Business context and reporting period
Intercontinental Exchange, Inc. (ICE) filed this Form 10-K for the fiscal year ended December 31, 2015. ICE operates exchanges, clearing houses and listings venues, and provides market data, analytics and related services. It reports one business segment.
Late in the year, ICE acquired Interactive Data on December 14 for approximately $5.6 billion (cash and stock) and Trayport on December 11 for $620 million in stock. Their results were consolidated only from their respective acquisition dates, so reported 2015 results do not reflect a full year of either business.
Financial results and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $4.682 billion | $4.352 billion | Up 8% |
| Revenue less transaction-based expenses | $3.338 billion | $3.092 billion | Up 8% |
| Operating income | $1.750 billion | $1.448 billion | Up 21% |
| Operating margin | 52% | 47% | Up 5 percentage points |
| Net income attributable to ICE | $1.274 billion | $981 million | Up 30% |
| Diluted EPS from continuing operations | $11.39 | $8.46 | Up 35% |
| Operating cash flow from continuing operations | $1.311 billion | $1.463 billion | Down 10% |
- Adjusted operating income was $1.973 billion, with a 59% adjusted operating margin; adjusted diluted EPS was $12.15. These are non-GAAP measures and exclude items management considers non-core.
- Revenue growth included data services fees of $871 million, up 26%, and listing fees of $405 million, up 10%. Net transaction and clearing fees were $3.228 billion, up 3%.
- Performance varied by market: Brent revenue rose 13%; interest-rate futures and options revenue fell 24%; CDS revenue fell 7%. Cash equities handled volume rose 14%, while U.S. equity-options volume fell 20%.
- For Q4 2015, revenue less transaction-based expenses was $875 million, operating income was $418 million, and net income attributable to ICE was $370 million. Diluted continuing-operations EPS was $3.29.
- Year-end cash and cash equivalents were $627 million, compared with $652 million in 2014. Total debt was $7.308 billion, up from $4.277 billion; the increase primarily funded Interactive Data.
- Debt included $2.591 billion of commercial paper, due in the short term, and $4.717 billion of long-term debt. The $3.4 billion revolving facility was undrawn; approximately $809 million was available for general corporate purposes after backing the commercial-paper balance.
- Cash flow from investing activities was negative $3.298 billion, including $3.751 billion paid for acquisitions, net of cash acquired. Financing activities provided $1.976 billion. Capital expenditures and capitalized software costs totaled $277 million.
- ICE paid $2.90 per share in dividends in 2015, or $331 million including dividend equivalents, and repurchased $660 million of stock. The board raised the quarterly dividend to $0.85 per share in February 2016.
Balance-sheet current assets and liabilities include $51.169 billion of clearing-member margin deposits and guaranty funds, with an equal liability. These pass-through amounts should not be treated as ordinary corporate liquidity.
Material changes versus the prior comparable period
Revenue growth and improved operating margin reflected higher data and listings revenues, increased Brent activity, and lower operating expenses. Operating expenses declined 3% to $1.588 billion, partly due to reduced NYSE integration and professional-services costs; this was partially offset by higher depreciation, employee costs and the newly acquired businesses. A stronger U.S. dollar reduced 2015 revenue by $55 million and operating expenses by $17 million versus 2014.
Operating cash flow declined $152 million, primarily from normal working-capital movements and timing of payments, including $204 million more cash paid for income taxes. Debt rose materially to finance Interactive Data. Goodwill and other intangible assets increased to $22.837 billion, largely from the two December acquisitions.
Outlook, management commentary, risks and unusual items
- Management expects 2016 operating capital expenditures and capitalized software costs of $270 million to $280 million, plus $45 million to $55 million of real-estate capital expenditures. It expects cash on hand and operating cash flows to be sufficient to repay debt as it matures and stated that excess cash would be used to reduce debt. The filing gives no specific earnings or revenue guidance.
- ICE expects Interactive Data to produce $150 million in annual cost synergies, with 90% expected to be achieved by the end of 2018. Achievement depends on successful integration; the U.K. Competition and Markets Authority was reviewing the Trayport acquisition.
- Management cited market volatility and trading volumes, competition and pricing pressure, regulatory changes, technology reliability and cybersecurity, foreign exchange movements, clearing-member defaults, and acquisition integration as significant risks. The filing also highlights ICE’s $7.3 billion debt load and commercial-paper refinancing and rollover exposure.
- NYSE experienced a trading-system failure on July 8, 2015. ICE also disclosed prior regulatory penalties of $3 million paid to the CFTC in 2015 and $5 million to the SEC in 2014. It recorded $15 million of litigation settlements and accruals in 2015.
- Reported results included a $108 million deferred tax benefit, principally related to future U.K. tax-rate reductions, and favorable tax settlements. No goodwill or other intangible-asset impairment was recorded in 2015; however, Creditex’s customer-relationship intangible had only an 8% cushion in its recoverability test.
- ICE’s financial-statement audit and internal-control audit received unqualified opinions. Management excluded Interactive Data from its year-end internal-control assessment because it was acquired in December.
Most important facts for investors to verify
- Whether Interactive Data and Trayport integration delivers the expected $150 million annual synergies, and whether the Trayport regulatory review affects the acquisition’s benefits.
- How ICE will manage the $2.591 billion commercial-paper balance and near-term debt maturities, and whether operating cash flow supports debt reduction alongside dividends and investment.
- Whether trading activity, especially interest-rate and equity-options volumes, offsets continued growth in data and listings revenues.
- Whether clearing-house liquidity, collateral and default protections remain adequate under severe market stress, given the scale of member deposits and ICE’s own guaranty-fund contributions.
- Whether litigation appeals, regulatory changes, the July 2015 system outage, or impairment testing of acquired assets result in material costs or business restrictions.