
Technology
    Corporate
Items and
Eliminations
    Consolidated  
     (in millions)  

Three months ended September 30, 2009

           

Total revenues

   $ 691      $ 80    $ 36      $ 3      $ 810   

Cost of revenues

     (461     —        —          —          (461
                                       

Revenues less liquidity rebates, brokerage, clearance and exchange fees

     230        80      36        3        349   
                                       

Income (loss) before income taxes

   $ 84      $ 26    $ (3 ) (1)    $ (23 ) (2)     $ 84   
     Market
Services
    Issuer
Services
   Market
Technology
    Corporate
Items and
Eliminations
    Consolidated  
     (in millions)  

Three months ended September 30, 2008

           

Total revenues

   $ 869      $ 89    $ 29      $ 3      $ 990   

Cost of revenues

     (591     —        —          —          (591
                                       

Revenues less liquidity rebates, brokerage, clearance and exchange fees

     278        89      29        3        399   
                                       

Income (loss) before income taxes

   $ 134      $ 15    $ (9   $ (44 ) (3)     $ 96   
     Market
Services
    Issuer
Services
   Market
Technology
    Corporate
Items and
Eliminations
    Consolidated  
     (in millions)  

Nine months ended September 30, 2009

           

Total revenues

   $ 2,243      $ 241    $ 100      $ 9      $ 2,593   

Cost of revenues

     (1,509     —        —          —          (1,509
                                       

Revenues less liquidity rebates, brokerage, clearance and exchange fees

     734        241      100        9        1,084   
                                       

Income (loss) before income taxes

   $ 310      $ 72    $ 4 (1)     $ (46 ) (4)     $ 340   
     Market
Services
    Issuer
Services
   Market
Technology
    Corporate
Items and
Eliminations
    Consolidated  
     (in millions)  

Nine months ended September 30, 2008

           

Total revenues

   $ 2,275      $ 258    $ 84      $ 8      $ 2,625   

Cost of revenues

     (1,568     —        —          —          (1,568
                                       

Revenues less liquidity rebates, brokerage, clearance and exchange fees

     707        258      84        8        1,057   
                                       

Income (loss) before income taxes

   $ 369      $ 60    $ (10   $ 20 (5 )     $ 439   

 

(1)

The three and nine months ended September 30, 2009 amounts include expense of $6 million related to asset retirements.

(2)

The three months ended September 30, 2009 amount primarily includes debt conversion expense of $25 million related to an inducement for the conversion of our 3.75% convertible notes completed in September 2009.

(3)

The three months ended September 30, 2008 amount primarily includes a loss of $45 million on foreign currency contracts, which were purchased to hedge the foreign exchange exposure in connection with our acquisition of Nord Pool’s clearing, international derivatives and consulting subsidiaries. See Note 14, “Derivative Financial Instruments and Hedging Activities,” for further discussion.

(4)

The nine months ended September 30, 2009 amount primarily includes:

 

   

debt conversion expense of $25 million related to an inducement for the conversion of our 3.75% convertible notes completed in September 2009;

 

   

loss of $19 million on the sale of our 25.25% share capital in Orc; and

 

   

loss of $5 million on the sale of an available-for-sale investment in Oslo, which was acquired as part of our business combination with OMX AB.

 

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(5)

The nine months ended September 30, 2008 amount primarily includes:

 

   

income from unconsolidated investees, net of $27 million, primarily related to our $26 million gain on the non-monetary contribution of the Nasdaq trade name to obtain an equity interest in NASDAQ Dubai; offset by a

 

   

loss on foreign currency contracts, net of $11 million, primarily comprised of a loss of $39 million on foreign currency contracts, which were purchased to hedge the foreign exchange exposure in connection with our acquisition of Nord Pool’s clearing, international derivatives and consulting subsidiaries, partially offset by a $27 million net gain from foreign currency option and forward contracts purchased to hedge the business combination with OMX. See Note 14, “Derivative Financial Instruments and Hedging Activities,” for further discussion.

