INTERCONTINENTALEXCHANGE, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
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þ |
|
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2009
or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 001-32671
INTERCONTINENTALEXCHANGE, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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58-2555670 |
(State or other jurisdiction of
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(IRS Employer |
incorporation or organization)
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Identification Number) |
2100 RiverEdge Parkway, Suite 500, Atlanta, Georgia 30328
(Address of principal executive offices) (Zip Code)
(770) 857-4700
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o |
Non-accelerated filer o
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Smaller reporting company o |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of May 4, 2009, the number of shares of the registrants Common Stock outstanding was
72,829,409 shares.
IntercontinentalExchange, Inc.
Form 10-Q
Quarterly Period Ended March 31, 2009
Table
of Contents
1
Part I. Financial Information
IntercontinentalExchange, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)
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March 31, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
229,596 |
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$ |
283,522 |
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Short-term restricted cash |
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77,827 |
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|
30,724 |
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Short-term investments |
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3,086 |
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3,419 |
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Customer accounts receivable, net of allowance for
doubtful accounts of $2,355 and $1,478 at March 31, 2009
and December 31, 2008, respectively |
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110,647 |
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81,248 |
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Margin deposits and guaranty funds |
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12,691,205 |
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12,117,820 |
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Prepaid expenses and other current assets |
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25,524 |
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35,855 |
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Total current assets |
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13,137,885 |
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12,552,588 |
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Property and equipment, net |
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86,905 |
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88,952 |
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Other noncurrent assets: |
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Goodwill |
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1,497,921 |
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1,434,816 |
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Other intangible assets, net |
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731,786 |
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728,855 |
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Long-term restricted cash |
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129,152 |
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105,740 |
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Cost method investments |
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29,161 |
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32,724 |
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Other noncurrent assets |
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12,096 |
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15,906 |
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Total other noncurrent assets |
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2,400,116 |
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2,318,041 |
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Total assets |
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$ |
15,624,906 |
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$ |
14,959,581 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
46,239 |
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$ |
49,663 |
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Accrued salaries and benefits |
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17,105 |
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41,096 |
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Current portion of licensing agreement |
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13,268 |
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12,686 |
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Current portion of long-term debt |
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90,000 |
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46,875 |
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Income taxes payable |
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33,308 |
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17,708 |
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Margin deposits and guaranty funds |
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12,691,205 |
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12,117,820 |
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Other current liabilities |
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20,091 |
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25,794 |
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Total current liabilities |
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12,911,216 |
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12,311,642 |
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Noncurrent liabilities: |
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Noncurrent deferred tax liability, net |
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192,763 |
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194,301 |
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Long-term debt |
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280,000 |
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332,500 |
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Noncurrent portion of licensing agreement |
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80,843 |
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82,989 |
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Other noncurrent liabilities |
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33,982 |
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24,901 |
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Total noncurrent liabilities |
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587,588 |
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634,691 |
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Total liabilities |
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13,498,804 |
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12,946,333 |
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Commitments and contingencies
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Redeemable stock put |
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1,068 |
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EQUITY |
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IntercontinentalExchange, Inc. shareholders equity: |
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Preferred stock, $0.01 par value; 25,000 shares
authorized; no shares issued or outstanding at March 31,
2009 and December 31, 2008 |
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Common stock, $0.01 par value; 194,275 shares
authorized; 76,782 and 76,502 shares issued at March 31,
2009 and December 31, 2008, respectively; 72,738 and
72,364 shares outstanding at March 31, 2009 and December
31, 2008, respectively |
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768 |
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765 |
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Treasury stock, at cost; 4,044 and 4,138 shares at March
31, 2009 and December 31, 2008, respectively |
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(345,264 |
) |
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(355,520 |
) |
Additional paid-in capital |
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1,611,610 |
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1,608,344 |
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Retained earnings |
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805,359 |
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732,752 |
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Accumulated other comprehensive income |
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18,030 |
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19,890 |
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Total IntercontinentalExchange, Inc. shareholders equity |
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2,090,503 |
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2,006,231 |
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Noncontrolling interest in consolidated subsidiaries |
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35,599 |
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5,949 |
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Total equity |
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2,126,102 |
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2,012,180 |
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Total liabilities and equity |
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$ |
15,624,906 |
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$ |
14,959,581 |
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See accompanying notes.
2
IntercontinentalExchange, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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Revenues: |
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Transaction and clearing fees, net |
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$ |
203,478 |
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$ |
177,432 |
|
Market data fees |
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26,114 |
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24,720 |
|
Other |
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1,961 |
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5,062 |
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Total revenues |
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231,553 |
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207,214 |
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Operating expenses: |
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Compensation and benefits |
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54,706 |
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30,679 |
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Professional services |
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12,839 |
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6,972 |
|
Selling, general and administrative |
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22,906 |
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|
14,337 |
|
Depreciation and amortization |
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27,303 |
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10,946 |
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Total operating expenses |
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117,754 |
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|
62,934 |
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|
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Operating income |
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|
113,799 |
|
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|
144,280 |
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|
|
|
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Other income (expense): |
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Interest and investment income |
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|
610 |
|
|
|
2,919 |
|
Interest expense |
|
|
(5,254 |
) |
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|
(5,134 |
) |
Other income (expense), net |
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|
(79 |
) |
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|
354 |
|
|
|
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Total other expense, net |
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(4,723 |
) |
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(1,861 |
) |
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Income before income taxes |
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109,076 |
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|
142,419 |
|
Income tax expense |
|
|
36,854 |
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|
50,129 |
|
|
|
|
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|
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Net income |
|
$ |
72,222 |
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$ |
92,290 |
|
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Earnings per common share: |
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Basic |
|
$ |
0.99 |
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$ |
1.31 |
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Diluted |
|
$ |
0.98 |
|
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$ |
1.29 |
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|
Weighted average common shares outstanding: |
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Basic |
|
|
72,671 |
|
|
|
70,361 |
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Diluted |
|
|
73,606 |
|
|
|
71,348 |
|
|
|
|
|
|
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|
See accompanying notes.
3
IntercontinentalExchange, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
(In thousands)
(Unaudited)
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IntercontinentalExchange Inc. Shareholders Equity |
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Accumulated Other |
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Comprehensive Income from |
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Noncontrolling |
|
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Common |
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Additional |
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Foreign |
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Available- |
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Net |
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Interest in |
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Stock |
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Treasury Stock |
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Paid-in |
|
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Retained |
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Currency |
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For-Sale |
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Investment |
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Consolidated |
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Total |
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Shares |
|
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Value |
|
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Shares |
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|
Value |
|
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Capital |
|
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Earnings |
|
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Translation |
|
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Securities |
|
|
Hedges |
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|
Subsidiaries |
|
|
Equity |
|
Balance, January 1, 2008 |
|
|
70,963 |
|
|
$ |
710 |
|
|
|
(1,252 |
) |
|
$ |
(30,188 |
) |
|
$ |
1,043,971 |
|
|
$ |
431,708 |
|
|
$ |
33,046 |
|
|
$ |
59 |
|
|
$ |
(2,450 |
) |
|
$ |
|
|
|
$ |
1,476,856 |
|
Other comprehensive loss |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,657 |
) |
|
|
(108 |
) |
|
|
|
|
|
|
|
|
|
|
(10,765 |
) |
Exercise of common stock options |
|
|
397 |
|
|
|
4 |
|
|
|
(1 |
) |
|
|
(225 |
) |
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|
5,206 |
|
|
|
|
|
|
|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
4,985 |
|
Issuance of shares for acquisitions |
|
|
4,906 |
|
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|
49 |
|
|
|
|
|
|
|
|
|
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|
496,532 |
|
|
|
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|
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496,581 |
|
Repurchases of common stock |
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|
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|
|
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|
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(3,220 |
) |
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(300,000 |
) |
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|
|
|
|
|
|
|
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|
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|
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(300,000 |
) |
Change in fair value of redeemable
stock put |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72 |
|
Treasury shares received for
restricted stock and stock option
tax payments |
|
|
|
|
|
|
|
|
|
|
(295 |
) |
|
|
(45,783 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,783 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,112 |
|
Issuance of restricted stock |
|
|
236 |
|
|
|
2 |
|
|
|
630 |
|
|
|
20,676 |
|
|
|
(20,678 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits from stock option
plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,201 |
|
Noncontrolling interest issued in
connection with an acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,893 |
|
|
|
5,893 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56 |
|
|
|
301,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
76,502 |
|
|
|
765 |
|
|
|
(4,138 |
) |
|
|
(355,520 |
) |
|
|
1,608,344 |
|
|
|
732,752 |
|
|
|
22,389 |
|
|
|
(49 |
) |
|
|
(2,450 |
) |
|
|
5,949 |
|
|
|
2,012,180 |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,890 |
) |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
(1,860 |
) |
Exercise of common stock options |
|
|
61 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
886 |
|
Issuance of shares for acquisitions |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,894 |
|
Change in fair value of redeemable
stock put |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
385 |
|
Treasury shares received for
restricted stock and stock option
tax payments |
|
|
|
|
|
|
|
|
|
|
(110 |
) |
|
|
(7,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,256 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,746 |
|
Issuance of restricted stock |
|
|
168 |
|
|
|
2 |
|
|
|
204 |
|
|
|
17,512 |
|
|
|
(17,514 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefits from stock option
plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,255 |
|
Noncontrolling interest issued in
connection with an acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,700 |
|
|
|
29,700 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50 |
) |
|
|
72,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009 |
|
|
76,782 |
|
|
$ |
768 |
|
|
|
(4,044 |
) |
|
$ |
(345,264 |
) |
|
$ |
1,611,610 |
|
|
$ |
805,359 |
|
|
$ |
20,499 |
|
|
$ |
(19 |
) |
|
$ |
(2,450 |
) |
|
$ |
35,599 |
|
|
$ |
2,126,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
IntercontinentalExchange, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
72,222 |
|
|
$ |
92,290 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(1,890 |
) |
|
|
(2,003 |
) |
Change in available-for-sale securities, net of tax |
|
|
30 |
|
|
|
(22 |
) |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
70,362 |
|
|
$ |
90,265 |
|
|
|
|
|
|
|
|
See accompanying notes.
5
IntercontinentalExchange, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,222 |
|
|
$ |
92,290 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
27,303 |
|
|
|
10,946 |
|
Amortization of debt issuance costs |
|
|
650 |
|
|
|
177 |
|
Allowance for doubtful accounts |
|
|
877 |
|
|
|
145 |
|
Net realized gains on sales of available-for-sale investments |
|
|
(4 |
) |
|
|
(25 |
) |
Stock-based compensation |
|
|
9,780 |
|
|
|
7,886 |
|
Noncontrolling interest |
|
|
(50 |
) |
|
|
|
|
Deferred taxes |
|
|
(13,449 |
) |
|
|
1,457 |
|
Excess tax benefits from stock-based compensation |
|
|
(2,249 |
) |
|
|
(32,684 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Customer accounts receivable |
|
|
(29,676 |
) |
|
|
(22,578 |
) |
Prepaid expenses and other current assets |
|
|
8,086 |
|
|
|
987 |
|
Noncurrent assets |
|
|
3,330 |
|
|
|
(375 |
) |
Income taxes payable |
|
|
18,721 |
|
|
|
38,146 |
|
Accounts payable, accrued salaries and benefits, and other liabilities |
|
|
(27,821 |
) |
|
|
(17,027 |
) |
|
|
|
|
|
|
|
Total adjustments |
|
|
(4,502 |
) |
|
|
(12,945 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
67,720 |
|
|
|
79,345 |
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(3,728 |
) |
|
|
(3,132 |
) |
Capitalized software development costs |
|
|
(4,201 |
) |
|
|
(3,267 |
) |
Cash paid for acquisitions, net of cash acquired |
|
|
(39,842 |
) |
|
|
(29,612 |
) |
Proceeds from sales of cost method investment |
|
|
2,700 |
|
|
|
|
|
Proceeds from sales of available-for-sale investments |
|
|
2,668 |
|
|
|
126,181 |
|
Purchases of available-for-sale investments |
|
|
(1,997 |
) |
|
|
(55,392 |
) |
Increase in restricted cash |
|
|
(61,215 |
) |
|
|
(2,547 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(105,615 |
) |
|
|
32,231 |
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Repayments of credit facilities |
|
|
(9,375 |
) |
|
|
(9,375 |
) |
Excess tax benefits from stock-based compensation |
|
|
2,249 |
|
|
|
32,684 |
|
Payments relating to treasury shares received for restricted stock and stock
option tax payments and exercises |
|
|
(7,256 |
) |
|
|
(40,555 |
) |
Payments on capital lease obligations |
|
|
(1,568 |
) |
|
|
|
|
Proceeds from exercise of common stock options |
|
|
886 |
|
|
|
1,990 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(15,064 |
) |
|
|
(15,256 |
) |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
(967 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(53,926 |
) |
|
|
96,280 |
|
Cash and cash equivalents, beginning of period |
|
|
283,522 |
|
|
|
119,597 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
229,596 |
|
|
$ |
215,877 |
|
|
|
|
|
|
|
|
Supplemental cash flow disclosure |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
31,103 |
|
|
$ |
10,562 |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
3,159 |
|
|
$ |
3,168 |
|
|
|
|
|
|
|
|
Supplemental noncash investing activities |
|
|
|
|
|
|
|
|
Common stock issued for acquisitions |
|
$ |
5,894 |
|
|
$ |
24,737 |
|
|
|
|
|
|
|
|
See accompanying notes.
6
IntercontinentalExchange, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. |
|
Nature of Business and Organization |
IntercontinentalExchange, Inc. (the Company) is a leading operator of global regulated
futures exchanges and over-the-counter (OTC) markets for commodities and derivative financial
products. The Company owns ICE Futures Europe, which operates as a United Kingdom (U.K.)
Recognized Investment Exchange for the purpose of price discovery, trading and risk management
within the energy commodity futures and options markets. The Company owns ICE Futures U.S., Inc.
(ICE Futures U.S.), which operates as a United States (U.S.) Designated Contract Market for the
purpose of price discovery, trading and risk management within the soft commodity, index and
currency futures and options markets. The Company owns ICE Futures Canada, Inc. (ICE Futures
Canada), which operates as a Canadian derivatives exchange for the purpose of price discovery,
trading and risk management within the agricultural futures and options markets. In addition to
operating an OTC Exempt Commercial Market for trading energy commodities and derivatives, the
Company owns Creditex Group Inc. (Creditex), which operates in the OTC credit default swaps
(CDS) trade execution markets. In addition, the Company currently owns and operates five central
counterparty clearing houses, including ICE Trust U.S. LLC (ICE Trust), which began clearing the
CDS markets in March 2009. Headquartered in Atlanta, Georgia, the Company also has offices in
London, New York, Chicago, Houston, Calgary, Winnipeg and Singapore. The Company does not risk its
own capital by engaging in any trading activities or by extending credit to market participants.
The accompanying unaudited consolidated financial statements have been prepared by the Company
in accordance with U.S. generally accepted accounting principles pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim financial reporting.
Accordingly, the unaudited consolidated financial statements do not include all of the information
and footnotes required by U.S. generally accepted accounting principles for complete financial
statements and should be read in conjunction with the Companys audited consolidated financial
statements and related notes thereto for the year ended December 31, 2008. The accompanying
unaudited consolidated financial statements reflect all adjustments that are, in the opinion of the
Companys management, necessary for a fair presentation of results for the interim periods
presented. These adjustments are of a normal recurring nature. Preparing financial statements
requires management to make estimates and assumptions that affect the amounts that are reported in
the consolidated financial statements and accompanying disclosures. Although these estimates are
based on managements best knowledge of current events and actions that the Company may undertake
in the future, actual results may be different from the estimates. The results of operations for
the three months ended March 31, 2009 are not necessarily indicative of the results to be expected
for any future period or the full fiscal year.
