Intercontinental Exchange, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This 10-K reports full-year results; selected fourth-quarter figures are shown separately below. Financial amounts are in U.S. dollars unless stated otherwise.
Business context
ICE operates regulated exchanges and clearing houses, securities listings venues, and market-data and analytics businesses. Its reportable segments are Trading and Clearing and Data and Listings. Results include acquisitions, notably Interactive Data and Trayport (acquired in December 2015) and Securities Evaluations and Credit Market Analysis (acquired in October 2016), so year-over-year growth is not solely organic.
Key financial results
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Total revenue | $5.958 billion | $4.682 billion | +27% |
| Revenue less transaction-based expenses | $4.499 billion | $3.338 billion | +35% |
| Operating income | $2.167 billion | $1.750 billion | +24% |
| Operating margin | 48% | 52% | Down 4 percentage points |
| Net income attributable to ICE | $1.422 billion | $1.274 billion | +12% |
| Diluted EPS | $2.37 | $2.28 | +4% |
| Adjusted diluted EPS (non-GAAP) | $2.78 | $2.43 | +14% |
| Cash provided by operating activities | $2.149 billion | $1.311 billion | +64% |
Revenue growth reflected acquisitions and higher exchange-data, Brent crude and agricultural transaction and clearing revenue. Data services revenue was $1.978 billion, up 127%, including $1.1 billion from the acquired data businesses in 2016. Operating expenses rose 47% to $2.332 billion, primarily due to acquired operations, higher compensation, technology costs and depreciation and amortization. The effective tax rate increased to 29% from 22%; interest expense rose to $178 million from $97 million.
- Trading and Clearing: Revenue less transaction-based expenses of $2.102 billion (+2%); operating income of $1.222 billion (+7%) and operating margin of 58%, up from 56%.
- Data and Listings: Revenue of $2.397 billion (+88%); operating income of $945 million (+57%) and operating margin of 39%, down from 47%. Acquisitions materially affect comparability.
Fourth quarter: Revenue less transaction-based expenses was $1.138 billion versus $875 million in Q4 2015; operating income was $558 million versus $418 million. Net income attributable to ICE was $352 million versus $370 million, and diluted EPS was $0.59 versus $0.66.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $407 million at year-end, down from $627 million. Total debt was $6.364 billion, down from $7.308 billion; $2.493 billion was classified as short-term, including $1.642 billion of commercial paper and $851 million of notes due in 2017.
- ICE had a $3.4 billion revolving credit facility with no borrowings outstanding. After backing the commercial paper program, $1.8 billion was available for general corporate purposes. The commercial paper balance had a 0.74% weighted-average interest rate and 18-day weighted-average maturity.
- Operating cash flow was $2.149 billion. Investing activities used $898 million, including $425 million of net cash paid for acquisitions. Financing activities used $1.462 billion, including $949 million of net commercial-paper repayments, $409 million of dividends and $50 million of share repurchases.
- Capital expenditures were $250 million and capitalized software development costs were $115 million. ICE expected 2017 operating capital expenditures and capitalized software costs of $280–$300 million, plus $40–$45 million of real-estate capital expenditures.
- 2016 dividends were $0.68 per share. ICE announced a first-quarter 2017 dividend of $0.20 per share, an 18% increase. The board had authorized up to $950 million of additional repurchases at year-end.
ICE’s balance sheet includes $55.150 billion of margin deposits and guaranty-fund assets, matched by corresponding liabilities to clearing members; these are not general-purpose company liquidity. The filing states that operating cash flow and cash on hand are expected to be sufficient to repay debt as it matures.
Material changes and unusual items
- Acquisitions drove significant expansion of the data business and increased operating expenses, amortization and debt-servicing costs. ICE paid $431 million in cash for Securities Evaluations and Credit Market Analysis in October 2016 and acquired a majority equity position in MERS in June.
- The U.K. Competition and Markets Authority ordered ICE to divest Trayport. ICE appealed; the outcome was pending, and an unsuccessful appeal could require a sale at an uncertain price. The filing reports a $117 million accumulated foreign-currency translation loss associated with Trayport at year-end.
- ICE recorded a $33 million impairment of the Creditex customer-relationship intangible asset after selling certain U.S. voice-brokerage operations and discontinuing U.K. voice brokerage. It continued electronic CDS execution and related services.
- A 5-for-1 stock split took effect in November 2016; share and per-share data in the filing are retroactively adjusted.
- ICE reported a $300 million negative foreign-currency translation adjustment in 2016, primarily reflecting sterling weakness following the Brexit vote. Foreign-exchange movements also reduced 2016 revenue less transaction-based expenses by $59 million, partly offset by lower expenses.
Outlook, risks and contingencies
The filing provides no specific full-year 2017 revenue or earnings guidance. Management emphasized growing data offerings, trading and clearing capabilities, listings, technology and selective acquisitions. It anticipated continued growth in operating expenses with acquisitions and business expansion. Management also cited demand for market data, analytics and connectivity, while noting ongoing cost pressures and uncertain market and regulatory conditions.
- Key business risks include trading-volume and volatility fluctuations, intense competition, regulatory changes and divergence across jurisdictions, technology outages and cyberattacks, and the ability to integrate acquisitions and retain data customers.
- Clearing exposes ICE to member-default, collateral, investment and liquidity risks. Clearing houses held $95.7 billion of cash and non-cash collateral at year-end; their estimated maximum exposure under a hypothetical one-day price movement was $84.7 billion. ICE says it has never had a clearing-member default requiring use of non-defaulting members’ guaranty-fund assets.
- NYSE received an SEC Wells Notice in December 2016 concerning its response to the July 2015 trading outage. ICE disputed the proposed charges; the outcome and any resulting enforcement action were uncertain, and a loss range could not be reasonably estimated.
- Other disclosed exposures include $112 million of unrecognized tax benefits, plus $35 million of accrued tax interest and penalties. Ordinary-course legal matters were not generally expected to materially affect consolidated condition, results or liquidity, but developments could affect particular periods.
- ICE Clear Credit is designated systemically important. Brexit’s business and regulatory effects, future financial regulation, and potential implications for benchmarks and cross-border market access remained uncertain.
Important facts for investors to verify
- Separate acquisition-related growth from organic growth, particularly in data services, and assess the sustainability of recurring subscription revenue and customer retention.
- Track operating-margin pressure, acquisition integration costs, amortization, and the effect of the higher effective tax rate on GAAP earnings versus adjusted measures.
- Monitor the Trayport appeal and any required divestiture, including potential sale proceeds and currency-translation effects.
- Follow the SEC investigation concerning the NYSE outage and any subsequent enforcement action, litigation or financial impact.
- Review debt maturities, commercial-paper refinancing and leverage covenants alongside capital spending, dividends and repurchases; distinguish clearing-member collateral from ICE’s own liquidity.
- Assess clearing-house risk controls and collateral quality, as well as regulatory, cyber, technology, foreign-exchange and benchmark-administration risks.