For further discussion of our segments’ results, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Operating Results.”

17. Series A Convertible Preferred Stock

Our certificate of incorporation authorizes the issuance of 30,000,000 shares of preferred stock, par value $0.01 per share, issuable from time to time in one or more series. There were no shares issued and outstanding as of December 31, 2008.

In the third quarter of 2009, as an inducement for the conversion of our 3.75% convertible notes (see “Conversion of 3.75% Convertible Notes,” of Note 8, “Debt Obligations,” for a further discussion), we agreed to pay the Holders and certain of their affiliates an aggregate amount of $9 million in cash and to issue to the Holders 1,600,000 shares of our series A convertible preferred stock, with an aggregate initial liquidation preference amount of $16 million. Conversion of the series A convertible preferred stock is contingent upon shareholder approval and does not represent an unconditional obligation to transfer assets. The series A convertible preferred stock will automatically convert into our common stock upon shareholder approval, which we plan to seek at our next regularly scheduled annual shareholders’ meeting currently planned for May 2010. In accordance with U.S. GAAP, if the conversion and subsequent issuance of equity shares is not solely in the control of the issuer and the instrument does not represent an unconditional obligation to transfer assets, permanent equity classification is not permitted. Therefore, we have recorded the fair value of the series A convertible preferred stock of $15 million as temporary equity in the Condensed Consolidated Balance Sheets as of September 30, 2009.

Upon shareholder approval, the series A convertible preferred stock will automatically convert into the number of common shares determined by dividing the initial liquidation preference amount of $16 million by the average daily volume weighted average price, or VWAP, of NASDAQ OMX’s common stock during the 10 day period immediately preceding the date on which the results of the shareholder vote are calculated. At the time of conversion, the VWAP is subject to a floor price of 80% of the price of NASDAQ OMX’s common stock as of the initial issuance date, and a ceiling price of 120% of the price of NASDAQ OMX’s common stock as of the initial issuance date.

If shareholder approval is not received, a dividend on the preferred stock will commence at a rate of 12% per annum, and the series A convertible preferred stock will mature in October 2013. The series A convertible preferred stock will be accreted through retained earnings.

18. Subsequent Events

We have evaluated our subsequent events through November 6, 2009, the issuance date of this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2009.

In October 2009, we entered into agreements to sell substantially all of our Carpenter Moore Insurance Services, Inc. business. On October 2, 2009, we agreed to sell certain assets of the western region direct practice insurance brokerage business to Woodruff-Sawyer & Co. and on October 26, 2009, we agreed to sell the eastern region insurance brokerage business to Aon Risk Services Companies, Inc. The sales, which will be recognized in the fourth quarter of 2009, will not have a material impact on our results of operations.

In addition, on October 21, 2009, we obtained Financial Services Authority approval to sell our Broker Services operations in the United Kingdom to TD Waterhouse. The sale, which will also be recognized in the fourth quarter of 2009, will not have a material impact on our results of operations.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of the financial condition and results of operations of NASDAQ OMX in conjunction with our condensed consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q.

Overview

On February 27, 2008, Nasdaq and OMX AB combined their businesses and Nasdaq was renamed The NASDAQ OMX Group, Inc. Under the purchase method of accounting, Nasdaq was treated as the accounting and legal acquirer in the business combination with OMX AB. We also completed our acquisitions of PHLX in July 2008, BSX in August 2008 and certain businesses of Nord Pool in October 2008. These acquisitions also have been treated as purchases for accounting purposes, with NASDAQ OMX treated as the acquirer. Additionally, we purchased a majority stake in IDCG in December 2008 and a 20% aggregate equity interest in Agora-X (13.3% in March 2008 and an additional 6.7% in December 2008). The financial results of OMX AB are included in the consolidated financial results beginning on February 27, 2008. PHLX is included beginning July 2008, BSX beginning August 2008, the Nord Pool businesses beginning October 2008, IDCG beginning December 2008 and our initial equity interest in Agora-X of 13.3% beginning in March 2008 and the aggregate 20% beginning in December 2008.

