Business context and reporting period
FleetCor Technologies, Inc. (the registrant named in this 2014 filing) provides fuel cards and workforce payment products and services. This Form 10-Q reports the quarter and nine months ended September 30, 2014, compared with the same 2013 periods. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and condition
| Metric | Three months ended Sept. 30, 2014 | Year-over-year | Nine months ended Sept. 30, 2014 | Year-over-year |
|---|---|---|---|---|
| Net revenue | $295.3 | +31.1% | $822.7 | +28.6% |
| Operating income | $144.2 | +29.6% | $392.8 | +24.9% |
| Operating margin | 48.8% | 49.4% prior year | 47.7% | 49.2% prior year |
| Net income | $95.5 | +21.5% | $259.2 | +19.8% |
| Diluted EPS | $1.11 | $0.93 prior year | $3.02 | $2.56 prior year |
| Adjusted EBITDA (non-GAAP) | $169.9 | +$40.6 | $467.4 | +$104.2 |
- For the quarter, North America revenue rose 35.6% to $156.3 million and International revenue rose 26.4% to $138.9 million. Nine-month growth was 25.7% and 31.8%, respectively.
- Transactions grew 12.0% in the quarter and 14.7% over nine months. Management attributed growth to acquisitions and organic gains in transaction volume and revenue per transaction; higher fuel spreads benefited the quarter.
- For the quarter, adjusted revenue (a non-GAAP measure, net of merchant commissions) was $270.3 million, up from $208.2 million; adjusted net income was $117.6 million and adjusted diluted EPS was $1.37. Nine-month figures were $759.7 million, $322.6 million and $3.77, respectively.
- Nine-month operating cash flow was $317.5 million, versus $208.0 million. Investing used $280.2 million, principally for acquisitions; financing used $56.2 million, versus $253.6 million provided in the prior period. Cash and cash equivalents were $304.1 million at September 30, down from $338.1 million at year-end.
- Total notes, credit agreements and securitization debt was $1.355 billion at September 30, down from $1.486 billion at December 31, 2013. The $393.6 million securitization balance is backed by receivables. Management reported approximately $372 million available under the credit facility and $29.8 million of additional securitization capacity; it said liquidity was adequate for anticipated needs over the next 12 months, excluding the planned Comdata acquisition, for which financing had been arranged.
- Total assets were $4.224 billion and stockholders’ equity $1.559 billion at September 30. Restricted cash was $42.3 million. Current liabilities were $1.929 billion; the filing does not present a conventional current ratio or a clear standalone measure of unrestricted working capital.
Material changes versus the prior comparable period
- Revenue growth substantially reflected prior-year acquisitions: management estimated they contributed about $29 million of quarterly and $111 million of nine-month incremental revenue. Organic growth and higher revenue per transaction also contributed.
- Operating margins declined 0.6 percentage points for the quarter and 1.5 points for the nine months. Higher stock-based compensation, acquired-intangible amortization, Russian bad-debt expense and certain startup and transaction costs offset revenue growth.
- Interest expense rose 29.4% for the quarter and 42.6% for nine months, primarily from acquisition-related borrowing and, over nine months, a higher leverage ratio. The effective tax rate also increased: 30.1% for the quarter versus 27.0%, and 30.5% for nine months versus 28.7%, partly because prior-year tax benefits did not recur.
- Foreign currency translation generated a $68.5 million comprehensive loss for the quarter and a $45.7 million loss for nine months. This affected comprehensive income and accumulated other comprehensive loss, rather than reported net income.
Outlook, commentary, risks and unusual items
- On August 12, 2014, FleetCor agreed to acquire Comdata for $3.45 billion, with closing anticipated in the fourth quarter of 2014. The stated plan included approximately $2.4 billion of new debt and issuance of about 7.3 million shares. On October 24, the company entered into a new $3.355 billion credit agreement, with up to $430 million of additional commitments; initial borrowing was expected at the Comdata closing. Completion remained subject to closing conditions.
- Management forecast 2014 capital expenditures of approximately $23 million. The filing does not provide earnings or revenue guidance.
- Key exposures identified include fuel-price and fuel-spread volatility, customer credit losses, foreign exchange, interest rates, economic conditions, regulatory actions, dependence on business relationships, acquisition execution and integration, and access to financing. Russian economic weakness increased bad-debt expense.
- Contingent consideration from 2013 acquisitions was recorded at $78.6 million and was payable in the fourth quarter of 2014 and first quarter of 2015. Ordinary-course legal matters were not expected by management to have a material adverse effect; the company reported no material legal proceedings or governmental investigations at filing date. It was in compliance with debt covenants at September 30.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when the Comdata acquisition closed, its final purchase price and financing, and the resulting leverage, share dilution and integration costs.
- How much reported growth came from acquisitions versus sustainable organic volume and revenue-per-transaction gains, including sensitivity to fuel spreads and fuel prices.
- Whether margin pressure from amortization, stock compensation, bad debts and other costs persists, and how non-GAAP adjusted measures reconcile with GAAP results.
- Debt maturities, covenant headroom, use of revolving and securitization capacity, and the availability and tax implications of cash held by foreign subsidiaries.
- Collection performance and allowance adequacy, particularly given higher Russian bad-debt expense and growth in receivables.