Intercontinental Exchange, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports unaudited fourth-quarter results. ICE operates exchanges and clearing houses, fixed-income and data businesses, and U.S. mortgage technology platforms.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $8.244 billion | $6.547 billion | +26% |
| Revenue less transaction-based expenses | $6.036 billion | $5.202 billion | +16% |
| Operating income | $3.033 billion | $2.673 billion | +13% |
| Operating margin | 50% | 51% | Down 1 point |
| Net income attributable to ICE | $2.089 billion | $1.933 billion | +8% |
| Diluted EPS | $3.77 | $3.42 | +10% |
| Cash from operating activities | $2.881 billion | $2.659 billion | +8% |
Adjusted results, which are non-GAAP, were adjusted operating income of $3.541 billion, adjusted operating margin of 59%, adjusted net income attributable to ICE of $2.500 billion and adjusted diluted EPS of $4.51. These exclude items including acquisition-related costs and acquired-intangible amortization; they should be considered alongside GAAP results.
Fourth-quarter results
For the three months ended December 31, 2020, revenue less transaction-based expenses was $1.671 billion, operating income was $780 million, net income attributable to ICE was $526 million and diluted EPS was $0.93. The comparable 2019 figures were $1.298 billion, $622 million, $448 million and $0.80, respectively.
Segments and operating trends
- Exchanges: Revenue less transaction-based expenses was $3.631 billion, up 10%; operating income was $2.389 billion, up 10%, with a 66% operating margin. Higher energy, cash-equity and equity-options activity contributed to growth. Futures and options contract volume rose 6% overall; cash-equities volume rose 42% and equity-options volume rose 61%.
- Fixed Income and Data Services: Revenue was $1.810 billion, up 3%; operating income was $492 million, up 12%, with a 27% margin. Fixed-income data and analytics revenue rose 5%; CDS clearing revenue fell 2% despite record clearing activity, partly because lower interest rates reduced income on collateral.
- Mortgage Technology: Revenue was $595 million, versus $139 million in 2019; operating income was $152 million, versus $67 million. Results include Ellie Mae from its September 4, 2020 acquisition and Simplifile for the periods owned. Ellie Mae contributed $351 million of revenue from acquisition through year-end.
ICE said 48% of 2020 revenue less transaction-based expenses came from non-transaction and clearing sources, including data, listings and mortgage technology. Segment reporting was reorganized into three segments effective October 1, 2020, and prior periods were recast.
Cash, debt and capital
- Cash and cash equivalents were $583 million at year-end, down from $841 million. Restricted cash and cash equivalents were $1.408 billion. Operating cash flow was $2.881 billion; investing activities used $9.830 billion, principally reflecting $9.446 billion of acquisition payments.
- Total debt was $16.537 billion, compared with $7.819 billion a year earlier, following debt issuance to help fund Ellie Mae. Debt included $12.9 billion of fixed-rate notes, $1.2 billion of floating-rate notes and $2.4 billion of commercial paper. Interest expense rose to $357 million from $285 million.
- The $3.7 billion revolving credit facility had no borrowings outstanding. At year-end, $2.4 billion supported commercial paper and $171 million supported subsidiary commitments; approximately $1.1 billion remained available for general corporate purposes. Management said operating cash flows and cash on hand should be sufficient to repay debt, while noting potential future financing needs.
- ICE paid $669 million in dividends ($1.20 per share) and repurchased $1.247 billion of stock during 2020. Repurchases were discontinued in August in connection with the Ellie Mae acquisition. The company announced a $0.33-per-share dividend for the first quarter of 2021.
- Management expected 2021 capital expenditures and capitalized software development costs of $400–$430 million. The filing does not provide a full-year revenue or earnings forecast.
The $84.083 billion of margin deposits, guaranty funds and delivery-contract receivables on the balance sheet had corresponding liabilities to clearing members; these balances are not equivalent to unrestricted corporate liquidity.
Material developments, outlook and risks
- Ellie Mae acquisition: ICE acquired the mortgage technology provider for approximately $11.4 billion in cash and stock. Preliminary purchase accounting included $7.709 billion of goodwill and $4.453 billion of identifiable intangible assets; valuations were not final at year-end. The acquisition materially increased debt and amortization expense.
- COVID-19: ICE reported that markets and services remained operational, while most employees worked remotely. Pandemic-related volatility increased activity in some products. Management said the future effect on results could not be estimated and depends on developments in the pandemic and economy.
- Bakkt: In January 2021, Bakkt agreed to combine with a SPAC, subject to approvals and other conditions. ICE expected to retain an approximately 65% economic interest but, after closing, to deconsolidate Bakkt and account for it as an equity-method investment. Closing was expected in the second quarter of 2021; it was not completed as of the filing date.
- Unusual items: 2020 included $105 million of acquisition-related transaction and integration costs, a $30 million accrual for potential legal settlements, an $8 million regulatory-settlement accrual, an $11 million Bakkt software impairment, and a $14 million debt-extinguishment payment. Investment gains included $35 million on Euroclear and $20 million on the sale of BIDS. A U.K. tax-rate change generated $65 million of deferred tax expense.
- Legal and regulatory exposures: Matters include Providence exchange litigation, an appeal in LIBOR litigation, potential civil claims connected to Live Well broker quotes, and a pending court decision in the CME SPAN trademark dispute. ICE also disclosed an $8 million SEC penalty relating to legacy evaluated-pricing practices. The filing says certain potential losses cannot be reasonably estimated; it records the legal accrual noted above.
- Key risks: Clearing-member defaults and collateral/investment risks; high debt and commercial-paper rollover exposure; cyberattacks, system outages and third-party service failures; intense competition; mortgage-market and interest-rate sensitivity; acquisition integration and impairment risks; and evolving rules affecting market-data fees, Brexit-related access, benchmarks including LIBOR, and digital assets. The company reported no 2020 goodwill or intangible-asset impairment, but carried $21.3 billion of goodwill and $14.4 billion of net intangible assets.
Investor verification priorities
- Assess the sustainability of 2020 growth by separating higher market-driven trading activity from acquired revenue, especially Ellie Mae’s partial-year contribution.
- Review the final Ellie Mae purchase-price allocation, integration progress, realized synergies and resulting amortization and debt-service burden.
- Track debt reduction, commercial-paper maturities, floating-rate exposure and the availability of revolving-credit capacity.
- Monitor mortgage-market volumes, recurring data-service subscription trends, and the impact of equity market-data rule changes on NYSE revenue.
- Follow the status and potential financial effects of the disclosed litigation, regulatory matters, and Bakkt transaction; the filing does not quantify several possible losses.
- Distinguish corporate cash and liquidity from customer margin and guaranty-fund balances, and review clearing-house safeguards and collateral concentration.