Financial Highlights

The comparability of our operating results for the three months ended September 30, 2009 to the same period in 2008 is significantly impacted by our acquisition of PHLX and our Nord Pool transaction. The comparability of our operating results for the nine months ended September 30, 2009 to the same period in 2008 is significantly impacted by our business combination with OMX AB as well as the acquisition of PHLX and our Nord Pool transaction. In our discussion and analysis of results of operations, we have quantified the contribution of additional revenues or expenses resulting from OMX, NASDAQ OMX PHLX and NASDAQ OMX Commodities operations wherever such amounts were material. While identified amounts may provide indications of general trends, the analysis cannot completely address the effects attributable to integration efforts.

In addition, fluctuations in the value of foreign currencies relative to the U.S. dollar impacted our operating results. Impacts associated with fluctuations in foreign currency are discussed in more detail under “Item 3. Quantitative and Qualitative Disclosures about Market Risks.” For the three months ended September 30, 2009, approximately 36% of our revenues less liquidity rebates, brokerage, clearance and exchange fees and 24% of our operating income were derived in currencies other than the U.S. dollar, primarily the Swedish Krona and Euro. For the nine months ended September 30, 2009, approximately 34% of our revenues less liquidity rebates, brokerage, clearance and exchange fees and 23% of our operating income were derived in currencies other than the U.S. dollar, primarily the Swedish Krona and Euro.

In countries with currencies other than the U.S. dollar, revenues and expenses are translated using monthly average rates of exchange. The following discussion of results of operations eliminates the impact of year-over-year foreign currency fluctuations to better measure the comparability of operating results between periods. Operating results excluding the impact of foreign currency fluctuations are calculated by translating the current year’s results by the prior period’s exchange rates.

The following summarizes significant changes in our financial performance in the third quarter and first nine months of 2009 when compared with the same periods in 2008:

 

   

Revenues less liquidity rebates, brokerage, clearance and exchange fees decreased $50 million, or 12.5%, to $349 million in the third quarter of 2009, compared with $399 million in the third quarter of 2008, reflecting a decrease in operational revenues of $35 million and an unfavorable impact from foreign exchange of $15 million. The operational decline was primarily due to a decrease in U.S. cash equity trading revenues less liquidity rebates, brokerage, clearance and exchange fees due to declines in matched share volume and the average net fee per share matched on NASDAQ’s trading system. In September 2009, we introduced a revised fee structure on NASDAQ OMX BX and in November 2009, we introduced a revised fee structure on NASDAQ to address the declines in the average net fee per share matched. Assuming volume and market share are comparable with the third quarter of 2009, our revised fee structure would favorably impact our fourth quarter 2009 U.S. cash equity trading revenues less liquidity rebates, brokerage, clearance and exchange fees.

 

   

Revenues less liquidity rebates, brokerage, clearance and exchange fees increased $27 million, or 2.6%, to $1,084 million in the first nine months of 2009, compared with $1,057 million in the first nine months of 2008, reflecting an $85 million increase due to operational growth, partially offset by an unfavorable impact from foreign exchange of $58 million. The operational growth was primarily due to an increase in derivative trading revenues mainly due to the inclusion of NASDAQ OMX PHLX’s derivative trading revenues for the full nine-month period in 2009 compared to two months in 2008 and the inclusion of results of operations from OMX for the full nine-month period in 2009 compared to seven months in 2008. The increase in operational growth was partially offset by a decrease in U.S. cash equity trading revenues less liquidity rebates, brokerage, clearance and exchange fees due to a decrease in the number of shares matched and routed on NASDAQ’s trading system.

