Business context and reporting period
FLEETCOR Technologies, Inc. (NYSE: FLT) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The filing is for FLEETCOR, not a registrant named Corpay. The company provides business payment solutions across fuel, corporate payments, tolls, lodging, gift cards and other categories. It reports three geographic segments: North America, Brazil and International.
Financial results and key metrics
Amounts are in U.S. dollars; financial statement figures are in millions except per-share amounts.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue, net | $585.3 | $681.0 | $1,771.5 | $1,950.0 |
| Operating income | $264.5 | $329.1 | $678.3 | $910.6 |
| Operating margin | 45.2% | 48.3% | 38.3% | 46.7% |
| Net income | $188.8 | $225.8 | $494.4 | $659.6 |
| Diluted EPS | $2.19 | $2.49 | $5.68 | $7.33 |
| Adjusted net income (non-GAAP) | $241.9 | $280.6 | $703.9 | $775.7 |
| Adjusted diluted EPS (non-GAAP) | $2.80 | $3.10 | $8.09 | $8.62 |
- Cash flow: Nine-month operating cash flow was $1,214.7 million, versus $791.1 million, primarily reflecting favorable working-capital timing. Investing cash used was $74.6 million (prior year: $383.5 million); financing cash used was $1,221.9 million (prior year: $260.5 million). Capital expenditures were $55.0 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $788.9 million, excluding restricted cash of $582.0 million. Total debt, including the securitization facility, was $4,492.6 million; $1,333.8 million was classified as current. Management reported approximately $1.6 billion of liquidity, comprising approximately $789 million of available cash and $800 million available under the credit facility; there was no additional capacity under the securitization facility. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $11,094.0 million and stockholders’ equity was $2,937.8 million at September 30, 2020, compared with $12,248.5 million and $3,711.6 million, respectively, at December 31, 2019.
Material changes versus the prior comparable period
- Q3 revenue declined 14.1%, operating income fell 19.6%, and net income fell 16.4% year over year. For the first nine months, revenue decreased 9.2%, operating income 25.5%, and net income 25.0%.
- Management attributed revenue pressure chiefly to pandemic-related reductions in business activity and transaction volumes. Q3 revenue also reflected an estimated $28 million adverse foreign-exchange impact and $9 million from lower fuel prices, partly offset by approximately $4 million of favorable fuel spreads. For the nine-month period, management estimated a $60 million adverse macroeconomic impact, including $84 million from foreign exchange and $22 million from lower fuel prices, partly offset by $45 million of favorable fuel spreads.
- Q3 revenue fell across North America (13.3%), Brazil (25.3%) and International (7.5%). Nine-month segment revenue changes were North America down 6.5%, Brazil down 19.7% and International down 9.2%. Brazil’s reported declines were substantially affected by currency movements.
- Nine-month processing expense rose 23.5%, largely due to a roughly $90 million customer receivable write-off, higher credit losses and 2019 acquisitions. The customer was in the cross-border payments business and entered voluntary bankruptcy.
- Nine-month results included a $30.0 million investment gain, compared with a $15.7 million investment loss in 2019. The 2020 gain related to a trading security sold in Q3. The 2019 period also included a $65 million tax benefit associated with the Masternaut disposition; the 2020 period included a $9.8 million increase in reserves for prior-year tax positions.
- Foreign-currency translation and derivative movements produced a $610.7 million nine-month other comprehensive loss, mainly reflecting currency translation. This was recorded outside net income.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no quantified earnings or revenue guidance. Management said COVID-19’s duration and economic effects were uncertain and could continue to negatively affect revenue, earnings, cash flows and liquidity into 2021. It cited possible further volume reductions, fuel-price and spread changes, currency movements, weaker business travel and trucking activity, customer distress and increased credit losses.
- Response: Management described work-from-home and business-continuity measures, cash consolidation and liquidity monitoring, discretionary-spending reductions, contractor furloughs and executive pay cuts, and tighter credit limits and payment terms in selected distressed areas. It cautioned these actions might not offset the pandemic’s effects.
- Credit and foreign exchange: The company recorded a $152.5 million provision for credit losses during the first nine months and ended the period with an $83.9 million allowance. It estimates credit losses using forward-looking economic conditions, including COVID-19 effects. Its customer foreign-exchange derivative contracts had $16.2 billion of aggregate notional amount; notional is not the same as net exposure, as offsetting positions may reduce market risk. Counterparty performance remains a risk.
- Debt facilities and rate exposure: The company had $2.0 billion of variable-rate debt hedged with interest-rate swaps. The swaps had a $100.7 million fair-value liability at quarter-end; approximately $49 million of existing losses were expected to be reclassified into earnings over the next 12 months. The receivables securitization facility was due to expire in November 2020; a committed amendment was expected to extend it to November 2021 and increase certain fees. The company terminated a temporary $250 million revolving facility in August after concluding it was no longer needed.
- Capital allocation and transactions: The company repurchased approximately 1.0 million shares for $238.4 million in Q3. The board later increased the authorized repurchase program to $4.1 billion; approximately $1.06 billion remained available as of the filing. Repurchases may be funded with cash flow, working capital and debt. The company did not anticipate paying dividends. It acquired a U.S. lodging business for approximately $70.1 million in August and agreed to acquire AFEX for approximately $450 million, with closing expected in 2021 subject to approvals and customary conditions.
- Legal matters: The FTC’s lawsuit concerning advertising and marketing practices in the U.S. direct fuel-card business seeks, among other things, injunctive relief and consumer redress. The company disputes the allegations and said it could not estimate a reasonably possible loss or range of loss. A federal shareholder derivative action was dismissed without leave to amend in October 2020; a related state action remained stayed pending further developments.
- Non-GAAP measures: Adjusted net income and adjusted EPS exclude specified items, including amortization, stock compensation, deal and restructuring costs, legal items and the unusual customer receivable write-off. They are supplemental measures and are not substitutes for GAAP results.
Important facts for investors to verify
- Whether transaction volumes, segment revenues and margins recover as pandemic effects and related restrictions evolve; compare reported results with management’s non-GAAP macro-adjusted measures.
- The collectability of receivables, the adequacy of the credit-loss allowance and any further customer failures, particularly in cross-border payments.
- Cash generation after working-capital timing effects, and the amount of unrestricted cash and genuinely available borrowing capacity.
- Debt balances, covenant headroom, floating-rate exposure, swap costs and the terms and completion of the securitization-facility extension.
- The outcome and potential financial exposure from the FTC lawsuit, and the status of the AFEX acquisition and its financing.
- The effect of share repurchases funded partly with debt on leverage, liquidity and per-share results; distinguish GAAP results from adjusted measures and one-time gains or charges.