The accompanying unaudited consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany balances and transactions between the
Company and its wholly-owned subsidiaries have been eliminated in consolidation. As discussed in
Note 10, the Company completed its acquisition of The Clearing Corporation (TCC) on March 6, 2009
and has included the financial results of TCC in its consolidated financial statements effective
from March 6, 2009.
On January 1, 2009, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 141 (revised 2007), Business Combinations, (SFAS No. 141R). Under SFAS No. 141R, an acquirer
is required to recognize all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value, with limited exceptions. SFAS No. 141R changes the accounting
treatment for certain specific acquisition-related items including expensing acquisition costs as
incurred, valuing noncontrolling interests at fair value at the acquisition date and expensing
restructuring costs associated with an acquired business. SFAS No. 141R also includes a number of
new disclosure requirements. SFAS No. 141R will be applied prospectively to business combinations
consummated on or after January 1, 2009, including the Companys acquisition of TCC on March 6,
2009. As a result of the Companys adoption of SFAS No. 141R, $5.6 million in transaction costs
related to the acquisition of TCC were expensed in the accompanying consolidated statement of
income for the three months ended March 31,
7
2009, of which $2.2 million had been included as deferred acquisition costs and classified in
noncurrent assets in the Companys consolidated balance sheet as of December 31, 2008. The Company
expects the adoption of SFAS No. 141R to have an impact on its financial results, but the extent of
the impact is dependent on the size, complexity and number of acquisitions made in the future and
the use of external advisory service providers.
On January 1, 2009, the Company adopted SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements-an amendment of ARB No. 51 (SFAS No. 160). SFAS No. 160 amends ARB No. 51 to
establish and improve accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 also changes the way the
consolidated income statement is presented, establishes a single method of accounting for changes
in a parents ownership interest in a subsidiary that do not result in deconsolidation, requires
that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated, and
expands disclosures in the consolidated financial statements in order to clearly identify and
distinguish between the interests of the parents owners and the interests of the noncontrolling
owners of a subsidiary. The adoption of SFAS No. 160 did not have a material impact on the
Companys consolidated financial statements. The Companys adoption of SFAS No. 160 resulted in a
reclassification of noncontrolling interest from the mezzanine section of the balance sheet to equity of $5.9 million.
Increases in noncontrolling interest, including that resulting from the acquisition of TCC, will be
recorded within equity, with any income attributable to that noncontrolling interest
recorded separately in the Companys consolidated statements of income, if material.
3. |
|
Short-Term and Long-Term Investments |
Investments consist of available-for-sale securities. Available-for-sale securities are
carried at fair value using primarily quoted prices in active markets for identical securities,
with unrealized gains or losses reported as a component of accumulated other comprehensive income.
The cost of securities sold is based on the specific identification method. As of March 31, 2009,
available-for-sale securities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
U.S. Treasury securities |
|
$ |
1,998 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,998 |
|
Corporate bonds |
|
|
1,101 |
|
|
|
|
|
|
|
19 |
|
|
|
1,082 |
|
Municipal bonds |
|
|
2,760 |
|
|
|
|
|
|
|
|
|
|
|
2,760 |
|
Other |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,865 |
|
|
$ |
|
|
|
$ |
19 |
|
|
$ |
5,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contractual maturities of the investments as of March 31, 2009, were as follows (in
thousands):
|
|
|
|
|
|
|
Estimated Fair |
|
|
|
Value |
|
Maturities: |
|
|
|
|
Due within 1 year |
|
$ |
2,990 |
|
Due within 1 year to 5 years |
|
|
96 |
|
Due within 5 years to 10 years |
|
|
|
|
Due after 10 years |
|
|
2,760 |
|
|
|
|
|
Total |
|
$ |
5,846 |
|
|
|
|
|
Investments that the Company intends to hold for more than one year are classified as
long-term investments. The Company currently expects to hold $2.8 million of the investments for
more than one year as of March 31, 2009 and has classified them as long-term investments. The $2.8
million relates to an auction rate security that failed to settle at auction due to recent credit
market conditions. The fair value of this auction rate security, which has continued to pay the
full coupon rate and has a high credit rating, was determined based on level 3 unobservable inputs,
which means the inputs reflect managements own assumptions and the assets trade infrequently, and
are supported by little or no market activity that are significant to the fair value of the asset.
The Company does not intend to hold any of the other investments for more than one year. Therefore,
the Company has classified the remaining $3.1 million as short-term investments in the accompanying
consolidated balance sheet as of March 31, 2009.
8
4. |
|
Cost Method Investments |
The Company has an 8% equity ownership in the National Commodity and Derivatives Exchange, Ltd
(NCDEX), a derivatives exchange located in Mumbai, India, which it acquired for $37.0 million in
2006. In 2008, the Company recorded an impairment loss of $15.7 million, reducing the carrying
value of the investment to $21.3 million. The Company wrote down its cost method investment in
NCDEX due to the significance of the decrease in the estimated fair value of its investment
resulting from the suspended trading of certain key NCDEX contracts, potential foreign investment
limits, current market conditions and the uncertainty surrounding the potential for the Company to
recover the carrying value of the investment.
The Company may be required to sell a portion of its NCDEX stake by June 30, 2009 as a result
of a change in Indian law that limits the total ownership by foreign entities in Indian commodities
exchanges to a maximum of 5%. The Company, as well as NCDEX and other non-Indian NCDEX
shareholders, have petitioned the Indian government and the Forward Markets Commission, the market
regulator, to either increase the foreign ownership limit, to grandfather those who were foreign
investors at the time that the law was passed in August 2008 or to extend the amount of time
permitted to sell interests in excess of 5% given current market conditions. If these petitions are
not successful, the Company could be required to sell the 3% interest by June 30, 2009 or shortly
thereafter. The Company will continue to monitor the carrying value of $21.3 million and if it is
determined that additional other-than-temporary impairment exists, the Company will recognize an
impairment loss equal to the difference between the fair value and the adjusted carrying value of
the 8% equity stake.
5. |
|
Goodwill and Other Intangible Assets |
The following is a summary of the activity in the goodwill balance for the three months ended
March 31, 2009 (in thousands):
|
|
|
|
|
Goodwill balance at December 31, 2008 |
|
$ |
1,434,816 |
|
Acquisition of TCC |
|
|
56,840 |
|
Other activity |
|
|
6,265 |
|
|
|
|
|
Goodwill balance at March 31, 2009 |
|
$ |
1,497,921 |
|
|
|
|
|
The following is a summary of the activity in the other intangible assets balance for the
three months ended March 31, 2009 (in thousands):
|
|
|
|
|
Other intangible assets balance at December 31, 2008 |
|
$ |
728,855 |
|
Acquisition of TCC |
|
|
19,680 |
|
Other activity |
|
|
(593 |
) |
Amortization of intangibles |
|
|
(16,156 |
) |
|
|
|
|
Other intangible assets balance at March 31, 2009 |
|
$ |
731,786 |
|
|
|
|
|
The goodwill and other intangible assets from the acquisition of TCC (Note 10) have been
included in the global OTC segment for purposes of segment reporting as this is consistent with how
it is reported internally to the Companys chief operating decision maker. The TCC goodwill amount
above was allocated to the CDS reporting unit for purposes of future impairment testing. The
Company estimates that none of the goodwill acquired for the TCC acquisition will be deductible for
tax purposes as it was a nontaxable transaction. The other activity in the goodwill and other
intangible assets balances relates to adjustments to the purchase price, other intangible assets
and related goodwill for acquisitions completed in 2008, primarily relating to updated valuations
of identified tangible and intangible assets, and to foreign currency translation adjustments. The
Company did not recognize any impairment losses on goodwill or other intangible assets during the
three months ended March 31, 2009.
As of March 31, 2009, the Company had a senior unsecured credit agreement under which a term
loan facility in the aggregate principal amount of $175.0 million was outstanding and a revolving
credit facility in the aggregate principal amount of $250.0 million (collectively, the Credit
Facilities). As of March 31, 2009, $195.0 million was outstanding under the revolving credit
facility, which was due to be repaid by January 12, 2010. The Company also had a separate senior
credit agreement (the Credit Agreement) outstanding that provided for an additional 364-day
9
revolving credit facility in the aggregate principal amount of $150.0 million for use by ICE
Clear Europe, of which no amounts were outstanding as of March 31, 2009.
On April 9, 2009, the Credit Facilities and the Credit Agreement were cancelled, amended
and/or replaced with new aggregate $775.0 million unsecured senior credit facilities (the New
Credit Facilities) with Wachovia Bank, National Association (Wachovia), as Administrative Agent,
Bank of America, N.A., as Syndication Agent, and the lenders named therein. The New Credit
Facilities provide for a 364-day senior unsecured revolving credit facility in the aggregate
principal amount of $300.0 million, a three-year senior unsecured revolving credit facility in the
aggregate principal amount of $100.0 million, a three-year senior unsecured term loan facility in
the aggregate principal amount of $200.0 million and an amended senior unsecured term loan facility
in the aggregate principal amount of $175.0 million. The full $200.0 million available under the
new term loan facility was borrowed on April 9, 2009 and was used to pay off the $195.0 million in
principal that was outstanding under the old revolving credit facility. The original term loan
facility was amended and the $175.0 million that was outstanding thereunder remains outstanding
under the New Credit Facilities. No amounts were borrowed under the new $400.0 million combined
revolving credit facilities.
Loans under the New Credit Facilities shall, at the option of the Company, bear interest on
the principal amount outstanding at either (i) LIBOR plus an applicable margin rate or (ii) a base
rate plus an applicable margin rate. The base rate will be equal to the higher of (i) Wachovias
prime rate, (ii) the federal funds rate plus 0.5%, or (iii) the LIBOR rate for an interest period
of one month plus 1.5%. The applicable margin rate ranges from 2.50% to 4.50% on the LIBOR loans
and from 1.50% to 3.50% for the base rate loans based on the Companys total leverage ratio
calculated on a trailing twelve month period. Interest on each outstanding borrowing is payable on
at least a quarterly basis. Aggregate principal maturities on the borrowings outstanding under the
New Credit Facilities are $67.5 million for the remaining nine months in 2009 and $99.0 million, $132.8 million and $75.7 million in
2010, 2011 and 2012, respectively.
As of April 9, 2009, the Company had a six-month LIBOR-rate loan related to the $175.0 million
term loan facility with a stated interest rate of 4.31% per annum, including the applicable margin
rate of 2.50% on the LIBOR loan. As of April 9, 2009, the Company had a one-month LIBOR-rate loan
related to the $200.0 million term loan facility with a stated interest rate of 2.97% per annum,
including the applicable margin rate of 2.50% on the LIBOR loan. The closing of the New Credit
Facilities increased the deferred debt issuance costs to $11.3 million.
The New Credit Facilities include an unutilized revolving credit commitment fee that is equal
to the unused maximum revolver amount multiplied by an applicable margin rate and is payable in
arrears on a quarterly basis. The applicable margin rate ranges from 0.50% to 0.90% based on the
Companys total leverage ratio calculated on a trailing twelve month period. Based on this
calculation, the applicable margin rate was 0.50% as of April 9, 2009.
Of the $300.0 million available under the 364-day senior unsecured revolving credit facility,
(i) up to $150.0 million of such amount can be used to provide liquidity for the clearing
operations of ICE Clear Europe, (ii) up to $100.0 million of such amount can be used to provide
liquidity for the clearing operations of ICE Trust, and (iii) up to $50.0 million of such amount
can be used to provide liquidity for the clearing operations of ICE Clear U.S. The $100.0 million
available under the three-year senior unsecured revolving credit facility can be used for working
capital and general corporate purposes.
With limited exceptions, the Company may prepay the outstanding loans under the New Credit
Facilities, in whole or in part, without premium or penalty. The New Credit Facilities contain
affirmative and negative covenants, including, but not limited to, leverage and interest coverage
ratios, as well as limitations or required notices or approvals for acquisitions, dispositions of
assets and certain investments, the incurrence of additional debt or the creation of liens and
other fundamental changes to the Companys business. The Company has been and is currently in
compliance with all applicable covenants under the New Credit Facilities.
On April 21, 2009, the Company reduced its exposure to interest rate volatility on the $175.0
million and $200.0 term loan facilities by entering into interest rate swaps that are effective
from December 31, 2009 through the maturity dates of the term loan facilities. The interest rate
swaps fix the interest rate to 4.26% and 4.36% on the $175.0 million and $200.0 million term loan
facilities, respectively.
10
7. |
|
Stock-Based Compensation |
The Company currently sponsors employee stock option and restricted stock plans. All stock
options are granted at an exercise price equal to the fair value of the common stock on the date of
grant. The grant date fair value is based on the closing stock price on the date of grant. The fair
value of the stock options and restricted stock on the date of the grant is recognized as expense
over the vesting period, net of estimated forfeitures. The non-cash compensation expenses
recognized in the Companys consolidated statements of income for the stock options and restricted
stock were $9.8 million and $7.9 million for the three months ended March 31, 2009 and 2008,
respectively.
The following is a summary of stock options for the three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Exercise Price |
|
|
|
Number of Options |
|
|
per Option |
|
Outstanding at December 31, 2008 |
|
|
2,463,415 |
|
|
$ |
36.83 |
|
Exercised |
|
|
(60,935 |
) |
|
|
15.92 |
|
Forfeited |
|
|
(14,944 |
) |
|
|
93.23 |
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2009 |
|
|
2,387,536 |
|
|
|
37.01 |
|
|
|
|
|
|
|
|
|
Details of stock options outstanding as of March 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
|
|
|
Weighted Average |
|
|
Contractual Life |
|
|
Value |
|
|
|
Number of Options |
|
|
Exercise Price |
|
|
(years) |
|
|
(In thousands) |
|
Vested or expected to vest |
|
|
2,259,181 |
|
|
$ |
35.32 |
|
|
|
6.75 |
|
|
$ |
102,164 |
|
Exercisable |
|
|
1,692,811 |
|
|
$ |
26.08 |
|
|
|
6.16 |
|
|
$ |
89,560 |
|
The total intrinsic value of stock options exercised during the three months ended March 31,
2009 and 2008 was $2.7 million and $23.1 million, respectively. As of March 31, 2009, there were
$25.1 million in total unrecognized compensation costs related to stock options. These costs are
expected to be recognized over a weighted average period of 2.4 years as the stock options vest.
In December 2008, the Company reserved a maximum of 465,895 restricted shares for potential
issuance as performance-based restricted shares for certain Company employees. These restricted
shares are also subject to a market condition that may reduce the number of shares that are issued
if the 2009 Company total shareholder return falls below that of the 2009 return of the Dow Jones Global Exchanges
Index. The number of shares issued will be reduced by either 10% or 20% if the 2009 Company total
shareholder return is below the 2009 return of the Dow Jones Global Exchange Index. The Company
used a Monte Carlo simulation model to determine the grant date fair value of these awards. The
grant date was December 16, 2008, which was the date when the Company and the employees reached a
mutual understanding of award terms, and it is also the service inception date, which is the date
when the requisite service period began. These shares vest over a three-year period based on the
Companys financial performance targets set by the Companys compensation committee for the year
ending December 31, 2009. The compensation expense to be recognized under these
performance-based restricted shares is expected to be $6.0 million if the Threshold Performance
Target is met and 93,179 shares vest, $12.0 million if the Target Performance Target is met and
186,358 shares vest, $20.9 million if the Above Target Performance Target is met and 326,127 shares
vest, and $29.9 million if the Maximum Performance Target is met and 465,895 shares vest. Shares to
be issued will be prorated on a straight-line basis between performance level targets. The Company
will recognize expense on an accelerated basis over the three-year vesting period based on the
Companys quarterly assessment of the probable 2009 actual performance as compared to the 2009
financial performance targets. If the market condition is not achieved, compensation cost will not
be affected since the grant date fair value of the award gave consideration to the probability of
market condition achievement.
