Corpay (then FleetCor Technologies, Inc.) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The filing registrant is FleetCor Technologies, Inc.; the filing does not use the Corpay name. Amounts are in U.S. dollars unless noted.
Business context
FleetCor provided commercial payment solutions across fuel, corporate payments, tolls, lodging, gift cards and other products. It reported North America and International segments. The 2018 results include the Cambridge, CLS and Russian fuel-card acquisitions made in 2017.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $585.0m | $541.2m | $1,170.5m | $1,061.7m |
| Operating income | $264.8m | $216.0m | $524.9m | $411.1m |
| Operating margin | 45.3% | 39.9% | 44.8% | 38.7% |
| Net income | $176.9m | $131.0m | $351.8m | $254.7m |
| Diluted EPS | $1.91 | $1.39 | $3.78 | $2.70 |
| Adjusted net income per diluted share (non-GAAP) | $2.57 | $1.99 | $5.07 | $3.94 |
- Q2 revenue increased 8.1% year over year; management cited approximately 9% organic growth on a constant fuel price, spread, foreign currency and acquisition/disposition basis. Six-month revenue rose 10.2%, with approximately 9% organic growth on that basis.
- Q2 segment revenue was $370.9m in North America, up 8.2%, and $214.0m International, up 8.0%. Segment operating margins were 43.5% and 48.3%, respectively, versus 39.3% and 40.9% a year earlier.
- Corporate Payments and Lodging were notable growth areas; Q2 revenue was $99.6m and $44.6m, respectively. Gift revenue declined to $33.3m from $41.3m. Fuel revenue was $270.8m versus $278.2m.
- ASC 606 reduced reported revenue by approximately $23m in Q2 and $48m for the first half, primarily because certain merchant commissions and processing costs moved from expenses to net presentation. Management estimated the standard reduced net income by $0.6m in Q2 and $2.6m for the first half. Prior periods were not restated.
- Q2 operating income grew 22.6% and net income 35.0%. The lower effective tax rate (23.5% versus 31.2% in Q2 2017) reflected U.S. tax reform, partly offset by GILTI tax. Interest expense rose 39.0% to $33.2m, attributed to acquisition and share-repurchase borrowing and higher LIBOR.
Cash flow, debt and liquidity
- For the first six months, operating cash flow was $275.1m, up from $207.7m. Investing cash outflow was $49.6m; financing cash outflow was $104.8m. Operating cash flow was affected by working-capital movements, including receivables.
- Cash and cash equivalents were $919.7m and restricted cash $265.8m at June 30; together they totaled $1.185bn. Restricted cash was not freely available for general use.
- Total notes, credit-agreement borrowings and securitization debt were $4.748bn, including $939m drawn under the $950m receivables securitization facility. The company reported approximately $444m available under its credit facility and no additional availability under the securitization facility.
- Management said cash, available borrowing capacity and operating cash generation were expected to cover liquidity needs for at least 12 months. The company was in compliance with financial and non-financial debt covenants at June 30, 2018.
- Share repurchases totaled $380.7m in the first half. After a July 2018 authorization increase, the program allowed up to a further $629.2m of repurchases through February 1, 2019; funding could include cash flow, working capital and debt.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or EPS guidance. Management described liquidity as sufficient for at least the next 12 months, subject to forecasts and market conditions.
- Management identified exposure to economic conditions, customer credit losses, fuel prices and fuel-price spreads, foreign exchange, interest rates, acquisitions and integration, regulation, competition, key business relationships and international operations.
- Unauthorized access discovered April 26, 2018 primarily involved Stored Value Solutions gift-card systems. The investigation concluded; management said accessed card information did not include personal identifiers and expected no material operating impact. The company incurred approximately $1.7m of related expense in the quarter and enhanced IT controls, but noted future incidents could occur.
- Shareholder class-action and derivative suits concerning earlier statements about fees, growth and prospects remained unresolved. The company disputed the allegations and said it could not reasonably estimate potential losses.
- Foreign-currency translation losses were $362.1m in Q2 and $318.8m for the first half, reducing comprehensive income despite net income growth. Management also cited adverse Q2 foreign exchange and fuel-spread effects, partly offset by higher fuel prices.
- The company had not completed its accounting for certain Tax Act effects. It had recorded a provisional $81.8m transition-tax expense in 2017 and intended to pay the tax in eight annual interest-free installments beginning in 2018.
Most important facts to verify
- Compare reported revenue growth with the ASC 606-adjusted and management-defined organic growth figures; 2017 was not restated.
- Review debt maturities, variable-rate exposure, covenant headroom and the effect of continued buybacks on leverage and liquidity.
- Monitor receivables, bad-debt provisions and working-capital cash demands, given the sizable receivables balance and cash-flow sensitivity.
- Assess the durability of growth in Corporate Payments and Lodging and the decline in Gift revenue, as well as fuel-price and spread sensitivity.
- Track developments in the shareholder litigation, the system-access incident and completion of the company’s Tax Act accounting.