Business context and reporting period
Intercontinental Exchange, Inc. (ICE) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. ICE operates exchanges and clearing houses, along with securities listing, trading, market-data and technology businesses. The results reflect the NYSE acquisition from November 13, 2013; 2013 comparison periods therefore do not include NYSE. Euronext and certain NYSE Technologies businesses are presented as discontinued operations.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue, less transaction-based expenses | $750m | $372m | $1,547m | $724m |
| Operating income | $327m | $225m | $718m | $425m |
| Operating margin | 44% | 60% | 46% | 59% |
| Net income attributable to ICE | $226m | $154m | $487m | $289m |
| Diluted EPS | $1.95 | $2.09 | $4.22 | $3.94 |
| Adjusted diluted EPS (non-GAAP) | $2.17 | $2.19 | $4.56 | $4.23 |
Q2 revenue less transaction-based expenses rose 102% year over year, while operating income increased 46%. The reported operating margin declined, reflecting higher operating expenses following the NYSE acquisition and integration. Q2 diluted EPS fell 7%, while weighted-average diluted shares increased to 116 million from 73 million, primarily due to shares issued for the NYSE acquisition. Adjusted figures are non-GAAP measures.
- Revenue mix and activity: Q2 continuing-operations transaction and clearing fees were $721m, market-data fees $96m, listing fees $83m and other revenue $111m. ICE cited lower energy-market activity amid low volatility and subdued demand; natural-gas contract volume fell 44% year over year in Q2. U.S. cash-equity and options revenues and listing fees reflect the acquired NYSE businesses.
- Cash flow: Six-month cash from operating activities from continuing operations was $836m, versus $382m. Investing activities provided $1.651bn, including $1.984bn of Euronext sale proceeds; financing activities used $1.285bn, including $1.090bn of debt repayments and $151m of dividends. Capital expenditures and capitalized software costs totaled $98m.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $2.057bn, total debt $3.931bn, and equity $13.279bn. Debt was down from $5.058bn at year-end 2013. A $3.0bn revolving facility was undrawn; after commercial-paper backstop and clearing-house reservations, $2.3bn was available for general corporate purposes. Of reported cash, €969m (about $1.3bn) was placed in term deposits to fund the June 2015 euro-note principal and final coupon. Customer margin deposits and guaranty funds of $46.872bn are matched by corresponding liabilities and are not general-purpose liquidity.
- Margins, interest and taxes: Six-month interest expense was $51m, compared with $20m; the continuing-operations effective tax rate was 28% in both periods. ICE reported no goodwill or intangible-asset impairment in the periods presented.
Material changes, outlook and risks
- On June 24, ICE sold 94% of Euronext, receiving €1.4bn (about $1.9bn) in net proceeds, and retained a 6% stake valued at $107m. Euronext’s results were classified as discontinued operations; ICE reported $21m of discontinued-operations income after tax for the first half. ICE reported no gain or loss on the deconsolidation.
- ICE acquired Singapore Mercantile Exchange in February; its exchange and clearing operations were temporarily closed during transition to ICE platforms. Management said its 2014 results were not expected to be materially affected by SMX.
- Management projected 2014 operational capital expenditures and capitalized software costs of $165m–$175m, plus $75m–$85m of real-estate capital expenditures. It expected an additional $136m of restricted liquid regulatory capital to be required when EMIR requirements superseded existing ICE Clear Europe requirements. No full-year earnings or revenue guidance is provided in the filing.
- Management said operating cash flow and cash on hand should be sufficient to repay debt as it matures, but noted commercial-paper rollover risk; the revolving facility is the stated backstop. The NYSE euro notes mature in June 2015, with euro deposits set aside for principal and final interest. ICE also anticipated $43m of additional pension contributions in the second half of 2014.
- Key exposures include exchange trading-volume and volatility changes, competitive and pricing pressure, NYSE integration and synergy execution, technology and cybersecurity, foreign-exchange movements, clearing-member defaults, and regulatory change. The filing cites potential effects from EMIR, MiFID II, proposed U.S. derivatives position limits and SEC scrutiny of equity-market structure. ICE estimated a hypothetical 10% fall in sterling would reduce equity by $633m and a 10% fall in the euro by $100m.
- Legal matters include securities-market and market-data class actions and a Brazilian arbitration asserting at least 100m reais (about $45m) in damages. ICE said it was defending the arbitration and generally did not expect ordinary-course proceedings to materially affect its condition, results or liquidity, while noting a particular period could be adversely affected.
- After quarter-end, ICE completed the Wombat sale in July, expected the NYFIX/Metabit sale to close in Q3 subject to regulatory approval, and repurchased 1.8m shares for $350m. The board increased repurchase authorization to $1.05bn in July.
Important facts for investors to verify
- Assess operating performance on a consistent basis given the NYSE acquisition, discontinued operations and higher post-acquisition share count; distinguish reported from non-GAAP adjusted results.
- Confirm the availability and maturity of cash and investments, particularly the euro deposits earmarked for 2015 notes, and the actual headroom under the revolving facility after clearing-house reservations.
- Track integration costs, realized NYSE synergies, revenue and margin trends, and whether weak energy-market volumes persist.
- Monitor regulatory capital requirements, clearing-house exposures and collateral arrangements; the $60.9bn estimated one-day guarantee exposure excludes margin and guaranty-fund protections and is a modeled estimate.
- Follow the status and financial impact of the NYFIX/Metabit divestiture, share repurchases, legal proceedings and applicable regulatory changes.