11
The following is a summary of the nonvested restricted shares for the three months ended March
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of |
|
|
Grant-Date Fair |
|
|
|
Restricted Stock Shares |
|
|
Value per Share |
|
Nonvested at December 31, 2008 |
|
|
1,142,332 |
|
|
$ |
92.33 |
|
Granted |
|
|
59,593 |
|
|
|
58.72 |
|
Vested |
|
|
(165,818 |
) |
|
|
110.09 |
|
Forfeited |
|
|
(19,832 |
) |
|
|
104.31 |
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2009 |
|
|
1,016,275 |
|
|
|
87.23 |
|
|
|
|
|
|
|
|
|
Restricted stock shares granted in the table above include both time-based and
performance-based grants. Unvested performance-based restricted shares granted are presented in the
table above at the maximum number of restricted shares that would vest if the maximum performance
targets are met. Performance-based shares awarded in prior years have been adjusted to reflect the
actual shares to be issued based on the achievement of past performance targets. As of March 31,
2009, there were $42.5 million in total unrecognized compensation costs related to the time-based
restricted stock and the performance-based restricted stock. These costs are expected to be
recognized over a weighted average period of 2.2 years as the restricted stock vests. These
unrecognized compensation costs assume that the target performance level will be met on the
performance-based restricted shares granted in December 2008. During the three months ended March
31, 2009 and 2008, the total fair value of restricted stock vested under all restricted stock plans
was $10.0 million and $120.5 million, respectively.
The Companys effective tax rate decreased to 33.8% for the three months ended March 31, 2009
from 35.2% for the three months ended March 31, 2008. The effective tax rate for the three months
ended March 31, 2009 is lower than the federal statutory rate primarily due to a decrease in the
percentage of income taxable in the United States at U.S. federal and state statutory tax rates and
an increase in foreign earnings, which are taxed at lower foreign tax rates. The effective tax rate
for the three months ended March 31, 2008 is higher than the federal statutory rate primarily due
to state taxes and non-deductible expenses, which are partially offset by favorable foreign income
tax rates, tax exempt interest income and tax credits.
The undistributed earnings of the Companys foreign subsidiaries that have not been remitted
to the United States totaled $417.0 million and $363.4 million as of March 31, 2009 and December
31, 2008, respectively. These earnings are not subject to U.S. income tax until they are
distributed to the United States.
9. |
|
Clearing Organizations |
ICE Clear U.S. performs the clearing and settlement of every futures and options contract
traded through ICE Futures U.S., ICE Clear Canada performs the same function for every futures and
options contract traded through ICE Futures Canada and ICE Clear Europe performs the same function
for every futures and options contract traded through ICE Futures Europe, as well as for all of the
Companys cleared OTC energy products. TCC performs clearing and settlement services to its
participants for trades in futures contracts, options contracts and OTC transactions executed on
various exchanges and marketplaces. ICE Trust performs the clearing and settlement of CDS contracts
and began clearing these contracts in March 2009. ICE Clear U.S., ICE Clear Europe, ICE Clear
Canada, TCC and ICE Trust are referred to herein collectively as the ICE Clearing Houses.
Each of the ICE Clearing Houses has equal and offsetting claims to and from their respective
clearing members on opposite sides of each contract, standing as the central financial counterparty
on every contract cleared. To the extent that funds are not otherwise available to satisfy an
obligation under an applicable contract, each ICE Clearing House bears financial counterparty
credit risk in the event that future market movements create conditions that could lead to its
clearing members failing to meet their obligations to that ICE Clearing House. Accordingly, the ICE
Clearing Houses account for this central counterparty guarantee as a performance guarantee under
FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and
rescission of FASB interpretation No. 34. Given that each contract is settled on at least a daily
basis for each clearing member, the ICE
12
Clearing Houses maximum exposure for this guarantee is approximately $21.5 billion as of
March 31, 2009, which represents the maximum estimated value by the ICE Clearing Houses of a one to
two day movement in pricing of the underlying unsettled contracts. This amount is based on
calculations determined using proprietary software that simulates gains and losses based on
historical market prices, volatility and other factors present at that point in time for those
particular unsettled contracts. Future actual market price volatility could result in the exposure
being significantly different than the amount estimated by the ICE Clearing Houses. The net
notional value of the unsettled contracts was approximately $62.2 billion as of March 31, 2009.
The ICE Clearing Houses reduce their exposure through a risk management program that includes
initial and ongoing financial standards for clearing firm admission and ongoing membership,
original and variation margin requirements, and mandatory deposits to a guaranty fund. The amounts
that the clearing members are required to maintain in the original margin and guaranty fund
accounts are determined by standardized parameters established by the margin or risk committees,
risk management departments and the boards of directors of each of the ICE Clearing Houses and may
fluctuate over time. The ICE Clearing Houses also have powers of assessment that provide the
ability to collect additional funds from their clearing members to cover a defaulting members
remaining obligations. ICE Clear Europe also has $100 million of insurance in the event of a
clearing member default which would be called upon prior to any member assessment.
Each of the ICE Clearing Houses requires all clearing members to maintain on deposit or
through pledge certain assets, which may include cash, government obligations, money market mutual
fund shares, certificates of deposit or letters of credit to secure payment of risk based margin as
may become due and such amounts in total are known as original margin. The daily payment of profits
and losses from and to the ICE Clearing Houses in respect of relevant contracts is known as
variation margin. ICE Clear U.S. marks all outstanding futures contracts to market at least twice
daily and pays and collects option premiums daily. ICE Clear Europe, ICE Clear Canada, TCC and ICE
Trust mark all outstanding positions to market at least once per day. Each of the ICE Clearing
Houses requires that each clearing member make deposits in a fund known as a guaranty or clearing
fund (Guaranty Fund), which is maintained by the relevant ICE Clearing House. These amounts serve
to secure the obligations of a clearing member to the ICE Clearing House to which it has made the
Guaranty Fund deposits and may be used to cover losses sustained by the respective ICE Clearing
House in the event of a default of a clearing member.
Should a particular clearing member fail to deposit original margin, or to make a variation
margin payment, when and as required, the relevant ICE Clearing House may liquidate or hedge the
clearing members open positions and use the clearing members original margin and Guaranty Fund
deposits to make up the amount owed. In the event that those deposits are not sufficient to pay
that owed amount in full, ICE Clear U.S., ICE Clear Canada and TCC may utilize the respective
Guaranty Fund deposits of all clearing members pro rata for that purpose. For ICE Clear Europe,
once a clearing members deposits are depleted and a default occurs, a $100.0 million contribution
made by the Company to ICE Clear Europe would be utilized. The $100.0 million is solely available
in the event of an ICE Clear Europe clearing member default and $50.0 million of the $100.0 million
will be utilized after the available funds of the defaulting member but before all other amounts
within the ICE Clear Europe Guaranty Fund. If additional cash is required to settle positions, then the remaining
$50.0 million will be called pro-rata along with other non-defaulting ICE Clear Europe clearing
members deposits in the ICE Clear Europe Guaranty Fund.
The Company has also contributed $10.0 million to the ICE Trust Guaranty Fund as of March 31,
2009 and it is obligated to increase the contribution up to $100.0 million over a two-year period
using profits and cash flows of the ICE Trust business (Note 10). As amounts are required to be
funded by the Company to the ICE Trust Guaranty Fund, those amounts will be available in the event
of an ICE Trust clearing member default. The first $50.0 million contributed to the ICE Trust Guaranty Fund, including the $10.0
million contributed as of March 31, 2009, will be utilized after the available funds of the
defaulting member but before all other amounts within the ICE Trust Guaranty Fund. The additional
$50.0 million contributed will be utilized pro-rata along with other non-defaulting ICE Trust
clearing members deposits in the ICE Trust Guaranty Fund.
Additionally, for ICE Clear Europe, if all Guaranty Fund amounts are depleted, proceeds from
the Companys $100.0 million insurance policy would be utilized. The relevant ICE Clearing House
may then assess its clearing members to meet any remaining shortfall after the Guaranty Fund
deposits are utilized.
13
As of March 31, 2009, original margin, unsettled variation margin, Guaranty Fund cash deposits
and performance collateral for delivery are as follows for ICE Clear U.S., ICE Clear Europe, ICE
Clear Canada, TCC and ICE Trust (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ICE Clear U.S. |
|
|
ICE Clear Europe |
|
|
ICE Clear Canada |
|
|
TCC |
|
|
ICE Trust |
|
|
Total |
|
Original margin |
|
$ |
562,011 |
|
|
$ |
10,913,648 |
|
|
$ |
5,935 |
|
|
$ |
43,034 |
|
|
$ |
227,751 |
|
|
$ |
11,752,379 |
|
Variation margin |
|
|
21,620 |
|
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
|
|
|
|
21,730 |
|
Guaranty Fund |
|
|
22,639 |
|
|
|
381,712 |
|
|
|
2,393 |
|
|
|
8,571 |
|
|
|
296,900 |
|
|
|
712,215 |
|
Performance
collateral for
delivery |
|
|
|
|
|
|
203,887 |
|
|
|
994 |
|
|
|
|
|
|
|
|
|
|
|
204,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
606,270 |
|
|
$ |
11,499,247 |
|
|
$ |
9,322 |
|
|
$ |
51,715 |
|
|
$ |
524,651 |
|
|
$ |
12,691,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded these cash deposits in the accompanying consolidated balance sheets
as current assets with offsetting current liabilities to the clearing members of the relevant ICE
Clearing House. All cash, securities and letters of credit are only available to meet the financial
obligations of that clearing firm to the relevant ICE Clearing House. ICE Clear U.S., ICE Clear
Europe, ICE Clear Canada, TCC and ICE Trust are separate legal entities and are not subject to the
liabilities of the other ICE Clearing Houses or the obligations of the members of the other ICE
Clearing Houses. These cash deposits may fluctuate due to the types of margin collateral choices
available to clearing members and the change in the amount of deposits required. As a result, these
assets and offsetting liabilities may vary significantly over time. The total ICE Clear Europe
Guaranty Fund balance as of March 31, 2009 is $481.7 million, which includes the $381.7 million in
Guaranty Fund deposits from clearing members as well as $100.0 million that ICE Clear Europe has
committed of its own cash and which is included in restricted cash in the accompanying consolidated
balance sheets. The total ICE Trust Guaranty Fund balance as of March 31, 2009 is $306.9 million,
which includes the $296.9 million in Guaranty Fund deposits from clearing members as well as $10.0
million that ICE Trust has committed of its own cash.
At the expiration of certain contracts that require physical deliveries, ICE Clear Europe and
ICE Futures Canada collect cash from the clearing members until the physical deliveries have been
made to the other clearing member. These cash deposits are referred to as performance collateral
for delivery.
In addition to the cash deposits for original margin, variation margin, and Guaranty Fund made
to the relevant ICE Clearing House, clearing members also pledge assets, including government
obligations, money market mutual funds, certificates of deposit or letters of credit to the
relevant ICE Clearing House to mitigate its credit risk. These assets are not reflected in the
accompanying consolidated balance sheet as the ICE Clearing Houses do not take legal ownership of
the assets as the risks and rewards remain with the clearing members. The ICE Clearing Houses have
the ability to access the accounts where these assets are held at the financial institutions and
depositories in the event of a clearing member default. As of March 31, 2009, there were only cash
deposits for the original margin, variation margin and Guaranty fund for ICE Trust.
As of March 31, 2009, the U.S. Government obligations and money market mutual funds pledged by
the clearing members as original margin and Guaranty Fund deposits for ICE Clear U.S. are detailed
below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
|
|
|
|
|
Government |
|
|
Money |
|
|
|
Securities at |
|
|
Market |
|
|
|
Face Value |
|
|
Mutual Fund |
|
Original margin |
|
$ |
7,341,038 |
|
|
$ |
527,316 |
|
Guaranty Fund |
|
|
139,280 |
|
|
|
30,542 |
|
|
|
|
|
|
|
|
Total |
|
$ |
7,480,318 |
|
|
$ |
557,858 |
|
|
|
|
|
|
|
|
14
As of March 31, 2009, the government obligations and letters of credit pledged by the clearing
members as original margin and Guaranty Fund deposits for ICE Clear Europe are detailed below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Government |
|
|
|
|
|
|
Securities at |
|
|
Letters |
|
|
|
Face Value |
|
|
Of Credit |
|
Original margin |
|
$ |
3,914,824 |
|
|
$ |
1,370,000 |
|
Guaranty Fund |
|
|
2,300 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,917,124 |
|
|
$ |
1,370,000 |
|
|
|
|
|
|
|
|
As of March 31, 2009, the Canadian Government obligations and letters of credit pledged by the
clearing members as original margin and Guaranty Fund deposits for ICE Clear Canada are detailed
below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
|
|
|
|
|
Government |
|
|
|
|
|
|
Securities at |
|
|
Letters |
|
|
|
Face Value |
|
|
Of Credit |
|
Original margin |
|
$ |
34,424 |
|
|
$ |
4,387 |
|
Guaranty Fund |
|
|
13,876 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
48,300 |
|
|
$ |
4,387 |
|
|
|
|
|
|
|
|
As of March 31, 2009, the Government obligations and money market mutual funds pledged by the
clearing members as original margin and Guaranty Fund deposits for TCC are detailed below (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Government |
|
|
Money |
|
|
|
Securities at |
|
|
Market |
|
|
|
Face Value |
|
|
Mutual Fund |
|
Original margin |
|
$ |
136,353 |
|
|
$ |
5,000 |
|
Guaranty Fund |
|
|
6,330 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
142,683 |
|
|
$ |
5,000 |
|
|
|
|
|
|
|
|
TCC Acquisition
The Company completed its acquisition of TCC on March 6, 2009. TCC is a U.S. clearing house
that provides clearing and settlement services to its participants for trades in futures contracts,
options on futures contracts and OTC transactions executed on various exchanges and marketplaces.
TCC also developed the CDS risk management framework, operational processes and infrastructure for
ICE Trusts clearing operations. The Company acquired 100% of TCC for cash and a 50% equity
interest in the parent company of ICE Trust. The 50% equity interest entitles the former stockholders of TCC to a 50%
share of ICE Trust net profits. The former stockholders of TCC have waived a portion of their profits
until December 31, 2009. The net profit allocation arrangement will be
reflected as income attributable to noncontrolling interest.
The acquisition facilitated the Companys expansion into clearing within the global CDS
markets. Assets acquired and liabilities assumed were recorded at their estimated fair values as of
March 6, 2009. The total preliminary purchase price was $107.1 million, and was comprised of $39.0
million in cash, $38.4 million in excess working capital paid to
the TCC shareholders and a 50% equity
interest in the parent company of ICE Trust with an estimated fair value of $29.7 million.
The preliminary fair value of the noncontrolling net profit sharing
interest was based on a discounted cash flow approach.
Under the acquisition method of SFAS No. 141R, the total preliminary purchase price was
allocated to TCCs net tangible and identifiable intangible assets based on the estimated fair
values of those assets as of March 6, 2009. The preliminary net tangible and identifiable
intangible assets acquired from TCC were $50.2 million, including $8.5 million of regulatory
capital that is reflected as restricted cash in the accompanying consolidated balance sheet as of
March 31, 2009. The primary areas of the preliminary purchase price allocation that are not yet
finalized relate to identifiable intangible assets, certain tangible assets and liabilities and
valuation of certain noncontrolling interest consideration given to the former TCC stockholders. In
performing the preliminary purchase price allocation, the Company considered, among other factors,
analyses of historical financial performance, estimates of future performance and anticipated
synergies. The Company has recorded preliminary intangible assets associated with the TCC
acquisition of $11.3 million for developed technology, which has been assigned a three to five year
useful life, and $8.4 million in other intangible assets. The excess of the purchase price over the
preliminary net tangible and identifiable intangible assets was $56.8 million and was recorded as
goodwill. The allocation of the purchase price will be finalized upon
completion of the fair value analysis of the acquired assets and
liabilities.
15
Creditex Acquisition
The Company completed its acquisition of Creditex on August 29, 2008. The primary areas of the
preliminary purchase price allocation that are not yet finalized relate to identifiable intangible
assets and certain tangible assets and liabilities.
