Intercontinental Exchange, Inc. annual report, FY2014

Intercontinental Exchange, Inc. — FY2014 Form 10-K

Reporting period: Fiscal year ended December 31, 2014. The filing also presents unaudited fourth-quarter results. ICE operates exchanges, clearing houses, and market-data and benchmark services across derivatives, equities, listings, and OTC markets. Results reflect NYSE for the full year in 2014, versus only from November 13 in 2013, so year-over-year growth is substantially acquisition-driven.

Financial performance

Metric	FY2014	FY2013	Change
Total revenue	$4.221 billion	$1.716 billion	146%
Revenue less transaction-based expenses	$3.092 billion	$1.598 billion	93%
Operating income	$1.448 billion	$790 million	83%
Operating margin on revenue less transaction-based expenses	47%	49%	Down 2 percentage points
Income from continuing operations	$1.005 billion	$320 million	214%
Net income attributable to ICE	$981 million	$254 million	286%
Diluted EPS	$8.55	$3.21	166%
Operating cash flow from continuing operations	$1.463 billion	$714 million	105%

All dollar amounts are U.S. dollars. Adjusted, non-GAAP FY2014 results included operating income of $1.703 billion, a 55% adjusted operating margin, net income attributable to ICE of $1.115 billion, and diluted EPS of $9.72. These measures exclude items management considers non-core; they are not substitutes for GAAP results.

In Q4 2014, revenue less transaction-based expenses was $800 million, operating income was $400 million, net income attributable to ICE was $288 million, and diluted EPS was $2.54. Q4 2013 included substantial acquisition and other charges and a net loss attributable to ICE of $176 million, limiting comparability.

Revenue and operating trends

• Transaction and clearing fees, net, were $3.013 billion; data-services fees were $631 million; listing fees were $367 million; and other revenue was $210 million.
• NYSE contributed $1.669 billion of revenue less transaction-based expenses in 2014, compared with $208 million in the post-acquisition period in 2013. U.S. cash equities and equity options generated $1.462 billion in transaction and clearing fees.
• Futures and options contract volume rose 60% to 1.303 billion, primarily reflecting the addition of Liffe interest-rate and other financial products. Excluding that expanded scope, trends varied: natural-gas volume fell 22%, while Brent volume rose 3%.
• Data-services fees increased 175% and listing fees increased from $33 million, largely reflecting NYSE. Operating expenses rose 103% to $1.644 billion, including $129 million of acquisition-related transaction and integration costs.
• Growth comparisons also reflect the 42.4 million shares issued for the NYSE acquisition; weighted-average diluted shares increased to 115 million from 79 million.

Cash, liquidity, and debt

• Cash and cash equivalents were $652 million at year-end, down from $961 million. Short-term investments were $1.2 billion, including euro deposits set aside for the June 2015 maturity of NYSE euro notes. Cash plus short- and long-term investments totaled approximately $2.2 billion; some cash and investments were restricted.
• Total debt was $4.289 billion: $2.042 billion current and $2.247 billion long-term. This included $905 million of commercial paper at a weighted-average rate of 0.26% and $1.137 billion carrying value of NYSE euro notes due June 2015. ICE had earmarked euro deposits to cover the notes’ principal and final coupon.
• The $3.0 billion revolving credit facility matures in 2019. At year-end, $905 million supported commercial paper and $303 million was reserved for clearing-house liquidity, leaving about $1.8 billion available for general corporate purposes.
• Operating cash flow from continuing operations was $1.463 billion. Investing activities provided $36 million, including $2.274 billion of proceeds from Euronext and NYSE Technologies disposals, offset by acquisitions, investments, and capital spending. Financing activities used $1.673 billion, including $645 million of share repurchases and $299 million of dividends.
• ICE paid $2.60 per share in dividends in 2014. The board announced a $0.65-per-share first-quarter 2015 dividend.

Material changes and significant items

• ICE sold its remaining Euronext shares in 2014, generating aggregate net cash proceeds of approximately $2.1 billion, and sold NYFIX, Metabit, and Wombat. Their results are presented as discontinued operations. Euronext proceeds were used to repay debt; NYSE Technologies proceeds funded debt repayment, investment, and shareholder returns.
• ICE completed the Liffe transition to ICE Futures Europe, acquired Singapore Mercantile Exchange, SuperDerivatives, True Office, and a 75% stake in Holland Clearing House, and temporarily closed the Singapore exchange and clearing house during platform transition.
• GAAP results include $129 million of acquisition-related transaction and integration costs and $151 million of acquired-intangible amortization. Discontinued operations contributed $11 million of net income in 2014, versus a $50 million loss in 2013.
• Interest expense rose to $96 million from $56 million, primarily due to debt associated with the NYSE acquisition. The effective tax rate was 29%, compared with 37% in 2013; the prior-year rate included the non-deductible Cetip impairment.

Outlook, risks, and contingencies

• Management expected near-term operating expenses to decline from 2014 levels as NYSE integration progressed, then rise over time with business growth and acquisitions. ICE targeted approximately $550 million in NYSE cost savings entering 2017, with at least $450 million expected entering 2016 and nearly 75% of the target expected by the end of 2015. These are targets, not guarantees.
• For 2015, ICE expected $165–$175 million of operational capital expenditures and capitalized software development costs, plus $70–$80 million of leasehold-improvement capital expenditures, primarily for its New York headquarters.
• Management cited trading-volume sensitivity to volatility, market conditions, and regulation; intense exchange and data-services competition; and execution risks in technology integration, acquisitions, and realizing synergies. European open-access and netting rules, margin requirements, position limits, and regulatory changes could affect volumes, costs, or market structure.
• Clearing-house operations entail member-default, collateral-value, investment-counterparty, and liquidity risks. At year-end, clearing-house cash margin and guaranty-fund deposits totaled $47.458 billion and were matched by corresponding liabilities; this is customer collateral, not general corporate liquidity. ICE also disclosed a $65.3 billion modeled maximum estimated exposure on unsettled cleared contracts before considering margin and guaranty-fund resources.
• Pending matters include equity-market structure and market-data class actions and a Brazil arbitration in which claimants sought at least 100 million Brazilian reais, reported as approximately $38 million. ICE said the loss range for the described cases could not be reasonably estimated and generally did not expect ordinary-course matters to materially affect its financial position.
• Other disclosed exposures include $145 million of unrecognized tax benefits, a possible 2015 put of the remaining NYSE Amex Options minority stake then valued at $125 million, and proposed OCC capital contributions subject to approval. The filing also identifies cyberattack, systems interruption, foreign-exchange, and goodwill-impairment risks.

Important facts for investors to verify

• Separate organic growth from the impact of the NYSE acquisition, divestitures, and changes in reported product mix; review comparable pro forma and volume data.
• Track delivery and timing of the NYSE synergy targets, integration costs, and planned consolidated trading-platform investment.
• Confirm repayment of the June 2015 NYSE euro notes and monitor commercial-paper refinancing, leverage, and the availability of revolving-credit capacity.
• Assess whether clearing volumes, member concentration, collateral quality, and regulatory liquidity requirements change the risk profile of clearing operations.
• Monitor developments in the disclosed litigation, tax audits, OCC capital plan, and regulatory implementation. The filing reports unqualified audit opinions and effective internal control over financial reporting as of December 31, 2014.