 

   

Operating expenses decreased $9 million, or 4.0%, to $218 million in the third quarter of 2009, compared with $227 million in the third quarter of 2008, reflecting a favorable impact from foreign exchange of $11 million, partially offset by an increase in operating expenses of $2 million.

 

   

Operating expenses increased $32 million, or 5.4%, to $629 million in the first nine months of 2009, compared with $597 million in the first nine months of 2008, reflecting an increase in operating expenses of $75 million, partially offset by a

 

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favorable impact from foreign exchange of $43 million. The increase in operating expenses was primarily due to the inclusion of OMX’s operating expenses for the full nine-month period in 2009 compared to seven months in 2008, as well as the inclusion of NASDAQ OMX PHLX’s operating expenses for the full nine-month period in 2009 compared to two months in 2008.

 

   

Net interest expense increased $32 million, or 91.4%, to $67 million in the first nine months of 2009, compared with $35 million in the first nine months of 2008, primarily reflecting a full nine months of interest expense in 2009 for the debt outstanding related to our business combination with OMX AB compared to seven months of debt outstanding in the first nine months of 2008. In addition, interest expense increased due to an increase in our outstanding debt obligations related to the acquisitions of PHLX and certain businesses of Nord Pool that were completed in the second half of 2008.

 

   

Income (loss) from unconsolidated investees, net was a net loss of $20 million for the first nine months of 2009, compared with net income of $27 million for the first nine months of 2008. The net loss for the first nine months of 2009 is primarily due to a $19 million loss recorded in May 2009 related to the sale of our share capital in Orc. The net income for the first nine months of 2008 was primarily related to the NASDAQ Dubai transaction.

 

   

Debt conversion expense was $25 million for the third quarter of 2009 and the first nine months of 2009 and was related to the conversion of most of our 3.75% convertible notes into common stock. The $25 million expense included a cash inducement of $9 million, the present value of series A convertible preferred stock issued totaling $15 million, and debt issuance and other costs of $1 million.

 

   

Loss on foreign currency contracts, net of $51 million for the third quarter of 2008 and $11 million for the first nine months of 2008 primarily related to the Nord Pool acquisition and losses on forward currency contracts used to limit our exposure to foreign currency exchange rate fluctuations on contracted revenue streams. The loss for the first nine months of 2008 was partially offset by gains on foreign currency contracts related to our business combination with OMX AB.

These current and prior year items are discussed in more detail below.

Business Environment

We serve listed companies, market participants and investors by providing high quality cash equity, fixed-income and derivative markets, thereby facilitating economic growth and corporate entrepreneurship. We also provide market technology to exchanges and markets around the world. In broad terms, our business performance is impacted by a number of drivers including macroeconomic events affecting the risk and return of financial assets, investor sentiment, government and private sector demands for capital, the regulatory environment for primary and secondary equity markets, and the changing technology in the financial services industry. Our future revenues and net income will continue to be influenced by a number of domestic and international trends including:

 

   

Trading volumes, particularly in U.S. and Nordic equity and derivative securities, which are driven primarily by overall macroeconomic conditions;

 

   

The number of companies seeking equity financing, which is affected by factors such as investor demand, the global economy, availability of diverse sources of financing, and tax and regulatory policies;

 

   

The gradual return of confidence to the credit markets increasing the availability of liquidity to our technology customers, suppliers, trading participants, and listed companies;

 

   

The reinvigoration of certain market participants following the partial or complete takeover of financial institutions by national governments and the distressed mergers of market participant organizations;

 

   

The emergence of new market participants seeing opportunities in the recovering global economy;

 

   

The ongoing constraints on our fixed-income issuers’ ability to access the credit markets due to rating downgrades or illiquidity in the market;

 

   

The increasing optimism of our technology customers and suppliers arising from the recent securities market rise and the economic stabilization;

 

   

Continuing pressure in transaction fee pricing due to intense competition in the U.S. and Europe;

 

   

Competition for listings and trade executions related to pricing, and product and service offerings; and

 

   

Other technological advancements and regulatory developments.