Formation of ICE Trust
The Company has assembled a comprehensive CDS infrastructure with its acquisitions of
Creditex, which included T-Zero, a wholly-owned subsidiary of Creditex and a CDS trade processing
platform, and TCC. The Company utilized select infrastructure, domain knowledge and personnel from
each entity to establish ICE Trust, which will serve as the Companys U.S. CDS clearing house. In
addition to utilizing in-house resources, ICE Trust has also entered into an agreement with Markit
Group Ltd. (Markit) to jointly produce daily settlement prices required for mark-to-market
pricing, margining and clearing. Distinct pricing structure agreements apply to the initial
clearing members of ICE Trust, which may limit the revenue opportunities available to ICE Trust
from these initial clearing members. The Company began processing and clearing North American CDS
indexes on March 9, 2009 through ICE Trust. The clearing house has received approvals from the
Federal Reserve Board of Governors and the New York State Banking Department and an exemption from
registration from the U.S. Securities and Exchange Commission and the U.S. Treasury.
Pursuant to bank capitalization requirements, the Company funded ICE Trusts operations with
$35.0 million in cash and it contributed an initial $10.0 million to the ICE Trust Guaranty Fund
(Note 9). The $45.0 million in cash has been reflected as restricted cash in the accompanying
consolidated balance sheet as of March 31, 2009. Over a two-year period, the Company is obligated
to increase its contribution to the ICE Trust Guaranty Fund to a total of $100.0 million.
11. |
|
Russell Licensing Agreement |
In 2007, the Company entered into an exclusive licensing agreement (the Licensing Agreement)
with the Frank Russell Company (Russell) to offer futures and options on futures contracts based
on the full range of Russells benchmark U.S. equity indexes. Due to the wind-down provisions of
other Russell licensing contracts, during the first year of the Licensing Agreement, the Company
offered the Russell contracts on a non-exclusive basis. These rights became exclusive on September
19, 2008, and subject to achieving specified trading volume, will remain exclusive throughout the
remainder of the Licensing Agreement, which extends through June 2014.
In exchange for the license rights, the Company paid Russell $50.0 million in July 2007 and
will also make annual cash payments based on the annual contract volume, subject to certain minimum
annual royalty payments. The Company has recorded the license rights as intangible assets, which
were valued based on the net present value of all minimum annual royalty payments that the Company
is required to make to Russell throughout the term of the agreement. As of March 31, 2009, the net
assets related to the Licensing Agreement are $136.0 million and are included in other intangible
assets in the accompanying consolidated balance sheets. The intangible assets are being amortized
based on the Companys valuations of the non-exclusive and the exclusive elements of the Licensing
Agreement. For the three months ended March 31, 2009 and 2008, amortization expense related to the
Licensing Agreement was $6.5 million and $42,000, respectively, which reflects amortization on the
exclusive and non-exclusive portions of the intangible assets.
Because the Company is required to make minimum annual royalty payments to maintain the
Russell license rights, the Company has recorded a liability based on the net present value of the
total required minimum royalty payments as of the effective date of the Licensing Agreement. As of
March 31, 2009, the current and noncurrent liabilities relating to the minimum annual royalty
payments under the Licensing Agreement are $13.3 million and $80.8 million, respectively, and are
reflected as licensing agreement liabilities in the accompanying consolidated balance sheet. The
difference between the present value of the payments and the actual payments is recorded as
interest expense using the effective interest method over the term of the Licensing Agreement. For
the three months ended March 31, 2009 and 2008, interest expense related to the Licensing Agreement
was $1.4 million and $1.5 million, respectively.
16
The Companys principal business segments consist of its global OTC segment, its futures
segment and its market data segment. The operations of ICE Futures Europe, ICE Futures U.S. and ICE
Futures Canada, and the respective clearing of the futures contracts that trade at each of these
exchanges, make up the futures segment and the operations of ICE Data make up the market data
segment. The remaining companies and operations have been included in the global OTC segment as
they primarily support the Companys OTC business operations. Intersegment revenues and
transactions attributable to the performance of services are recorded at cost plus an agreed market
percentage intercompany profit. Intersegment revenues attributable to licensing transactions have
been priced in accordance with comparable third party agreements. Financial data for the Companys
business segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global |
|
|
|
|
|
|
Market |
|
|
|
|
|
|
OTC |
|
|
Futures |
|
|
Data |
|
|
|
|
|
|
Segment |
|
|
Segment |
|
|
Segment |
|
|
Total |
|
|
|
(In thousands) |
|
Three Months Ended March 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
119,581 |
|
|
$ |
97,979 |
|
|
$ |
13,993 |
|
|
$ |
231,553 |
|
Intersegment revenues |
|
|
11,652 |
|
|
|
7,652 |
|
|
|
8,439 |
|
|
|
27,743 |
|
Depreciation and amortization |
|
|
18,158 |
|
|
|
9,110 |
|
|
|
35 |
|
|
|
27,303 |
|
Interest and investment income |
|
|
78 |
|
|
|
519 |
|
|
|
13 |
|
|
|
610 |
|
Interest expense |
|
|
3,376 |
|
|
|
1,878 |
|
|
|
|
|
|
|
5,254 |
|
Income tax expense |
|
|
12,186 |
|
|
|
20,119 |
|
|
|
4,549 |
|
|
|
36,854 |
|
Net income |
|
|
20,305 |
|
|
|
42,922 |
|
|
|
8,995 |
|
|
|
72,222 |
|
Total assets |
|
|
2,933,364 |
|
|
|
12,660,513 |
|
|
|
31,029 |
|
|
|
15,624,906 |
|
Revenues from three clearing members of the futures segment comprised 17.2%, 10.9 % and 10.2%
of the Companys futures revenues for the three months ended March 31, 2009. These clearing members
are primarily intermediaries and represent a broad range of principal trading firms. If a clearing
member ceased its operations, the Company believes that the trading firms would continue to conduct
transactions and would clear those transactions through another clearing member firm. No additional
members or customers accounted for more than 10% of the Companys segment revenues or consolidated
revenues during the three months ended March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global |
|
|
|
|
|
|
Market |
|
|
|
|
|
|
OTC |
|
|
Futures |
|
|
Data |
|
|
|
|
|
|
Segment |
|
|
Segment |
|
|
Segment |
|
|
Total |
|
|
|
(In thousands) |
|
Three Months Ended March 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
93,349 |
|
|
$ |
100,649 |
|
|
$ |
13,216 |
|
|
$ |
207,214 |
|
Intersegment revenues |
|
|
7,820 |
|
|
|
1,111 |
|
|
|
8,061 |
|
|
|
16,992 |
|
Depreciation and amortization |
|
|
9,006 |
|
|
|
1,919 |
|
|
|
21 |
|
|
|
10,946 |
|
Interest and investment income |
|
|
1,053 |
|
|
|
1,682 |
|
|
|
184 |
|
|
|
2,919 |
|
Interest expense |
|
|
3,539 |
|
|
|
1,595 |
|
|
|
|
|
|
|
5,134 |
|
Income tax expense |
|
|
16,217 |
|
|
|
27,367 |
|
|
|
6,545 |
|
|
|
50,129 |
|
Net income |
|
|
35,343 |
|
|
|
44,032 |
|
|
|
12,915 |
|
|
|
92,290 |
|
Total assets |
|
|
1,718,542 |
|
|
|
1,310,156 |
|
|
|
24,237 |
|
|
|
3,052,935 |
|
Revenues from three clearing members of the futures segment comprised 15.3%, 13.0% and 11.2%
of the Companys futures revenues for the three months ended March 31, 2008. No additional members
or customers accounted for more than 10% of the Companys segment revenues or consolidated revenues
during the three months ended March 31, 2008.
13. Earnings Per Common Share
The following is a reconciliation of the numerators and denominators of the basic and diluted
earnings per common share computations for the three months ended March 31, 2009 and 2008:
17
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except per |
|
|
|
share amounts) |
|
Basic: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,222 |
|
|
$ |
92,290 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
72,671 |
|
|
|
70,361 |
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.99 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
72,671 |
|
|
|
70,361 |
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options and restricted shares |
|
|
935 |
|
|
|
987 |
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
73,606 |
|
|
|
71,348 |
|
|
|
|
|
|
|
|
Diluted earnings per common share |
|
$ |
0.98 |
|
|
$ |
1.29 |
|
|
|
|
|
|
|
|
Basic earnings per common share is calculated using the weighted average common shares
outstanding during the period. Common equivalent shares from stock options and restricted stock
awards, using the treasury stock method, are also included in the diluted per share calculations
unless their effect of inclusion would be antidilutive. During the three months ended March 31,
2009 and 2008, 715,000 and 108,000 outstanding stock options, respectively, were not included in
the computation of diluted earnings per common share, because to do so would have had an
antidilutive effect.
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q, including the sections entitled Legal Proceedings and
Managements Discussion and Analysis of Financial Condition and Results of Operations, contains
forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995
that are based on our present beliefs and assumptions and on information currently available to us.
You can identify forward-looking statements by terminology such as may, will, should,
could, would, targets, goal, expect, intend, plan, anticipate, believe,
estimate, predict, potential, continue, or the negative of these terms or other comparable
terminology. These statements relate to future events or our future financial performance and
involve risks, uncertainties and other factors that may cause our actual results, levels of
activity, performance or achievements to differ materially from those expressed or implied by these
forward-looking statements. These risks and other factors include those set forth under the heading
Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008.
Forward-looking statements and other risks and factors that may affect our performance
include, but are not limited to: our business environment; conditions in global financial markets;
increasing competition and consolidation in our industry; changes in domestic and foreign
regulations or government policy; minimizing the risks associated with operating multiple clearing
houses in multiple jurisdictions; technological developments, including clearing developments; the
success of our clearing initiative for the credit default swap market, including the lack of a
liquid market for CDS trading; the success of our global clearing strategy; the accuracy of our
cost estimates and expectations; our belief that cash flows will be sufficient to fund our working
capital needs and capital expenditures at least through the end of 2010; our ability to increase
the connectivity to our marketplace; our ability to develop new products and services and pursue
strategic acquisitions and alliances on a timely, cost-effective basis; maintaining existing market
participants and attracting new ones; protecting our intellectual property rights; not violating
the intellectual property rights of others; proposed or pending litigation and adverse litigation
results; our belief in our electronic platform and disaster recovery system technologies; our
ability to gain access to comparable products and services if our key technology contracts were
terminated; and the risk that acquired businesses will not be integrated successfully or that the
revenue opportunities, cost savings and other anticipated synergies from mergers and investments
may not be fully realized or may take longer to realize than expected. We caution you not to place
undue reliance on these forward-looking statements as they speak only as of the date on which such
statements were made, and we undertake no obligation to update any forward-looking statement or to
reflect the occurrence of an unanticipated event. New factors emerge from time to time, and it is
not possible for management to predict all factors that may affect our business and prospects.
Further, management cannot assess the impact of each factor on the business or the extent to which
any factor, or combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
In this quarterly report on Form 10-Q, unless otherwise indicated, the terms
IntercontinentalExchange, ICE, we, us, our, our company and our business refer to
IntercontinentalExchange, Inc., together with its consolidated subsidiaries. Due to rounding,
figures may not sum exactly.
Overview and Our Business Environment
We are a leading operator of regulated global futures exchanges, over-the-counter, or OTC,
markets and derivatives clearing houses. We operate the leading electronic futures and OTC
marketplace for trading a broad array of energy, soft agricultural and agricultural commodities,
credit default swaps, or CDS, and financial products. Currently, we are the only marketplace to
offer an integrated electronic platform for side-by-side trading of products in both futures and
OTC markets, together with clearing services. Through our widely-distributed electronic
marketplaces, we bring together buyers and sellers of derivative and physical commodities and
financial contracts and offer a range of services to support our participants risk management and
trading activities.
We conduct our regulated U.K.-based energy futures exchange through our wholly-owned
subsidiary, ICE Futures Europe. We conduct our regulated U.S.-based futures exchange through our
wholly-owned subsidiary, ICE Futures U.S. We conduct our regulated Canadian futures exchange
through our wholly-owned subsidiary, ICE Futures Canada. ICE Futures Europe, as well as our OTC
energy marketplace, clears contracts through ICE Clear Europe, ICE Futures U.S. clears its
contracts through ICE Clear U.S. and ICE Futures Canada clears its contracts through ICE Clear
Canada. We conduct our OTC CDS trade execution markets through Creditex Group Inc., or
19
Creditex, and clear CDS markets through ICE Trust U.S. LLC, or ICE Trust. We completed our
acquisition of The Clearing Corporation, or TCC, in March 2009, as part of our global strategy to
offer clearing in the CDS market.
We operate three business segments: a futures segment, a global OTC segment and a market data
segment. In our futures markets, we offer trading in standardized derivative contracts on our
regulated exchanges. In our OTC markets, which include energy markets and credit derivatives, we
offer electronic trading and OTC voice brokering in OTC contracts, including contracts that provide
for the physical delivery of an underlying asset or commodity or for financial settlement based on
the price of an underlying asset or commodity. Through our market data segment, we offer a variety
of market data services and products for both futures and OTC market participants and observers.
Our business is primarily transaction based, and our revenues and profitability relate
directly to the level of trading activity in our markets. Trading volume is driven by a number of
factors, including the degree of volatility in the prices of commodities and financial instruments
such as equity indexes and foreign exchange, as well as regulatory changes, fee modifications and
competition. Price volatility increases the need to hedge price risk and creates opportunities for
the exchange of risk between market participants. Changes in our futures trading volume and OTC
average daily commissions have also been driven by varying levels of volatility and liquidity both
in our markets and in the broader commodities markets, which influence trading volume across all of
the markets we operate.
Since our business is primarily transaction-based, declines in trading volumes and market
liquidity could adversely affect our business and profitability. Market liquidity is one of the
primary keys to attracting and maintaining customers and is an important indicator of a markets
strength. Recently, global financial markets have experienced volatile and adverse conditions,
including the decrease in available credit, losses resulting from declining asset values, defaults
on loans and outflows of customer funds and investments. These events have resulted in the failure
of certain financial services firms and resulted in many of our customers decreasing their risk
exposure and trading activity.
We operate our futures and OTC markets primarily on our electronic platforms and we offer ICE
Futures U.S.s options markets on both our electronic platform and the trading floor based in New
York. We also operate certain of our OTC markets through voice brokering. As participation
continues to increase and as participants continue to employ more sophisticated financial
instruments and risk management strategies to manage their price exposure, we believe there remains
opportunity for further growth in the trading and clearing of derivative products in these markets
globally. We do not risk our own capital by engaging in any trading activities or by extending
credit to market participants.
Financial Highlights
|
|
Our consolidated revenues increased by 11.7% to $231.6 million for the three months ended
March 31, 2009, compared to the same period in 2008, primarily due to revenues from recent
acquisitions, revenues from the exclusive trading of Russell Index futures and options on ICE
Futures U.S., which commenced in September 2008, and clearing fee revenues collected in our
energy futures and OTC contracts. This revenue growth was partially offset by lower OTC energy
and soft agricultural futures contract volume. |
|
|
|
Our consolidated operating expenses increased by 87.1% to $117.8 million for the three
months ended March 31, 2009, compared to the same period in 2008, primarily due to recent
acquisitions, transaction costs related to the acquisition of TCC and costs associated with
employee termination costs, costs incurred to vacate office space, the establishment of ICE
Trust and increased technology spending and the related depreciation expenses. These increased
operating expenses were partially offset by costs incurred to close our futures trading floors
in New York and Dublin and costs associated with the establishment of ICE Clear Europe in the
first quarter of 2008. The operating expenses associated with the TCC acquisition, employee
termination costs, establishment of ICE Trust and costs incurred to vacate office space during
the three months ended March 31, 2009 were $12.9 million. |
|
|
|
Our consolidated operating margin decreased to 49.1% for the three months ended March 31,
2009, compared to 69.6% for the same period in 2008. |
20
|
|
Our consolidated net income decreased by 21.7% to $72.2 million for the three months ended
March 31, 2009, compared to net income of $92.3 million in the same period in 2008. |
During the three months ended March 31, 2009, 62.6 million contracts were traded in our
futures markets, roughly flat with 62.5 million contracts traded during the three months ended
March 31, 2008. During the three months ended March 31, 2009, 50.2 million contract equivalents
were traded in our OTC energy markets, down 25.6% from 67.5 million contract equivalents traded
during the three months ended March 31, 2008.
