IntercontinentalExchange Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited consolidated results include NYSE Euronext from its November 13, 2013 acquisition date. ICE operates global exchanges and clearing houses across derivatives, securities, listings, market data and related services.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $1.198 billion | $352 million |
| Revenue less transaction-based expenses | $932 million | $352 million |
| Operating income / margin | $409 million / 44% | $200 million / 57% |
| Continuing-operations income | $273 million | $137 million |
| Net income attributable to ICE Group | $262 million | $135 million |
| Diluted EPS | $2.27 | $1.85 |
| Operating cash flow | $519 million | $150 million |
- Adjusted net income attributable to ICE Group, a non-GAAP measure, was $301 million versus $149 million; adjusted diluted EPS was $2.60 versus $2.03. Adjustments primarily excluded NYSE Euronext acquisition and integration costs and specified other items.
- Cash and equivalents were $964 million at March 31, 2014. Total debt was $4.881 billion, comprising $1.297 billion short-term and $3.584 billion long-term debt. Shareholders’ equity was $12.915 billion.
- Operating cash flow increased substantially, in part due to higher earnings and a $306 million increase in deferred revenue. Annual NYSE Euronext listing fees billed in January contributed to deferred revenue and cash generation.
- Investing cash outflow was $249 million, including $142 million for acquisitions and a $60 million increase in restricted cash and investments. Financing cash outflow was $266 million, including $161 million of debt repayments and $76 million of dividends.
- The quarterly dividend was $0.65 per share. The effective tax rate was 28%, unchanged from the prior-year quarter.
Material changes and business developments
- Reported growth largely reflects the addition of NYSE Euronext: management attributed $570 million of the $580 million increase in revenue less transaction-based expenses to NYSE Euronext. The prior-year comparison does not include that business, so it is not a like-for-like measure of organic growth.
- Operating expenses rose to $523 million from $152 million, including $61 million of acquisition-related transaction and integration costs. Management cited NYSE Euronext-related costs, including $30 million in employee termination costs.
- The company reported ICE and Euronext as separate segments. Q1 revenue less transaction-based expenses was $796 million for ICE and $136 million for Euronext; operating income was $354 million and $55 million, respectively.
- ICE acquired Singapore Mercantile Exchange in February. Its exchange and clearing operations were temporarily shut down during a transition to ICE platforms, with relaunch expected by year-end; management did not expect the acquisition to be material to 2014 results.
- ICE planned a second-quarter 2014 Euronext IPO, subject to regulatory approvals and other conditions, and expected to use proceeds to reduce debt. It also planned to divest NYSE Technologies’ Trading Solutions and Transaction Services businesses, with proceeds likewise expected to reduce debt.
Outlook, risks and unusual items
- Management expected 2014 operational capital expenditures and capitalized software development costs of $200–$210 million, plus $70–$80 million of real-estate capital expenditures. It said operating cash flow should fund debt service, working capital and capital needs for the foreseeable future.
- Management expected EMIR-related requirements to increase ICE Clear Europe liquid regulatory capital needs by an estimated $140–$150 million later in 2014, funded from cash on hand.
- On April 3, 2014, after quarter-end, ICE entered a $3.0 billion revolving credit facility maturing in 2019, terminated its prior credit facilities and repaid the $367 million term-loan balance using new commercial paper. At that date, $1.4 billion was available for general corporate purposes after commercial-paper backstop and clearing-house reserves.
- Key stated risks include market activity and volatility, pricing and competition, regulation and equity-market-structure scrutiny, successful integration and realization of NYSE Euronext synergies, completion of the Euronext IPO and technology divestiture, clearing-house counterparty exposure, technology and cybersecurity, litigation, and interest- and foreign-exchange-rate changes.
- Clearing-house collateral and margin deposits were $42.8 billion on the balance sheet, matched by corresponding liabilities. The clearing houses estimated a $59.9 billion maximum one-day counterparty exposure on unsettled contracts, excluding their risk-management program; actual exposure could differ materially. ICE had contributed $210 million to certain guaranty funds, which is at risk in a clearing-member default.
- Two purported class actions filed in April and May 2014 named NYSE subsidiaries among numerous defendants and sought unspecified damages and equitable relief. The company said outcomes could not reasonably be predicted.
- Unusual comparison item: Q4 2013 included a $190 million impairment on the Cetip investment and a $51 million early debt-payoff expense; these were not Q1 2014 charges.
Most important facts for investors to verify
- How much of reported growth and earnings reflects the NYSE Euronext acquisition, and how comparable pro forma or organic trends develop.
- Whether planned Euronext IPO and NYSE Technologies divestiture proceeds materialize, their timing, and the resulting debt reduction.
- Progress on integration, cost synergies, restructuring expenses and the Singapore exchange relaunch.
- Cash-flow quality, particularly the contribution of listing-fee billings and deferred revenue, alongside capital and regulatory liquidity needs.
- Debt refinancing and commercial-paper rollover exposure, clearing-house risk and collateral requirements, and the outcome of the equity-market lawsuits and evolving regulation.