Currently our business drivers are characterized by improvement in investors’ outlook for financial institutions and global economic growth, continued declines in the levels of market volatility, emerging industry reaction to regulatory initiatives and continued rapid evolution and deployment of new technology in the financial services industry. The business environment that influenced our financial performance during the third quarter of 2009 can be characterized as follows:

 

   

A modestly increased pace for new equity issuance relative to the second quarter of 2009 with 20 IPOs across all exchanges in the U.S. and 12 new IPOs on The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic;

 

   

Improved yet limited access to debt and equity capital for both new and established companies;

 

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A 42% reduction of activity experienced by The NASDAQ Stock Market relative to the third quarter of 2008 in U.S. equity matched trades driven by decreased trading levels resulting from diminished volatility, a loss of market share and decline in overall activity relative to the highly elevated trading levels of 2008 due to the financial crisis;

 

   

A 4% decrease relative to the third quarter of 2008 in the number of equity transactions on our Nordic and Baltic exchanges driven by decreased participant trading in response to changed economic conditions;

 

   

A 29% decrease relative to the third quarter of 2008 in the value of equity transactions on our Nordic and Baltic exchanges resulting from lower equity valuations, lower trading activity due to diminished volatility and the relative return of overall trading activity to levels predating the financial crisis;

 

   

A 31% decline experienced by our Nordic and Baltic exchanges relative to the third quarter of 2008 in number of traded derivatives contracts in equity related products (excluding EDX and Eurex) driven by reduced volatility and by the changed economic climate;

 

   

A 1% decrease relative to the third quarter of 2008 in number of cleared derivatives contracts in fixed-income related products on our Nordic and Baltic exchanges;

 

   

Intense competition among U.S. exchanges for both equity trading volume and listings, and growing competition in Europe;

 

   

Globalization of exchanges, customers and competitors extending the competitive horizon beyond national markets;

 

   

Consolidation of major global customers as financial institutions are acquired, merged, and restructured; and

 

   

Market trends requiring continued investment in technology to meet customers’ demands for speed, capacity, and reliability as markets adapt to a global financial industry, as increasing numbers of new companies surface, and as emerging countries show ongoing interest in developing their financial markets.

 

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NASDAQ OMX’s Operating Results

Key Drivers

The following table includes key drivers for our Market Services, Issuer Services, and Market Technology segments. In evaluating the performance of our business, our senior management closely watches these key drivers.

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2009     2008     2009     2008  

Market Services

       

Cash Equity Trading

       

Average daily share volume in NASDAQ securities (in billions)

    2.25        2.26        2.30        2.27   

Matched market share in NASDAQ securities executed on NASDAQ

    30.4     41.0     33.6     43.3

Matched market share in NASDAQ securities executed on NASDAQ OMX BX

    2.0     —          1.0     —     

Market share reported to the FINRA/NASDAQ Trade Reporting Facility in NASDAQ securities (1)

    39.3     21.3     36.1     21.7

Total market share in NASDAQ securities (2)

    71.8     62.3     70.7     65.0

Matched market share in NYSE securities executed on NASDAQ

    14.1     23.3     15.8     22.3

Matched market share in NYSE securities executed on NASDAQ OMX BX

    3.1     —          1.3     —     

Market share reported to the FINRA/NASDAQ Trade Reporting Facility in NYSE securities (1)

    35.4     18.7     31.8     18.2

Total market share in NYSE securities (2)

    52.6     42.0     48.9     40.5

Matched market share in NYSE Amex and regional securities executed on NASDAQ

    22.2     35.3     24.6     35.3

Matched market share in NYSE Amex and regional securities executed on NASDAQ OMX BX

    2.1     —          1.2     —     

Market share reported to the FINRA/NASDAQ Trade Reporting Facility in NYSE Amex and regional securities (1)

    34.4     14.6     31.9     15.7

Total market share in NYSE Amex and regional securities (2)