CDS Clearing
Prior to ICE Trust clearing CDS transactions, credit derivative contracts were only traded
between two market participants on a bilateral basis and were not cleared through a central
counterparty or clearing house. The buyer of the contract would make a payment or series of
payments to the seller in return for protection against default. The bilateral nature of these
transactions left the participants exposed to counterparty risk, which could result in systemic
implications in times of financial distress. ICE Trust is our regulated North American CDS clearing
house solution, which has developed a market structure that brings transparency, capital efficiency
and mitigation of counterparty credit risk by acting as a central counterparty to clear CDS
transactions.
We have assembled a comprehensive CDS market infrastructure with our acquisition of Creditex,
a leading CDS trade execution venue that owned and operated T-Zero, a CDS trade processing
platform, and our acquisition of TCC. We have used select infrastructure, domain knowledge and
personnel from these entities to establish ICE Trust. ICE Trust is designed to fit the workflow and
operations that exist within the industry today while supporting new standards for regulation and
transparency. ICE Trust has entered into an agreement with Markit Group Ltd., or Markit, to jointly
produce daily settlement prices required for mark-to-market pricing, margining and clearing.
We began processing and clearing North American CDS index contracts on March 9, 2009 through
ICE Trust. Clearing of North American CDS indexes will be followed by U.S. liquid single-name CDS
contracts. Through May 1, 2009, ICE Trust has cleared 2,493 transactions totaling $257 billion of
notional value, and resulting in $30 billion in notional value of open interest.
ICE Trust is the industrys first CDS clearing house to process transactions. ICE
Trust is designed to address the operational and risk management needs of the credit derivatives
market, as well as calls by regulators and policy makers for systemic risk reduction. The clearing
house has received approvals from the Federal Reserve Board of Governors and the New York State
Banking Department and an exemption from registration from the U.S. Securities and Exchange
Commission and the U.S. Treasury Department. Our competitors have announced plans to develop CDS
clearing in the United States and in Europe. To date, these companies have not cleared any CDS
transactions.
ICE Trust has established rules and operating procedures governing the clearing house,
including membership and governance requirements. ICE Trust membership is open to all qualifying
buy-side and sell-side institutions. As a neutral and independent clearing house, all qualified CDS
market participants will have the ability to access ICE Trust. Membership is available to
institutions that meet the financial and eligibility standards set forth in the Rules of the
clearing house. Each member firm will provide ICE Trust with authority to obtain their respective
transaction information for the purpose of facilitating the novation of existing CDS contracts that
are warehoused within The Depository Trust & Clearing Corporation.
Pursuant to bank capitalization requirements, we funded ICE Trusts operations with $35.0
million in cash and contributed an initial $10.0 million to the ICE Trust Guaranty Fund. Over a
two-year period, we are obligated to increase our contribution to the ICE Trust Guaranty Fund to a
total of $100.0 million.
CDS clearing by ICE Trust follows several successful initiatives underway within the industry
to reduce systemic and operational risks in the credit derivatives market. We have played a key
role in certain of these initiatives, including portfolio compression and credit event auctions,
which we administer in conjunction with Markit. Compression runs, which reduce the overall size and
the number of line items in credit derivative portfolios without changing the risk parameters of
the portfolios, that we have conducted have reduced over $2 trillion in notional outstanding for
single-name CDS in recent months, and credit event auctions have been relied upon by market
participants for the orderly settlement of credit derivative trades referencing 43 defaulted
entities, including Fannie
21
Mae and Lehman Brothers. We have worked closely with the International Swaps and Derivatives
Association, Inc., or ISDA, regulators and market participants in designing innovative solutions to
enhance a broad array of CDS risk management, execution, processing and clearing services. ICE
Trust is subject to regulation by multiple regulators including the Federal Reserve Bank of New
York and the New York State Banking Department. Although it operates pursuant to exemptive relief
from the U.S. Securities and Exchange Commission and the U.S. Treasury Department, it is required
to comply with certain requirements to satisfy the conditions of the exemptive relief. Further, ICE
Trust is applying to become a Registered Overseas Clearing House with the Financial Services
Authority, or FSA, in the United Kingdom and will be subject to FSA supervision.
T-Zero also established a re-couponing service to support the CDS industry for single-name
coupon standardization. T-Zero is the most widely adopted affirmation and novation consent platform
for credit derivatives transactions, and is currently relied upon by over 380 buy-side firms for
various aspects of CDS trading processing. Beginning in April 2009, the CDS market moved to a new
single-name Standard North American Corporate, or SNAC, 100 and 500 bps coupon CDS contract. This
standardization prepares the market for clearing of single-name trades in a manner analogous to the
way CDS index contracts are now being cleared by ICE Trust. T-Zeros portfolio re-couponing service
allows both dealers and buy-side firms to efficiently transition existing non-standard single-name
CDS positions to the new SNAC convention.
ICE Clear Europe is working with European regulators and industry participants to develop
clearing for CDS European reference entities, such as the Markit iTraxx indices, with a launch
planned in the second quarter of 2009, subject to regulatory approvals. ICE Clear Europe plans to
offer a CDS clearing platform and a separate risk pool that is distinct from the risk pool
associated with energy markets currently cleared by ICE Clear Europe. ICE Clear Europe is currently
establishing governing rules and operating procedures appropriate for European CDS clearing,
including membership and margining requirements. It is anticipated that the use of ICE Clear Europe
for CDS clearing will offer efficiency and a common market infrastructure to market participants
globally.
Variability in Quarterly Comparisons
In addition to general economic conditions and conditions in the financial markets,
particularly the commodities markets, trading is subject to variability in trading volume due to a
number of key factors. These factors include geopolitical events, weather, real and perceived
supply and demand imbalances, regulatory considerations, availability of capital, the number of
trading days in a period and seasonality. These and other factors could cause our revenues to
fluctuate from quarter to quarter. These fluctuations may affect the reliability of quarter to
quarter comparisons of our revenues and operating results when, for example, these comparisons are
between quarters in different seasons. Inter-seasonal comparisons will not necessarily be
indicative of our results for future periods.
Segment Reporting
Our business is currently divided into three segments: our futures segment, our global OTC
segment and our market data segment. For a discussion of these segments and related financial
disclosure, refer to Note 12 to our consolidated financial statements and related notes included
elsewhere in this Quarterly Report on Form 10-Q.
Intersegment Fees
Our OTC segment provides and supports the platform for electronic trading in our futures
segment. Intersegment fees include charges for developing, operating, managing and supporting the
platform for electronic trading in our futures segment. Our futures segment and our OTC segment
provide access to trading data to our market data segment. Our market data segment provides
marketing and other promotional services to our OTC segment. During the three months ended March
31, 2009, our futures segment began to charge our market data segment for the underlying futures
data which the market data segment charges data vendors in the form of terminal and license fees.
These internal charges are reflected as intersegment revenues and expenses. We determine the
intercompany or intersegment fees to be paid by the business segments based on transfer pricing
standards and independent documentation. These intersegment fees have no impact on our consolidated
operating results. We expect the structure of these intersegment fees to remain unchanged and
expect that they will continue to have no impact on our consolidated operating results.
22
Our Futures Segment
The following table presents, for the periods indicated, selected statement of income data in
dollars and as a percentage of revenues for our futures segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
% |
|
|
2008 |
|
|
% |
|
|
|
(Dollar amounts in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction and clearing fees, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ICE Brent Crude futures |
|
$ |
28,009 |
|
|
|
26.5 |
% |
|
$ |
23,109 |
|
|
|
22.7 |
% |
ICE WTI Crude futures |
|
|
12,861 |
|
|
|
12.2 |
|
|
|
13,030 |
|
|
|
12.8 |
|
ICE Gas Oil futures |
|
|
12,730 |
|
|
|
12.0 |
|
|
|
10,929 |
|
|
|
10.7 |
|
Sugar futures and options(1) |
|
|
15,823 |
|
|
|
15.0 |
|
|
|
26,248 |
|
|
|
25.8 |
|
Cotton futures and options(1) |
|
|
2,967 |
|
|
|
2.8 |
|
|
|
9,297 |
|
|
|
9.2 |
|
Russell Index futures and options(2) |
|
|
7,561 |
|
|
|
7.2 |
|
|
|
122 |
|
|
|
0.1 |
|
Other futures products and options |
|
|
18,142 |
|
|
|
17.2 |
|
|
|
14,650 |
|
|
|
14.4 |
|
Intersegment fees |
|
|
7,652 |
|
|
|
7.2 |
|
|
|
1,111 |
|
|
|
1.1 |
|
Other(3) |
|
|
(115 |
) |
|
|
(0.1 |
) |
|
|
3,264 |
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
105,630 |
|
|
|
100.0 |
|
|
|
101,760 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses(4)(5) |
|
|
21,603 |
|
|
|
20.5 |
|
|
|
21,449 |
|
|
|
21.1 |
|
Intersegment expenses |
|
|
11,104 |
|
|
|
10.5 |
|
|
|
7,458 |
|
|
|
7.3 |
|
Depreciation and amortization(5)(6) |
|
|
9,110 |
|
|
|
8.6 |
|
|
|
1,919 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
41,817 |
|
|
|
39.6 |
|
|
|
30,826 |
|
|
|
30.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
63,813 |
|
|
|
60.4 |
|
|
|
70,934 |
|
|
|
69.7 |
|
Other income (expense), net |
|
|
(772 |
) |
|
|
(0.7 |
) |
|
|
465 |
|
|
|
0.5 |
|
Income tax expense |
|
|
20,119 |
|
|
|
19.1 |
|
|
|
27,367 |
|
|
|
26.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
42,922 |
|
|
|
40.6 |
% |
|
$ |
44,032 |
|
|
|
43.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The soft agricultural commodities revenues, including sugar and cotton futures and options contract
revenues, decreased from the prior period primarily due to a significant reduction in the
availability of credit to participants in the agricultural markets during the current period and less
hedging activity resulting from a significant reduction in both global exports and U.S. production of
cotton during the current period as compared to the prior period, which experienced significant price
volatility, resulting in higher contract volume. |
|
(2) |
|
The Russell Index futures and options began trading exclusively on ICE Futures U.S. in September 2008. |
|
(3) |
|
The financial results for the three months ended March 31, 2009 include $3.2 million in net interest
paid to the clearing members for margin deposits at ICE Clear Europe, which is recorded as a
reduction to other revenues. |
|
(4) |
|
Includes compensation and benefits expenses and professional services expenses. |
|
(5) |
|
The financial results for the three months ended March 31, 2009 include $4.1 million in employee
termination costs, asset write offs and costs to vacate office space in New York City. The financial
results for the three months ended March 31, 2008 include $2.1 million in costs associated with the
closure of ICE Futures U.S.s futures trading floors, including $1.7 million in compensation
expenses. |
|
(6) |
|
The financial results for the three months ended March 31, 2009 include $6.5 million in amortization
expense relating to the Russell Licensing Agreement. Refer to Note 11 to our consolidated financial
statements and related notes included elsewhere in this Quarterly Report on Form 10-Q for more
information on this item. |
Transaction and clearing fees are presented net of rebates. We recorded rebates in our futures
segment of $23.5 million and $15.2 million for the three months ended March 31, 2009 and 2008,
respectively. The increase in rebates is due primarily to an increase in the number of rebates
programs offered on various futures and option contracts and from higher contract volume traded
during the period, primarily the Russell Index futures and options contracts. We offer rebates in
certain of our markets primarily to support market liquidity and trading volume by providing
qualified participants in those markets a discount to the applicable commission rate. These rebates
reduce revenue that would have been generated had full commissions been charged and assuming that
the same volume had been generated without the rebate program.
23
In our futures business segment, we earn transaction and clearing fees from both
counterparties to each futures contract or option on futures contract that is traded, based on the
volume of the commodity underlying the futures or option contract that is traded. In the past, we
did not derive direct revenues from the clearing process associated with ICE Futures Europe because
participants paid clearing fees directly to a third party clearing house. However, upon the launch
of ICE Clear Europe in November 2008, we now capture all clearing revenues associated with ICE
Futures Europe, the amount of which will depend upon many considerations, including but not limited
to transaction volume, pricing and new products.
A futures contract is a standardized contract for a fixed quantity of the commodity underlying
each contract. The following table presents, for the periods indicated, trading activity in our
futures markets by commodity type based on the total number of contracts traded:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
|
|
(In thousands) |
Number of futures and option contracts traded: |
|
|
|
|
|
|
|
|
ICE Brent Crude futures |
|
|
18,288 |
|
|
|
16,740 |
|
ICE WTI Crude futures |
|
|
11,523 |
|
|
|
13,903 |
|
ICE Gas Oil futures |
|
|
8,160 |
|
|
|
7,284 |
|
Sugar futures and options |
|
|
6,954 |
|
|
|
12,867 |
|
Cotton futures and options |
|
|
1,235 |
|
|
|
4,530 |
|
Russell Index futures and options |
|
|
10,183 |
|
|
|
90 |
|
Other futures and options |
|
|
6,224 |
|
|
|
7,115 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
62,567 |
|
|
|
62,529 |
|
|
|
|
|
|
|
|
|
|
The following table presents our quarter-end open interest for our futures contracts. Open
interest is the aggregate number of contracts (long or short) that clearing members hold either for
their own account or on behalf of their clients.
