CORPAY, INC. quarterly report, Q2 FY2020

Business context and reporting period

FleetCor Technologies, Inc. (now associated with the Corpay name) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. It provides business payment solutions across fuel, corporate payments, tolls, lodging, gift and other categories. Results were substantially affected by the COVID-19 pandemic and related economic disruption.

Key financial metrics

Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.

For the first half, operating cash flow was $802.2 million, versus $550.0 million in 2019; management attributed the increase mainly to working-capital timing. Investing cash outflow was $37.4 million and financing cash outflow was $1,032.4 million. Cash and cash equivalents were $765.8 million at June 30, excluding restricted cash of $425.6 million. Management reported total liquidity of approximately $1.9 billion, including about $1.1 billion of credit-facility availability and cash net of restricted cash.

Total debt, including the receivables securitization facility, was $4.448 billion at June 30, compared with $5.037 billion at year-end 2019. This included $654 million outstanding under the $1.0 billion securitization facility; the company said it had no additional liquidity available under that facility. The company reported compliance with debt covenants. Stockholders’ equity was $2.966 billion, down from $3.712 billion at December 31, 2019.

Material changes versus the prior comparable periods

• Q2 revenue fell 18.8% year over year, and first-half revenue fell 6.5%. Management cited lower activity and transaction volumes related to COVID-19, adverse foreign exchange effects and lower fuel prices. Favorable fuel spreads partly offset these pressures.
• Q2 operating income declined 28.4%; first-half operating income declined 28.8%. First-half operating margin fell to 34.9% from 45.8%, with the approximately $90.1 million customer receivable write-off also weighing on results.
• First-half net income declined 29.6%. Comparisons also reflect unusual items: 2020 included a $31.3 million investment gain, primarily from bill.com shares, while 2019 included a $65 million tax benefit related to the Masternaut disposition.
• First-half processing expense rose 42.2% to $355.0 million, largely due to the customer receivable write-off, higher credit-loss expense and 2019 acquisitions. The provision for credit losses was $139.0 million, versus $40.1 million in the first half of 2019.
• First-half cash flow from operations increased, but financing outflows rose substantially, principally due to $557.4 million of common-stock repurchases and reduced net securitization borrowings. Foreign-currency translation contributed to a $566.9 million first-half loss in other comprehensive income and a decline in reported equity.
• Brazil became a separate reportable segment in 2020; prior-period segment results were recast for comparison.

Outlook, management commentary, risks and contingencies

• Management provided no quantified earnings or revenue guidance in the supplied filing text. It said the duration and effects of COVID-19 were uncertain and could continue to adversely affect revenue, earnings, cash flow and liquidity.
• Identified pressures include reduced business activity and travel, slower trucking, lower fuel prices, currency movements, customer financial distress or bankruptcy, and resulting credit losses. Management said it was responding with work-from-home arrangements, expense controls, reduced discretionary spending, tighter customer credit limits and payment terms, and added borrowing capacity.
• On April 24, 2020, the company added a $250 million revolving facility with a maturity in April 2021 as a precautionary liquidity measure; it reported no borrowings on that facility as of August 10, 2020. The $1.0 billion securitization facility matures November 14, 2020.
• The company recorded a $90.1 million provision and write-off tied to a customer receivable in its foreign-currency trading business. Its allowance for credit losses was $88.4 million at June 30; estimates included adjustments for COVID-19 economic conditions.
• The FTC lawsuit alleges unfair or deceptive practices concerning advertising and marketing of the U.S. direct fuel-card business and seeks injunctive relief and consumer redress. The company disputes the claims; it said it could not estimate a reasonably possible loss or range of loss. Shareholder derivative actions also remain pending or stayed.
• Variable-rate debt exposes the company to interest-rate changes; swaps cover $2.0 billion of variable-rate debt. The company also faces foreign-exchange, counterparty, fuel-price and fuel-spread risks.

Most important facts for investors to verify

• Whether business volumes and revenue recover from the pandemic-related declines, and how much results remain exposed to travel, trucking, fuel prices and foreign exchange.
• The collectability of receivables, including the impact of the $90.1 million customer write-off and any further COVID-related credit losses.
• Liquidity and refinancing plans, especially the November 2020 securitization-facility maturity, the April 2021 revolving-facility maturity and covenant headroom.
• The sustainability of operating cash flow, given management’s attribution of the first-half increase largely to working-capital timing.
• Resolution and potential financial consequences of the FTC and derivative litigation, for which the filing does not provide a clear estimated loss.
• How GAAP results compare with adjusted, non-GAAP results, including the exclusions for amortization, stock compensation, unusual costs, investment gains, tax items and the customer receivable write-off.