    58.6     49.9     57.6     51.0

Matched share volume in all U.S.-listed equities (in billions)

    131.4        179.2        436.5        469.3   

Matched market share in all U.S.-listed equities executed on NASDAQ

    19.4     29.6     21.5     30.0

Matched market share in all U.S.-listed equities executed on NASDAQ OMX BX

    2.7     —          1.0     —     

Average daily number of equity trades on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic

    189,002        196,671        210,004        197,869   

Average daily value of shares traded on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic (in billions)

  $ 3.0      $ 5.0      $ 3.1      $ 5.6   

Derivative Trading

       

Average daily volume of U.S. equity option contracts (in millions)

    13.2        14.4        13.5        13.3   

NASDAQ OMX PHLX matched market share of U.S. equity options

    17.0     16.6     17.4     16.2

The NASDAQ Options Market matched market share of U.S. equity options

    3.2     1.3     3.1     0.7

Average daily volume of equity option and fixed-income contracts traded on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic

    298,849        391,049        317,958        434,211   

Average daily volume of Nordic equity option contracts traded on EDX London

    87,636        169,604        110,076        160,957   

Average daily volume of Finnish option contracts traded on Eurex

    65,779        72,993        74,272        74,081   

Clearing Turnover:

       

Power contracts (TWh) (3)

    480.0        —          1,573.5        —     

Carbon contracts (1000 tCO2) (3)

    13,745        —          34,196        —     

Issuer Services

       

Initial public offerings:

       

NASDAQ

    12        2        15        12   

Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic

    —          3        —          14   

New listings:

       

NASDAQ (4)

    33        58        67        148   

Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic

    2        4        9        18   

Number of listed companies:

       

NASDAQ (5)

    2,863        3,062        2,863        3,062   

Exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic (6)

    800        841        800        841   

Market Technology

       

Order intake (in millions) (7)

  $ 37      $ 61      $ 56      $ 188   

Total order value (in millions) (8)

  $ 318      $ 465      $ 318      $ 465   

 

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(1)

Transactions reported to the Financial Industry Regulatory Authority, or FINRA/NASDAQ Trade Reporting Facility.

(2)

Includes transactions executed on both NASDAQ’s and NASDAQ OMX BX’s systems plus trades reported through the FINRA/NASDAQ Trade Reporting Facility.

(3)

Transactions executed on Nord Pool and reported for clearing to NASDAQ OMX Commodities measured by Terawatt hours (TWh) and one thousand metric tons of carbon dioxide (1000 tCO2).

(4)

New listings include IPOs, including those completed on a best efforts basis, issuers that switched from other listing venues, closed-end funds and separately listed ETFs.

(5)

Number of listed companies for NASDAQ at period end, including separately listed ETFs.

(6)

Represents companies listed on the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic and companies on the alternative markets, NASDAQ OMX First North, at period end.

(7)

Total contract value of orders signed.

(8)

Represents total contract value of orders signed that are yet to be recognized as revenue.

 

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Table of Contents

Business Segments

We manage, operate and provide our products and services in three business segments: Market Services, Issuer Services and Market Technology.

 

   

The Market Services segment includes our U.S. and European Transaction Services businesses and our Market Data business, which are interrelated because the Transaction Services businesses generate the quote and trade information that we sell to market participants and data distributors. Market Services also includes our Broker Services business.

 

   

The Issuer Services segment includes our Global Listing Services and the Global Index Group businesses. The companies listed on The NASDAQ Stock Market and the exchanges that comprise NASDAQ OMX Nordic and NASDAQ OMX Baltic represent a diverse array of industries. This diversity of companies listed on NASDAQ OMX markets allows us to develop industry-specific and other indexes that we use to develop and license NASDAQ OMX branded indexes, associated derivatives and index products as part of our Global Index Group. The Global Listing Services business also includes our Corporate Services business.