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
|
2009 |
|
2008 |
|
|
(In thousands) |
Open
interest futures and option contracts: |
|
|
|
|
|
|
|
|
ICE Brent Crude futures |
|
|
678 |
|
|
|
588 |
|
ICE WTI Crude futures |
|
|
514 |
|
|
|
541 |
|
ICE Gas Oil futures |
|
|
470 |
|
|
|
251 |
|
Sugar futures and options |
|
|
1,517 |
|
|
|
2,099 |
|
Cotton futures and options |
|
|
315 |
|
|
|
912 |
|
Coffee futures and options |
|
|
288 |
|
|
|
438 |
|
Cocoa futures and options |
|
|
160 |
|
|
|
202 |
|
Russell index futures and options |
|
|
426 |
|
|
|
12 |
|
Other futures and options |
|
|
1,019 |
|
|
|
628 |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,387 |
|
|
|
5,671 |
|
|
|
|
|
|
|
|
|
|
Our OTC Segment
The following table presents, for the periods indicated, selected statement of income data in
dollars and as a percentage of revenues for our OTC segment, which includes energy and credit
derivatives markets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009(1) |
|
|
% |
|
|
2008 |
|
|
% |
|
|
|
(Dollar amounts in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction and clearing fees, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American natural gas(2) |
|
$ |
43,951 |
|
|
|
33.5 |
% |
|
$ |
60,066 |
|
|
|
59.4 |
% |
North American power |
|
|
19,586 |
|
|
|
14.9 |
|
|
|
15,702 |
|
|
|
15.5 |
|
Credit default swaps |
|
|
37,969 |
|
|
|
28.9 |
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009(1) |
|
|
% |
|
|
2008 |
|
|
% |
|
|
|
(Dollar amounts in thousands) |
|
Other commodities markets |
|
|
2,405 |
|
|
|
1.8 |
|
|
|
2,326 |
|
|
|
2.3 |
|
Electronic trade confirmation |
|
|
1,474 |
|
|
|
1.1 |
|
|
|
1,953 |
|
|
|
1.9 |
|
Intersegment fees |
|
|
11,652 |
|
|
|
8.9 |
|
|
|
7,820 |
|
|
|
7.7 |
|
Market data fees |
|
|
12,123 |
|
|
|
9.2 |
|
|
|
11,517 |
|
|
|
11.4 |
|
Other |
|
|
2,074 |
|
|
|
1.6 |
|
|
|
1,785 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
131,234 |
|
|
|
100.0 |
|
|
|
101,169 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses(3)(4) |
|
|
67,989 |
|
|
|
51.8 |
|
|
|
29,958 |
|
|
|
29.6 |
|
Intersegment expenses |
|
|
8,528 |
|
|
|
6.5 |
|
|
|
8,150 |
|
|
|
8.1 |
|
Depreciation and amortization |
|
|
18,158 |
|
|
|
13.8 |
|
|
|
9,006 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
94,675 |
|
|
|
72.1 |
|
|
|
47,114 |
|
|
|
46.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
36,559 |
|
|
|
27.9 |
|
|
|
54,055 |
|
|
|
53.4 |
|
Other expense, net |
|
|
(4,068 |
) |
|
|
(3.1 |
) |
|
|
(2,495 |
) |
|
|
(2.5 |
) |
Income tax expense |
|
|
12,186 |
|
|
|
9.3 |
|
|
|
16,217 |
|
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
20,305 |
|
|
|
15.5 |
% |
|
$ |
35,343 |
|
|
|
34.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The financial results for the three months ended March 31, 2009 include the
financial results for Creditex subsequent to its acquisition in August 2008,
the financial results for TCC subsequent to its acquisition on March 6, 2009,
and the financial results for ICE Trust following its formation in the first
quarter of 2009. |
|
(2) |
|
The North American natural gas contract trading volume decreased from the
prior year primarily due to several factors, including de-leveraging in the
broader markets and increased risk aversion, which reduced market liquidity,
as well as relatively high natural gas storage levels, which produced
multi-year lows in natural gas prices and reduced hedging activity. |
|
(3) |
|
Includes compensation and benefits expenses and professional services expenses. |
|
(4) |
|
The financial results for the three months ended March 31, 2009 include $5.6
million in transaction costs related to the acquisition of TCC, $1.4 million
in costs associated with the establishment of ICE Trust and $1.8 million in
employee termination costs. |
Transaction and clearing fees are presented net of rebates. We recorded rebates in our global
OTC segment of $3.2 million and $2.8 million for the three months ended March 31, 2009 and 2008,
respectively. Revenues in our global OTC segment are generated primarily through transaction and
clearing fees earned from trades. While we charge a monthly data access fee for access to our
electronic platform, we derive a substantial portion of our OTC revenues from transaction fees paid
by participants for each trade that they execute or clear based on the underlying commodity volume.
In addition to our transaction fee, cleared transactions require the payment of a clearing
fee. Consistent with ICE Futures Europe, we did not derive direct revenues from the OTC energy
clearing process in the past and participants paid the clearing fees directly to a third party
clearing house. However, upon the launch of ICE Clear Europe in November 2008, we now capture all
clearing revenues associated with our global OTC segment, the amount of which will depend upon many
considerations, including but not limited to transaction volume, pricing and new product
introductions. For the three months ended March 31, 2009 and 2008, transaction and clearing fees
related to cleared trades represented 51.4% and 71.5% of our total OTC revenues, respectively, net
of intersegment fees. Excluding the OTC CDS markets, transaction and clearing fees related to
cleared energy trades represented 91.4% of our total OTC energy transaction and clearing revenues
for the three months ended March 31, 2009.
The following tables present, for the periods indicated, the total volume or notional value of
the underlying commodity and number of contracts traded in our OTC markets:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
Total Volume OTC: |
|
|
|
|
|
|
|
|
North American natural gas (in million British thermal units, or MMBtu) |
|
|
108,326 |
|
|
|
156,104 |
|
Credit default swaps (notional value in billions of dollars )(1) |
|
|
728 |
|
|
|
|
|
North American power (in million megawatt hours) |
|
|
1,419 |
|
|
|
1,802 |
|
Global oil (in equivalent million barrels of oil) |
|
|
494 |
|
|
|
235 |
|
|
|
|
(1) |
|
We began offering credit default swaps for trading following our acquisition of Creditex in August 2008. |
25
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
|
|
(In thousands) |
Number of OTC energy contracts traded: |
|
|
|
|
|
|
|
|
North American natural gas |
|
|
45,060 |
|
|
|
62,442 |
|
North American power |
|
|
2,380 |
|
|
|
2,806 |
|
Global oil and other |
|
|
2,801 |
|
|
|
2,252 |
|
|
|
|
|
|
|
|
Total |
|
|
50,241 |
|
|
|
67,500 |
|
|
|
|
|
|
|
|
The following table presents our quarter-end open interest for our cleared OTC energy
contracts:
|
|
|
|
|
|
|
|
|
|
|
As of March 31, |
|
|
2009 |
|
2008 |
|
|
(In thousands) |
Open
interest cleared OTC energy contracts: |
|
|
|
|
|
|
|
|
North American natural gas |
|
|
8,157 |
|
|
|
6,852 |
|
North American power |
|
|
1,684 |
|
|
|
1,186 |
|
Global oil and refined products |
|
|
2,025 |
|
|
|
1,436 |
|
|
|
|
|
|
|
|
Total |
|
|
11,866 |
|
|
|
9,474 |
|
|
|
|
|
|
|
|
Our Market Data Segment
The following table presents, for the periods indicated, selected statement of income data in
dollars and as a percentage of revenues for our market data segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
% |
|
|
2008 |
|
|
% |
|
|
|
(Dollar amounts in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market data fees |
|
$ |
13,991 |
|
|
|
62.4 |
% |
|
$ |
13,203 |
|
|
|
62.1 |
% |
Intersegment fees |
|
|
8,439 |
|
|
|
37.6 |
|
|
|
8,061 |
|
|
|
37.9 |
|
Other |
|
|
2 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
22,432 |
|
|
|
100.0 |
|
|
|
21,277 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses(1) |
|
|
859 |
|
|
|
3.8 |
|
|
|
581 |
|
|
|
2.7 |
|
Intersegment expenses(2) |
|
|
8,111 |
|
|
|
36.1 |
|
|
|
1,384 |
|
|
|
6.5 |
|
Depreciation and amortization |
|
|
35 |
|
|
|
0.2 |
|
|
|
21 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,005 |
|
|
|
40.1 |
|
|
|
1,986 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
13,427 |
|
|
|
59.9 |
|
|
|
19,291 |
|
|
|
90.7 |
|
Other income (expense), net |
|
|
117 |
|
|
|
0.5 |
|
|
|
169 |
|
|
|
0.8 |
|
Income tax expense |
|
|
4,549 |
|
|
|
20.3 |
|
|
|
6,545 |
|
|
|
30.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,995 |
|
|
|
40.1 |
% |
|
$ |
12,915 |
|
|
|
60.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes compensation and benefits expenses and professional services expenses. |
|
(2) |
|
During the three months ended March 31, 2009, our futures segment began to
charge our market data segment for the underlying futures data which the
market data segment charges data vendors in the form of terminal and license
fees. These internal charges are reflected as intersegment revenues and
expenses. |
We earn terminal and license fee revenues that we receive from data vendors through the
distribution of real-time and historical futures prices and other futures market data derived from
trading in our futures markets. We also earn subscription fee revenues from OTC daily indices, view
only access to the OTC markets and OTC and futures end of day reports. In addition, we provide a
service to independently establish market price validation curves whereby participant companies
subscribe to receive consensus market valuations.
26
Key Statistical Information
The following table presents key transaction volume information, as well as other selected
operating information, for the periods presented. A description of how we calculate our market
share, our trading volume and other operating measures is set forth below.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands, except for rate |
|
|
|
per contract and percentages) |
|
Operating Data: |
|
|
|
|
|
|
|
|
Our Average Daily Trading and Clearing Fee Revenues: |
|
|
|
|
|
|
|
|
Our U.K. futures business average daily exchange and clearing fee revenues |
|
$ |
1,011 |
|
|
$ |
772 |
|
|
|
|
|
|
|
|
Our U.S. and Canadian futures business average daily exchange and clearing
fee revenues |
|
|
559 |
|
|
|
798 |
|
|
|
|
|
|
|
|
Our global credit derivatives OTC business average daily commission and
clearing fee revenues(1) |
|
|
627 |
|
|
|
|
|
Our bilateral global energy OTC business average daily commission fee revenues |
|
|
70 |
|
|
|
186 |
|
Our cleared global energy OTC business average daily commission and clearing
fee revenues |
|
|
1,007 |
|
|
|
1,094 |
|
|
|
|
|
|
|
|
Our global OTC business average daily commission and clearing fee revenues |
|
|
1,704 |
|
|
|
1,280 |
|
|
|
|
|
|
|
|
Our total average daily exchange, commission and clearing fee revenues |
|
$ |
3,274 |
|
|
$ |
2,850 |
|
|
|
|
|
|
|
|
Our Trading Volume: |
|
|
|
|
|
|
|
|
Futures volume |
|
|
62,567 |
|
|
|
62,529 |
|
Futures average daily volume |
|
|
999 |
|
|
|
1,004 |
|
OTC energy volume |
|
|
50,241 |
|
|
|
67,500 |
|
OTC energy average daily volume |
|
|
823 |
|
|
|
1,107 |
|
Our ICE Futures Europe rate per contact |
|
$ |
1.57 |
|
|
$ |
1.25 |
|
Our soft agricultural futures and options rate per contract |
|
$ |
2.34 |
|
|
$ |
2.14 |
|
Our financial futures and options rate per contract |
|
$ |
0.78 |
|
|
$ |
1.80 |
|
OTC Participants Trading Commission Percentages: |
|
|
|
|
|
|
|
|
Commercial companies (including merchant energy) |
|
|
50 |
% |
|
|
47 |
% |
Banks and financial institutions |
|
|
24 |
% |
|
|
23 |
% |
Liquidity providers |
|
|
26 |
% |
|
|
30 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
We began offering credit derivatives for trading following our acquisition of Creditex in August 2008. |
27
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
Overview
Consolidated net income decreased $20.1 million, or 21.7%, to $72.2 million for the three
months ended March 31, 2009 from $92.3 million for the comparable period in 2008. Net income from
our futures segment decreased $1.1 million, or 2.5%, to $42.9 million for the three months ended
March 31, 2009 from $44.0 million for the comparable period in 2008. Net income from our global OTC
segment decreased $15.0 million, or 42.5%, to $20.3 million for the three months ended March 31,
2009 from $35.3 million for the comparable period in 2008, primarily due a reduction in the trading
volume of the OTC North American natural gas contract and due to acquisition and restructuring
expenses incurred during the three months ended March 31, 2009, which was partially offset by OTC
clearing fee revenues that were recognized during the three months ended March 31, 2009 following
our formation of ICE Clear Europe. Net income from our market data segment decreased $3.9 million,
or 30.4%, to $9.0 million for the three months ended March 31, 2009 from $12.9 million for the
comparable period in 2008. Consolidated operating income, as a percentage of consolidated revenues,
decreased to 49.1% for the three months ended March 31, 2009 from 69.6% for the comparable period
in 2008. Consolidated net income, as a percentage of consolidated revenues, decreased to 31.2% for
the three months ended March 31, 2009 from 44.5% for the comparable period in 2008.
Our consolidated revenues increased $24.3 million, or 11.7%, to $231.6 million for the three
months ended March 31, 2009 from $207.2 million for the comparable period in 2008. This increase is
primarily attributable to $38.0 million of revenues derived from
execution, processing and clearing services
provided in our OTC credit markets for the three months ended
March 31, 2009 following our acquisition of Creditex in August
2008 and the formation of ICE Trust in March 2009, revenues from the exclusive trading of Russell Index options and futures on ICE Futures U.S.
and clearing fee revenues collected in our energy futures and OTC markets. The increase in revenues
was partially offset by lower trading volume in our OTC North American natural gas markets and soft
agricultural futures markets.
Consolidated operating expenses increased $54.8 million, or 87.1%, to $117.8 million for the
three months ended March 31, 2009 from $62.9 million for the comparable period in 2008. This
increase is primarily attributable to $37.5 million of expenses relating to Creditexs business for
the three months ended March 31, 2009, including amortization of intangible assets and non-cash
compensation expenses, $5.6 million in transaction costs incurred related to our acquisition of TCC
on March 6, 2009, $5.9 million in employee termination costs and costs incurred to vacate office
space in New York City, $6.5 million in amortization expense relating to the Russell Licensing
Agreement, additional depreciation and amortization expenses recorded on fixed asset additions and
intangible assets associated with our acquisitions and $1.4 million in professional services
expenses incurred relating to the establishment of ICE Trust. The increase in expenses was
partially offset by expenses incurred relating to the establishment of ICE Clear Europe and
severance costs associated with the ICE Futures U.S. floor closure incurred during the comparable
period in 2008.
Revenues
Transaction and Clearing Fees
Consolidated transaction and clearing fees increased $26.0 million, or 14.7%, to
$203.5 million for the three months ended March 31, 2009 from $177.4 million for the comparable
period in 2008. Transaction and clearing fees, as a percentage of consolidated revenues, increased
to 87.9% for the three months ended March 31, 2009 from 85.6% for the comparable period in 2008.
Transaction and clearing fees generated in our futures segment increased $708,000, or 0.7%, to
$98.1 million for the three months ended March 31, 2009 from $97.4 million for the comparable
period in 2008, while decreasing as a percentage of consolidated revenues to 42.4% for the three
months ended March 31, 2009 from 47.0% for the comparable period in 2008. The increase in
transaction and clearing fees was primarily due to an increase in revenues from the Russell Index
futures and options after they began trading exclusively on ICE Futures U.S. in September 2008, an
increase in the ICE Brent Crude futures revenues and the recognition of clearing fees following the
November 2008 launch of ICE Clear Europe. The increase was offset by a decrease in the soft
agricultural
28
commodities revenues, including sugar and cotton futures and options contract revenues, from
the prior period primarily due a significant reduction in the availability of credit to
participants in the agricultural markets during the current period and less hedging activity
resulting from a significant reduction in both global exports and U.S. production of cotton during
the current period as compared to the prior period, which experienced significant price volatility,
resulting in higher contract volume. Overall volume in our futures segment were 62.6 million
contracts during the three months ended March 31, 2009, in line with 62.5 million contracts during
the comparable period in 2008. Average transaction and clearing fees per trading day was $1.6
million per trading day for the three months ended March 31, 2009 and 2008.
Transaction and clearing fees generated in our global OTC segment increased $25.3 million, or
31.7%, to $105.4 million for the three months ended March 31, 2009 from $80.0 million for the
comparable period in 2008 primarily due to the acquisition of Creditex and the recognition of
clearing fees, partially offset by a reduction in the North American natural gas contract volume.
We recognized transaction and clearing fees in our OTC
credit markets of $38.0 million for the three months ended March 31, 2009
following our acquisition of Creditex in August 2008 and the
formation of ICE Trust in March 2009, and we recognized clearing fees for cleared OTC contracts
following the November 2008 launch of ICE Clear Europe. Contract volume in our North American
natural gas markets decreased 27.8% to 45.1 million contracts traded during the three months ended
March 31, 2009 from 62.4 million contracts traded during the comparable period in 2008. Volume in
the North American natural gas markets declined due to several factors, including de-leveraging in
the broader markets and increased risk aversion, which reduced market liquidity, as well as
relatively high storage levels, which produced multi-year lows in natural gas prices and reduced
hedging activity. Transaction and clearing fees in this segment, as a percentage of consolidated
revenues, increased to 45.5% for the three months ended March 31, 2009 from 38.6% for the
comparable period in 2008. Average transaction and clearing fees per trading day increased 33.1% to
$1.7 million per trading day for the three months ended March 31, 2009 from $1.3 million per
trading day for the comparable period in 2008.
