Intercontinental Exchange, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial figures are in millions except per-share data. ICE operates exchanges and clearing houses, with market-data, listing, benchmark and technology businesses.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue, less transaction-based expenses | $745 | $338 | $2,292 | $1,062 |
| Operating income | $330 | $202 | $1,048 | $627 |
| Operating margin | 44% | 60% | 46% | 59% |
| Net income attributable to ICE | $206 | $141 | $693 | $430 |
| Diluted EPS attributable to ICE | $1.80 | $1.92 | $6.02 | $5.86 |
| Operating cash flow from continuing operations | Not stated for the quarter | Not stated for the quarter | $922 | $562 |
Q3 adjusted operating margin was 49% versus 61%; adjusted diluted EPS was $2.06 versus $1.97. For the nine-month period, adjusted operating margin was 50% versus 63%, and adjusted diluted EPS was $6.62 versus $6.19. These are non-GAAP measures; ICE excludes specified acquisition and integration costs and related tax effects.
At September 30, 2014, cash and cash equivalents were $638, short-term investments $1,241, and short- and long-term restricted cash and investments $544. Total debt was $4,136, down from $5,058 at December 31, 2013. The $3.0 billion revolving facility had no borrowings; approximately $2.0 billion was available for general corporate purposes after commercial-paper backing and clearing-house reserves. The $1.2 billion short-term investment balance primarily consists of euro deposits set aside for the June 2015 NYSE EUR Notes maturity. Clearing-member margin and guaranty-fund balances are largely matched by liabilities and are not general corporate liquidity.
Changes and business context
- Results include NYSE from its November 2013 acquisition, substantially changing the scale and mix of the business; prior-period comparisons are therefore not like-for-like. ICE attributed much of revenue growth to NYSE, while certain energy-market activity weakened.
- ICE sold 94% of Euronext in June 2014 and sold NYSE Technologies businesses Wombat, NYFIX and Metabit during the quarter. Their results are presented as discontinued operations. ICE retained a 6% Euronext stake valued at $103.
- Q3 revenue, less transaction-based expenses, rose 121% year over year; operating expenses rose 206%, including integration costs and acquired NYSE expenses. Reported operating margin declined, while ICE said adjusted margin also fell year over year.
- Energy softness included lower natural-gas and gasoil futures volumes. ICE reported growth in interest-rate and other financial products, which includes acquired NYSE markets. Q3 discontinued operations produced a $10 net loss.
Outlook, capital allocation and risks
- ICE forecast 2014 operational capital expenditures and capitalized software development of $165–$175, plus $75–$85 of leasehold improvements, primarily for Atlanta and New York. It did not provide earnings guidance in the supplied filing text.
- Management said cash on hand and operating cash flows should be sufficient to meet debt maturities and working-capital needs. A $0.65-per-share Q4 dividend was announced November 4, 2014. At quarter-end, $601 remained authorized for share repurchases; ICE bought 2.3 million shares for $448 during the nine months.
- After quarter-end, ICE completed its $350 cash acquisition of SuperDerivatives on October 7, funded with commercial paper. The planned acquisition of 75% of Holland Clearing House was subject to regulatory approval and other closing conditions and was expected in Q4.
- Material uncertainties include integration and synergy execution, trading-volume and volatility changes, competition, technology and cybersecurity, regulatory change, and clearing-house counterparty exposure. EMIR-related capital requirements were expected to require an additional $136 of restricted cash. A 10% adverse currency move was estimated to reduce equity by $68 for the euro and $614 for sterling.
- ICE disclosed class-action litigation concerning equity-market structure and market-data distribution; possible losses could not be reasonably estimated. A separate Brazilian arbitration claim alleged damages of at least 100 million reais (about $41); ICE denied liability. Management generally did not expect ordinary-course proceedings to materially affect financial condition, results or liquidity, but noted outcomes could affect particular periods.
Important facts for investors to verify
- Separate the acquired NYSE contribution from organic performance, and assess the continuing effects of Euronext and NYSE Technologies disposals.
- Review the composition and availability of cash and investments, the planned funding of the 2015 euro-note maturity, and short-term commercial-paper rollover exposure.
- Track integration costs, expense trends, margin performance and whether management’s adjusted measures reconcile appropriately to GAAP results.
- Monitor EMIR implementation, clearing-house liquidity and collateral risks, and the status and potential exposure of disclosed litigation and arbitration.
- Confirm completion and financing of post-quarter acquisitions and subsequent capital returns; the filing reported no quantified earnings outlook.