 

   

The Market Technology segment provides technology solutions for trading, clearing and settlement, and information dissemination, and also offers facility management integration and advisory services.

Our management allocates resources, assesses performance and manages these businesses as three separate segments. See Note 16, “Segments,” to the condensed consolidated financial statements for further discussion.

Segment Operating Results

Of our total third quarter 2009 revenues less liquidity rebates, brokerage, clearance and exchange fees of $349 million, 65.9% was from our Market Services segment, 22.9% was from our Issuer Services segment, 10.3% was from our Market Technology segment and 0.9% related to other revenues, compared to our total third quarter 2008 revenues less liquidity rebates, brokerage, clearance and exchange fees of $399 million, of which 69.7% was from our Market Services segment, 22.3% was from our Issuer services segment, 7.3% was from our Market Technology segment and 0.7% related to other revenues.

Of our total first nine months of 2009 revenues less liquidity rebates, brokerage, clearance and exchange fees of $1,084 million, 67.7% was from our Market Services segment, 22.2% was from our Issuer Services segment, 9.2% was from our Market Technology segment and 0.9% related to other revenues, compared to our total first nine months of 2008 revenues less liquidity rebates, brokerage, clearance and exchange fees of $1,057 million, of which 66.9% was from our Market Services segment, 24.4% was from our Issuer Services segment, 7.9% was from our Market Technology segment and 0.8% related to other revenues.

The following table shows our total revenues, cost of revenues and revenues less liquidity rebates, brokerage, clearance and exchange fees by segment:

 

     Three Months Ended
September 30,
    Percentage
Change
    Nine Months Ended
September 30,
    Percentage
Change
 
     2009     2008       2009     2008    
     (in millions)           (in millions)        

Market Services

   $ 691      $ 869      (20.5 )%    $ 2,243      $ 2,275      (1.4 )% 

Cost of revenues

     (461     (591   (22.0 )%      (1,509     (1,568   (3.8 )% 
                                    

Market Services revenues less liquidity rebates, brokerage, clearance and exchange fees

     230        278      (17.3 )%      734        707      3.8

Issuer Services

     80        89      (10.1 )%      241        258      (6.6 )% 

Market Technology

     36        29      24.1     100        84      19.0

Other

     3        3      —          9        8      12.5
                                    

Total revenues less liquidity rebates, brokerage, clearance and exchange fees

   $ 349      $ 399      (12.5 )%    $ 1,084      $ 1,057      2.6
                                    

 

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MARKET SERVICES

The following table shows total revenues less liquidity rebates, brokerage, clearance and exchange fees from our Market Services segment:

 

     Three Months Ended
September 30,
    Percentage
Change
    Nine Months Ended
September 30,
    Percentage
Change
 
     2009     2008       2009     2008    
     (in millions)           (in millions)        

Transaction Services

            

Cash Equity Trading Revenues:

            

U.S. cash equity trading (1)

   $ 461      $ 643      (28.3 )%    $ 1,563      $ 1,736      (10.0 )% 

Cost of revenues:

            

Liquidity rebates

     (310     (471   (34.2 )%      (1,108     (1,201   (7.7 )% 

Brokerage, clearance and exchange fees (1)

     (127     (106   19.8     (334     (351   (4.8 )% 
                                    

Total U.S. cash equity cost of revenues

     (437     (577   (24.3 )%      (1,442     (1,552   (7.1 )% 
                                    

U.S. cash equity trading revenues less liquidity rebates, brokerage, clearance and exchange fees

     24        66      (63.6 )%      121        184      (34.2 )% 

European cash equity trading

     25        35      (28.6 )%      75        86      (12.8 )% 
                                    

Total cash equity trading revenues less liquidity rebates, brokerage, clearance and exchange fees

     49        101      (51.5 )%      196        270      (27.4 )% 
                                    

Derivative Trading Revenues:

            

U.S. derivative trading (2)

     58        44      31.8     171        46       

Cost of revenues:

            

Liquidity rebates

     (19