Market Data Fees
Consolidated market data fees increased $1.4 million, or 5.6%, to $26.1 million for the three
months ended March 31, 2009 from $24.7 million for the comparable period in 2008. During the three
months ended March 31, 2009 and 2008, we recognized $12.6 million and $12.0 million, respectively,
in data access fees and terminal fees in our global OTC and futures segments. During the three
months ended March 31, 2009 and 2008, we recognized $11.1 million and $10.8 million, respectively,
in terminal and license fees from data vendors in our market data segment. Consolidated market data
fees, as a percentage of consolidated revenues, decreased to 11.3% for the three months ended March
31, 2009 from 11.9% for the comparable period in 2008.
Other Revenues
Consolidated other revenues decreased $3.1 million, or 61.3%, to $2.0 million for the three
months ended March 31, 2009 from $5.1 million for the comparable period in 2008. The decrease in
other revenues is primarily due to $3.2 million in net interest paid to the clearing members for
their margin deposits at ICE Clear Europe, which is recorded as a reduction to other revenues.
Consolidated other revenues, as a percentage of consolidated revenues, decreased to 0.8% for the
three months ended March 31, 2009 from 2.4% for the comparable period in 2008.
Expenses
Compensation and Benefits
Consolidated compensation and benefits expenses increased $24.0 million, or 78.3%, to
$54.7 million for the three months ended March 31, 2009 from $30.7 million for the comparable
period in 2008. This increase includes $22.8 million in Creditex compensation and benefits expenses
recognized during the three months ended March 31, 2009 following the closing of the acquisition in
August 2008, a $1.9 million increase in non-cash compensation expenses and $2.9 million in employee
termination costs recognized during the three months ended March 31, 2009, partially offset by $1.7
million of severance costs associated with the closure of our futures open-outcry trading floors in
New York and Dublin during the three months ended March 31, 2008. Non-cash compensation expenses
recognized in our consolidated financial statements for our stock options and restricted stock were
$9.8 million for the three months ended March 31, 2009, compared to $7.9 million for the three
months ended March 31, 2008. This
29
increase was primarily due to $1.4 million in non-cash compensation costs related to the
Creditex stock awards we assumed in connection with the acquisition. Our employee headcount
increased slightly from 795 employees as of December 31, 2008 to 803 employees as of March 31,
2009, following the acquisition of TCC on March 6, 2009 and the employee terminations during the
three months of March 31, 2009. Consolidated compensation and benefits expenses, as a percentage of
consolidated revenues, increased to 23.6% for the three months ended March 31, 2009 from 14.8% for
the comparable period in 2008.
Professional Services
Consolidated professional services expenses increased $5.9 million, or 84.1%, to $12.8 million
for the three months ended March 31, 2009 from $7.0 million for the comparable period in 2008. This
increase was primarily due to $5.6 million in transaction costs incurred related to our acquisition
of TCC on March 6, 2009 and $1.4 million in professional services expenses incurred during the
three months ended March 31, 2009 relating to the establishment of ICE Trust, compared to $1.6
million in professional services expenses incurred during the three months ended March 31, 2008
relating to the establishment of ICE Clear Europe. Consolidated professional services expenses, as
a percentage of consolidated revenues, increased to 5.5% for the three months ended March 31, 2009
from 3.4% for the comparable period in 2008.
Selling, General and Administrative
Consolidated selling, general and administrative expenses increased $8.6 million, or 59.8%, to
$22.9 million for the three months ended March 31, 2009 from $14.3 million for the comparable
period in 2008. This increase was primarily due to $4.5 million of Creditex selling, general and
administrative expenses recognized during the three months ended March 31, 2009 following the
closing of the acquisition in August 2008, $2.4 million in costs incurred to vacate office space in
New York City, as well as increased technology hosting expenses, hardware and software support,
marketing expenses and rent expense that resulted from the growth of our business. Consolidated
selling, general and administrative expenses, as a percentage of consolidated revenues, increased
to 9.9% for the three months ended March 31, 2009 from 6.9% for the comparable period in 2008.
Depreciation and Amortization
Consolidated depreciation and amortization expenses increased $16.4 million, or 149.4%, to
$27.3 million for the three months ended March 31, 2009 from $10.9 million for the comparable
period in 2008. This increase was primarily due to additional amortization expenses recorded on the
intangible assets associated with our acquisitions in 2008 and during the three months ended March
31, 2009 and due to additional depreciation expenses recorded on fixed asset additions incurred
during 2008 and during the three months ended March 31, 2009. We recorded amortization expenses on
the acquired intangible assets of $16.2 million and $3.4 million for the three months ended March
31, 2009 and 2008, respectively. Consolidated depreciation and amortization expenses, as a
percentage of consolidated revenues, increased to 11.8% for the three months ended March 31, 2009
from 5.3% for the comparable period in 2008.
Other Income (Expense)
Consolidated other expense increased from other expense of $1.9 million for the three months
ended March 31, 2008 to other expense of $4.7 million for the three months ended March 31, 2009.
This increase in other expense primarily related to a decrease in interest income from $2.9 million
for the three months ended March 31, 2008 to $610,000 for the three months ended March 31, 2009.
The decrease in interest income was primarily due to a decrease in the cash balances as well as our
cash earning a lower return during the three months ended March 31, 2009 compared to the three
months ended March 31, 2008.
Income Taxes
Consolidated tax expense decreased $13.3 million to $36.9 million for the three months ended
March 31, 2009 from $50.1 million for the comparable period in 2008, primarily due to the decrease
in our pre-tax income. Our effective tax rate decreased to 33.8% for the three months ended March
31, 2009 from 35.2% for the comparable
30
period in 2008, primarily due to a decrease in the percentage of our income taxable in the
United States at higher statutory tax rates and an increase in foreign earnings, which are taxed at
favorable foreign tax rates.
Quarterly Results of Operations
The following table sets forth quarterly unaudited consolidated statements of income data for
the periods presented. We believe that this data has been prepared on substantially the same basis
as our audited consolidated financial statements and includes all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of our consolidated results of
operations for the quarters presented. The historical results for any quarter do not necessarily
indicate the results expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended, |
|
|
|
March 31, |
|
|
December 31, |
|
|
September 30, |
|
|
June 30, |
|
|
March 31, |
|
|
|
2009(1)(2) |
|
|
2008(2) |
|
|
2008(2) |
|
|
2008 |
|
|
2008(3) |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction and clearing fees, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ICE Brent Crude futures |
|
$ |
28,009 |
|
|
$ |
24,470 |
|
|
$ |
21,583 |
|
|
$ |
23,809 |
|
|
$ |
23,109 |
|
ICE WTI Crude futures |
|
|
12,861 |
|
|
|
11,352 |
|
|
|
10,837 |
|
|
|
12,722 |
|
|
|
13,030 |
|
ICE Gas Oil futures |
|
|
12,730 |
|
|
|
11,440 |
|
|
|
10,740 |
|
|
|
9,532 |
|
|
|
10,929 |
|
Sugar futures and options |
|
|
15,823 |
|
|
|
11,864 |
|
|
|
17,345 |
|
|
|
21,491 |
|
|
|
26,248 |
|
Cotton futures and options |
|
|
2,967 |
|
|
|
3,595 |
|
|
|
3,998 |
|
|
|
6,281 |
|
|
|
9,297 |
|
Russell Index futures and options |
|
|
7,561 |
|
|
|
9,023 |
|
|
|
4,269 |
|
|
|
126 |
|
|
|
122 |
|
Other futures products and options |
|
|
18,142 |
|
|
|
13,947 |
|
|
|
12,563 |
|
|
|
13,129 |
|
|
|
14,650 |
|
OTC: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American natural gas |
|
|
43,951 |
|
|
|
40,090 |
|
|
|
55,171 |
|
|
|
59,076 |
|
|
|
60,066 |
|
North American power |
|
|
19,586 |
|
|
|
14,177 |
|
|
|
14,364 |
|
|
|
16,157 |
|
|
|
15,702 |
|
Credit default swaps |
|
|
37,969 |
|
|
|
35,537 |
|
|
|
16,561 |
|
|
|
|
|
|
|
|
|
Other commodities markets |
|
|
2,405 |
|
|
|
1,570 |
|
|
|
1,758 |
|
|
|
2,300 |
|
|
|
2,326 |
|
Electronic trade confirmation services |
|
|
1,474 |
|
|
|
1,093 |
|
|
|
1,786 |
|
|
|
2,041 |
|
|
|
1,953 |
|
Market data fees |
|
|
26,114 |
|
|
|
26,960 |
|
|
|
25,771 |
|
|
|
25,493 |
|
|
|
24,720 |
|
Other |
|
|
1,961 |
|
|
|
2,142 |
|
|
|
4,698 |
|
|
|
5,003 |
|
|
|
5,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
231,553 |
|
|
|
207,260 |
|
|
|
201,444 |
|
|
|
197,160 |
|
|
|
207,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
54,706 |
|
|
|
57,004 |
|
|
|
41,186 |
|
|
|
30,923 |
|
|
|
30,679 |
|
Professional services |
|
|
12,839 |
|
|
|
6,716 |
|
|
|
9,089 |
|
|
|
6,928 |
|
|
|
6,972 |
|
Selling, general and administrative |
|
|
22,906 |
|
|
|
20,157 |
|
|
|
17,626 |
|
|
|
15,680 |
|
|
|
14,337 |
|
Depreciation and amortization |
|
|
27,303 |
|
|
|
26,056 |
|
|
|
14,401 |
|
|
|
10,844 |
|
|
|
10,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
117,754 |
|
|
|
109,933 |
|
|
|
82,302 |
|
|
|
64,375 |
|
|
|
62,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
113,799 |
|
|
|
97,327 |
|
|
|
119,142 |
|
|
|
132,785 |
|
|
|
144,280 |
|
Other expense, net(4) |
|
|
(4,723 |
) |
|
|
(16,171 |
) |
|
|
(860 |
) |
|
|
(1,146 |
) |
|
|
(1,861 |
) |
Income tax expense |
|
|
36,854 |
|
|
|
32,301 |
|
|
|
43,319 |
|
|
|
46,775 |
|
|
|
50,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,222 |
|
|
$ |
48,855 |
|
|
$ |
74,963 |
|
|
$ |
84,864 |
|
|
$ |
92,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The financial results for the three months ended March 31, 2009
include $5.6 million in transaction costs related to the acquisition
of TCC, $5.9 million in employee termination costs and costs to vacate
office space in New York City, $6.5 million in amortization expense
relating to the Russell Licensing Agreement and $1.4 million in costs
associated with the establishment of ICE Trust. |
|
(2) |
|
The financial results for the three months ended March 31, 2009,
December 31, 2008 and September 30, 2008 include the financial results
for Creditex subsequent to its acquisition in August 2008. The
financial results for the three months ended March 31, 2009 include
the financial results for TCC subsequent to its acquisition on March
6, 2009, and include the financial results for ICE Trust following its
formation. |
|
(3) |
|
The financial results for the three months ended March 31, 2008
include $2.1 million in costs associated with the closure of ICE
Futures U.S.s futures trading floors, including $1.7 million in
compensation expenses. |
|
(4) |
|
The financial results for the three months ended December 31, 2008
include an impairment to the NCDEX cost method investment of $15.7
million, which was recorded as other expense. |
31
Liquidity and Capital Resources
Since our inception, we have financed our operations, growth and cash needs primarily through
income from operations and borrowings under our credit facilities. Our principal capital
requirements have been to fund capital expenditures, working capital, strategic acquisitions and
investments, and the development of our electronic trading platforms. We financed the cash portion
of our merger with ICE Futures U.S. in 2007 with cash on hand and borrowings under our senior
unsecured credit facility discussed below. We financed the other acquisitions we made in 2008 and
2009 with a combination of stock and cash on hand. We financed the stock repurchases under our
stock repurchase plan during the year ended December 31, 2008 with cash on hand and borrowings
under the senior unsecured credit facility. We believe that cash on hand and cash flows from
operations will be sufficient to repay our outstanding indebtedness as it matures. In the future,
we may need to incur additional debt or issue additional equity in connection with our strategic
acquisitions or investments. See also Future Capital Requirements below.
Consolidated cash and cash equivalents were $229.6 million and $283.5 million as of March 31,
2009 and December 31, 2008, respectively. We had $5.8 million and $6.5 million in short-term and
long-term investments as of March 31, 2009 and December 31, 2008, respectively, and $207.0 million
and $136.5 million in short-term and long-term restricted cash as of March 31, 2009 and
December 31, 2008, respectively. We consider all short-term, highly liquid investments with
remaining maturity dates of three months or less at the time of purchase to be cash equivalents. We
classify all investments with original maturity dates in excess of three months and with maturities
less than one year as short-term investments and all investments that we intend to hold for more
than one year as long-term investments. Cash that is not available for general use, either due to
regulatory requirements or through restrictions in specific agreements, is classified as restricted
cash.
Cash Flow
The following tables present, for the periods indicated, the major components of net increases
(decreases) in cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(In thousands) |
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
67,720 |
|
|
$ |
79,345 |
|
Investing activities |
|
|
(105,615 |
) |
|
|
32,231 |
|
Financing activities |
|
|
(15,064 |
) |
|
|
(15,256 |
) |
Effect of exchange rate changes |
|
|
(967 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
$ |
(53,926 |
) |
|
$ |
96,280 |
|
|
|
|
|
|
|
|
Operating Activities
Consolidated net cash provided by operating activities was $67.7 million and $79.3 million for
the three months ended March 31, 2009 and 2008, respectively. Net cash provided by operating
activities primarily consists of net income adjusted for certain non-cash items, including
depreciation and amortization and the effects of changes in working capital. Fluctuations in net
cash provided by operating activities are primarily attributable to increases and decreases in our
net income between periods and, to a lesser extent, due to fluctuations in working capital. The
$11.6 million decrease in net cash provided by operating activities for the three months ended
March 31, 2009 from the comparable period in 2008 is primarily due to the $15.0 million decrease in
the OTC business segments net income for the three months ended March 31, 2009 from the comparable
period in 2008.
Investing Activities
Consolidated net cash (used in) provided by investing activities was ($105.6) million and
$32.2 million for the three months ended March 31, 2009 and 2008, respectively. Consolidated net
cash (used in) provided by investing activities for the three months ended March 31, 2009 and 2008
primarily relates to cash paid for acquisitions, sales and purchases of available-for-sale
investments, changes in the restricted cash balances, capital expenditures in each period for
software, including internally developed software, and for computer and network equipment. We paid
out cash for acquisitions, net of cash acquired, of $39.8 million and $29.6 million for the three
months ended March 31,
32
2009 and 2008, respectively. We had a net increase in restricted cash of $61.2 million and
$2.5 million for the three months ended March 31, 2009 and 2008, respectively, primarily relating
to the acquisition of TCC and the formation of ICE Trust and their associated regulatory
requirements. We had a net decrease in investments classified as available-for-sale of $671,000 and
$70.8 million for the three months ended March 31, 2009 and 2008, respectively. We incurred
capitalized software development costs of $4.2 million and $3.3 million for the three months ended
March 31, 2009 and 2008, respectively, and we had additional capital expenditures of $3.7 million
and $3.1 million for the three months ended March 31, 2009 and 2008, respectively. The additional
capital expenditures primarily relate to hardware purchases to continue the development and
expansion of our electronic platforms.
Financing Activities
Consolidated net cash used in financing activities was $15.1 million and $15.3 million for the
three months ended March 31, 2009 and 2008, respectively. Consolidated net cash used in financing
activities for the three months ended March 31, 2009 primarily relates to $7.3 million in cash
payments related to treasury shares received for restricted stock and stock option tax payments and
$9.4 million in repayments under the credit facilities described below, partially offset by $2.2
million in excess tax benefits from stock-based compensation. Consolidated net cash used in
financing activities for the three months ended March 31, 2008 primarily relates to $40.6 million
in cash payments related to treasury shares received for restricted stock and stock option tax
payments and $9.4 million in repayments for the credit facilities, partially offset by $32.7
million in excess tax benefits from stock-based compensation.
Loan Agreements
At March 31, 2009, we had a senior unsecured credit agreement, the Credit Facilities, under
which a term loan facility in the aggregate principal amount of $175.0 million was outstanding and
a revolving credit facility in the aggregate principal amount of $250.0 million of which $195.0
million was outstanding. We also had a separate senior credit agreement, the Credit Agreement,
outstanding that provided for an additional 364-day revolving credit facility in the aggregate
principal amount of $150.0 million for use by ICE Clear Europe, of which no amounts were
outstanding as of March 31, 2009.
On April 9, 2009, the Credit Facilities and the Credit Agreement were cancelled, amended
and/or replaced with a new $775.0 million senior unsecured credit facilities, the New Credit
Facilities, with Wachovia Bank, National Association, as Administrative Agent, Bank of America,
N.A., as Syndication Agent, and the lenders named therein. The New Credit Facilities provide for a
364-day senior unsecured revolving credit facility in the aggregate principal amount of $300.0
million, a three-year senior unsecured revolving credit facility in the aggregate principal amount
of $100.0 million, a three-year senior unsecured term loan facility in the aggregate principal
amount of $200.0 million and an amended senior unsecured term loan facility in the aggregate
principal amount of $175.0 million. We borrowed $200.0 million under the new term loan facility on
April 9, 2009 to repay the $195.0 million in principal that was outstanding under the old revolving
credit facility. The original term loan facility that has $175.0 million outstanding was amended
and is still outstanding under the New Credit Facilities. No amounts were borrowed under the new
$400.0 million combined revolving credit facilities.
Of the $300.0 million available under the 364-day senior unsecured revolving credit facility,
(i) up to $150.0 million of such amount can be used to provide liquidity for the clearing
operations of ICE Clear Europe, (ii) up to $100.0 million of such amount can be used to provide
liquidity for the clearing operations of ICE Trust, and (iii) up to $50.0 million of such amount
can be used to provide liquidity for the clearing operations of ICE Clear U.S. The $100.0 million
available under the three-year senior unsecured revolving credit facility can be used by us for
working capital and general corporate purposes.
Future Capital Requirements
Our future capital requirements will depend on many factors, including the rate of our trading
volume growth, required technology initiatives, regulatory requirements, the timing and
introduction of new products and enhancements to existing products, and the continuing market
acceptance of our electronic platform. We currently expect to make aggregate capital expenditures
ranging between $30 million and $40 million in 2009, which we believe will support the enhancement
of our technology and the continued expansion of our futures, OTC and
33
market data businesses. We believe that our cash flows from operations will be sufficient to
fund our working capital needs and capital expenditure requirements at least through the end of
2010. We expect our capitalized software development costs to remain relatively consistent with our
2008 capitalized software development costs.
After factoring in the $200.0 million reserved for ICE Clear Europe and ICE Clear U.S., we
currently have $200.0 million available under our revolving credit facilities that could be used by
us for general corporate purposes. The New Credit Facilities are currently the only significant
agreements or arrangements that we have with third parties to provide us with sources of liquidity
and capital resources. In the event that we consummate any strategic acquisitions or investments,
or if we are required to raise capital for any reason, we may need to incur additional debt or
issue additional equity to help raise the necessary funds. However, we cannot provide assurance
that such financing will be available or that the terms of such financing will be favorable to us,
particularly given prevailing economic conditions and disruptions in the credit markets.
Contractual Obligations and Commercial Commitments
In the first quarter of 2009, other than the New Credit Facilities described above, there were
no significant changes to our contractual obligations and commercial commitments from those
disclosed in the section Managements Discussion and Analysis of Financial Condition and Results
of Operations in our Annual Report on Form 10- K for the year ended December 31, 2008, or our 2008
Form 10-K.
Off-Balance Sheet Arrangements
We currently do not have any relationships with unconsolidated entities or financial
partnerships that have been established for the sole purpose of facilitating off-balance sheet
arrangements or other contractually limited purpose.
New and Recently Adopted Accounting Pronouncements
On January 1, 2009, we adopted Statement of Financial Accounting Standards, or SFAS, No. 141
(revised 2007), Business Combinations, or SFAS No. 141R. Under SFAS No. 141R, an acquirer is
required to recognize all the assets acquired and liabilities assumed in a transaction at the
acquisition-date fair value, with limited exceptions. SFAS No. 141R changes the accounting
treatment for certain specific acquisition-related items including expensing acquisition costs as
incurred, valuing noncontrolling interests at fair value at the acquisition date and expensing
restructuring costs associated with an acquired business. SFAS No. 141R also includes a substantial
number of new disclosure requirements. SFAS No. 141R will be applied prospectively to business
combinations consummated on or after January 1, 2009, including our acquisition of TCC on March 6,
2009. As a result of our adoption of SFAS No. 141R, $5.6 million in transaction costs related to
our acquisition of TCC were expensed in the consolidated statement of income for the three months
ended March 31, 2009, of which $2.2 million had been included as deferred acquisition costs and
classified in noncurrent assets in our consolidated balance sheet as of December 31, 2008. We
expect the adoption of SFAS No. 141R to have an impact on future business combinations, but the
extent of the impact is dependent on the size, complexity and number of acquisitions made in the
future and the use of external advisory service providers.
On January 1, 2009, we adopted SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements-an amendment of ARB No. 51. SFAS No. 160 amends ARB No. 51 to establish and
improve accounting and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. SFAS No. 160 also changes the way the consolidated income
statement is presented, establishes a single method of accounting for changes in a parents
ownership interest in a subsidiary that do not result in deconsolidation, requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated, and expands disclosures
in the consolidated financial statements in order to clearly identify and distinguish between the
interests of the parents owners and the interest of the noncontrolling owners of a subsidiary. The
adoption of SFAS No. 160 did not have a material impact on our consolidated financial
statements. Our adoption of SFAS No. 160 resulted in a reclassification of noncontrolling interest
from the mezzanine section of the balance sheet to equity of $5.9 million. Increases in noncontrolling interest, including
that resulting from the acquisition of TCC, will be recorded within equity, with any
income attributable to that noncontrolling interest recorded separately in our consolidated
statements of income, if material.
34
Critical Accounting Policies and Estimates
In the first quarter of 2009, there were no significant changes to our critical accounting
policies and estimates from those disclosed in the section Managements Discussion and Analysis of
Financial Condition and Results of Operations in our 2008 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk in the ordinary course of business. This market risk consists
primarily of interest rate risk associated with our cash and cash equivalents, short-term and
long-term investments, short-term and long-term restricted cash, current and long-term debt and
foreign currency exchange rate risk.
Interest Rate Risk
We have exposure to market risk for changes in interest rates relating to our cash and cash
equivalents, short-term and long-term investments, short-term and long-term restricted cash and
indebtedness. As of March 31, 2009 and December 31, 2008, our cash and cash equivalents, short-term
and long-term investments and short-term and long-term restricted cash were $442.4 million and
$426.5 million, respectively, of which $37.8 million and $23.1 million, respectively, were
denominated in pounds sterling, euros or Canadian dollars. The remaining investments are
denominated in U.S. dollars. We do not use our investment portfolio for trading or other
speculative purposes. A hypothetical 100 basis point decrease in long-term interest rates would
decrease annual pre-tax earnings by $4.4 million, assuming no change in the amount or composition
of our cash and cash equivalents, short-term and long-term investments and short-term and long-term
restricted cash.
As of March 31, 2009, we had $370.0 million in outstanding indebtedness, which bears interest
at fluctuating rates based on LIBOR and, therefore, subjects us to interest rate risk. A
hypothetical 100 basis point increase in long-term interest rates would decrease annual pre-tax
earnings by $3.7 million, assuming no change in the volume or composition of our outstanding debt.
The interest rates on our outstanding debt are currently reset on a monthly, quarterly or
semi-annual basis. On April 21, 2009, we reduced our exposure to interest rate volatility on the
$175.0 million and $200.0 term loan facilities then outstanding by entering into interest rate
swaps that are effective from December 31, 2009 through the maturity dates of the term loan
facilities. The interest rate swaps fix the interest rate to 4.26% and 4.36% on the $175.0 million
and $200.0 million term loan facilities, respectively.
Foreign Currency Exchange Rate Risk
We have foreign currency transaction risk related to the settlement of foreign currency
denominated assets, liabilities and payables that occur through our foreign operations, which are
received in or paid in pounds sterling or euros, due to the increase or decrease in the foreign
currency exchange rates between periods. We had foreign currency transaction gains (losses) of
($79,000) and $355,000 for the three months ended March 31, 2009 and 2008, respectively, primarily
attributable to the fluctuations of pounds sterling and euros relative to the U.S. dollar. The
average exchange rate of pounds sterling to the U.S. dollar decreased from 1.9788 for the three
months ended March 31, 2008 to 1.4351 for the three months ended March 31, 2009 and the average
exchange rate of euros to the U.S. dollar decreased from 1.5002 for the three months ended March
31, 2008 to 1.3030 for the three months ended March 31, 2009.
Of our consolidated revenues, 14.0% and 1.4% were denominated in pounds sterling, euros or
Canadian dollars for the three months ended March 31, 2009 and 2008, respectively. Of our
consolidated operating expenses, 33.7% and 6.8% were denominated in pounds sterling or Canadian
dollars for the three months ended March 31, 2009 and 2008, respectively. As the pound sterling,
euro or Canadian dollar exchange rate changes, the U.S. equivalent of revenues and expenses
denominated in foreign currencies changes accordingly. A 10% adverse change in the underlying
foreign currency exchange rates would not have a significant impact on our financial condition or
results of operations.
Revenues in our businesses are denominated in U.S. dollars, except with respect to a portion
of the sales through Creditex, all sales through ICE Futures Canada and a small number of futures
contracts at ICE Futures Europe. We may experience gains or losses from foreign currency
transactions in the future given there are still net assets or net
35
liabilities and expenses of our U.K. and Canadian subsidiaries that are denominated in pounds
sterling, euros or Canadian dollars. Our U.K. operations in some instances function as a natural
hedge because we generally hold an equal amount of monetary assets and liabilities that are
denominated in pounds sterling.
As of March 31, 2009, the portion of our shareholders equity attributable to accumulated
other comprehensive income from foreign currency translation was $20.5 million. The period-end
foreign currency exchange rate for the Canadian dollar to the U.S. dollar decreased from 0.8170 as
of December 31, 2008 to 0.7933 as of March 31, 2009 and the period-end foreign currency exchange
rate for pounds sterling to the U.S. dollar decreased from 1.4619 as of December 31, 2008 to 1.4300
as of March 31, 2009.
Impact of Inflation
We have not been adversely affected by inflation as technological advances and competition
have generally caused prices for the hardware and software that we use for our electronic platform
to remain constant or to decline. In the event of inflation, we believe that we will be able to
pass on any price increases to our participants, as the prices that we charge are not governed by
long-term contracts.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. As of the end of the period covered by
this report, an evaluation was carried out by our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these
disclosure controls and procedures are effective as of the end of the period covered by this
report.
(b) Changes in internal controls. There were no changes in our internal controls over
financial reporting that occurred during our most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal controls over financial
reporting. As a result, no corrective actions were taken.
Part II. Other Information
Item 1. Legal Proceedings
We are involved in a number of legal proceedings (including the one described below)
concerning matters arising in connection with the conduct of our business. We believe, based on
currently available information, that the results of such proceedings, in the aggregate, will not
have a material adverse effect on our financial condition.
On April 6, 2007, the Supreme Court of the State of New York, County of New York, granted ICE
Futures U.S.s motion to dismiss all claims brought against it in an action commenced on December
8, 2006, by certain holders of non-equity trading permits, or the Permit Holders, of ICE Futures
U.S. The plaintiffs alleged that, in violation of purported contract rights and/or rights under New
Yorks Not-For-Profit Corporation Law, ICE Futures U.S. had not allowed its Permit Holders,
including the plaintiffs, to vote on the merger pursuant to which we acquired ICE Futures U.S., and
had improperly denied the Permit Holders a portion of the merger consideration. Plaintiffs sought
(i) to enjoin consummation of the merger, (ii) declaratory relief regarding their past and future
rights as Permit Holders, and (iii) an award of unspecified damages on claims for breach of
fiduciary duty, breach of contract, unjust enrichment, estoppel and fraud. In addition to
dismissing its claims, the court also denied the plaintiffs motion for a preliminary
injunction. On February 4, 2008, the Permit Holders appealed the lower courts ruling dismissing
their complaint but did not pursue an appeal of the lower courts denial of their request for an
order enjoining the merger. The appeal was denied in its entirety by the appellate court in a
decision issued on June 24, 2008. On October 7, 2008, a motion by the Permit Holders for leave to
appeal to the New York Court of Appeals was denied by the Appellate Division. Thereafter, a motion
by the Permit Holders for leave to appeal directly to the New York Court of Appeals was denied on
January 20, 2009 by the Court of Appeals. On April 30,
2009, the New York Court of Appeals denied the Permit Holders
motion to reargue the denial of their motion for leave to appeal
directly to the Court of Appeals. Accordingly, the case is
now concluded.
36
Item 1A. Risk Factors
In the first quarter of 2009, there were no significant changes to our risk factors from those
disclosed in Part I, Item 1A, Risk Factors, in our 2008 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Document |
|
|
|
|
|
2.1
|
|
|
|
Agreement and Plan of Merger by and among The Clearing
Corporation (TCC), a Delaware corporation, ICE US Holding
Company L.P. (Holdco), a Cayman Islands exempted limited
partnership and subsidiary of IntercontinentalExchange, Inc.,
Pony Merger Sub LLC, a Delaware limited liability company,
IntercontinentalExchange, Inc., and TCC Stockholders
Representative LLC, a Delaware limited liability company (solely
in the capacity as representative of the former TCC
stockholders) dated as of March 6, 2009. |
|
|
|
|
|
10.1
|
|
|
|
Amendment and Restatement Agreement dated as of April 9, 2009
among IntercontinentalExchange, Inc., Wachovia Bank, National
Association, as Administrative Agent, Bank of America, N.A., as
Syndication Agent, and the lenders named therein for a senior
unsecured term loan facility in the aggregate principal amount
of $175.0 million (incorporated by reference to ICEs Current
Report on Form 8-K filed with the SEC on April 14, 2009, File
No. 001-32671). |
|
|
|
|
|
10.2
|
|
|
|
Credit Agreement dated as of April 9, 2009 among
IntercontinentalExchange, Inc., ICE US Trust LLC, Wachovia Bank,
National Association, as Administrative Agent, Bank of America,
N.A., as Syndication Agent, and the lenders named therein for a
364-day senior unsecured revolving credit facility in the
aggregate principal amount of $300.0 million (incorporated by
reference to ICEs Current Report on Form 8-K filed with the SEC
on April 14, 2009, File No. 001-32671). |
|
|
|
|
|
10.3
|
|
|
|
Credit Agreement dated as of April 9, 2009 among
IntercontinentalExchange, Inc., Wachovia Bank, National
Association, as Administrative Agent, Bank of America, N.A., as
Syndication Agent, and the lenders named therein for a
three-year senior unsecured revolving credit facility in the
aggregate principal amount of $100.0 million and a three-year
senior unsecured term loan facility in the aggregate principal
amount of $200.0 million (incorporated by reference to ICEs
Current Report on Form 8-K filed with the SEC on April 14, 2009,
File No. 001-32671). |
|
|
|
|
|
31.1
|
|
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
|
|
|
|
|
31.2
|
|
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
37
|
|
|
|
|
Exhibit |
|
|
|
|
Number |
|
|
|
Description of Document |
|
|
|
|
|
32.1
|
|
|
|
Section 1350 Certification of Chief Executive Officer |
|
|
|
|
|
32.2
|
|
|
|
Section 1350 Certification of Chief Financial Officer |
|
|
|
|
|
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
INTERCONTINENTALEXCHANGE, INC.
(Registrant)
|
|
Date: May 6, 2009 |
By: |
/s/ Scott A. Hill
|
|
|
|
Scott A. Hill |
|
|
|
Senior Vice President, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer) |
|
|
39