FleetCor Technologies, Inc. (now identified in the request as Corpay, Inc.) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The filing is by FleetCor Technologies, Inc.; it was signed November 12, 2019. Amounts below are U.S. dollars unless noted.
Business context
FleetCor provides business payment solutions across fuel, corporate payments, tolls, lodging, gift cards and related services. It reports North America and International segments. Results reflect organic growth, 2019 acquisitions, foreign-exchange and fuel-market effects, and the 2018 sale of a fuel portfolio.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $681.0m | $619.6m | $1,950.0m | $1,790.1m |
| Operating income | $329.1m | $281.1m | $910.6m | $806.0m |
| Operating margin | 48.3% | 45.4% | 46.7% | 45.0% |
| Net income | $225.8m | $157.7m | $659.6m | $509.5m |
| Diluted EPS | $2.49 | $1.71 | $7.33 | $5.50 |
| Adjusted net income (non-GAAP) | $280.6m | $246.6m | $775.7m | $717.9m |
| Adjusted diluted EPS (non-GAAP) | $3.10 | $2.68 | $8.62 | $7.75 |
Q3 revenue rose 9.9% year over year; management estimated approximately 11% organic growth after adjusting for fuel prices and spreads, foreign exchange, and acquisitions. Nine-month revenue increased 8.9%, with approximately 12% organic growth on management’s adjusted basis. For Q3, corporate payments revenue increased 31% and tolls 16%; gift revenue declined 14%. For the nine months, corporate payments grew to $376m from $300m, while gift revenue fell to $133m from $139m.
Q3 operating income grew 17.1%; both segments expanded margins. Nine-month operating income rose 13.0%. Processing expense increased 8.0%, selling expense 12.5%, and general and administrative expense 4.5% for the nine-month period. Net income growth also reflected a lower tax provision: the nine-month effective tax rate was 15.4%, including a $65m tax benefit related to the Masternaut investment disposition; excluding specified discrete items, management reported a 23.3% rate.
For the nine months, operating cash flow was $791.1m, investing cash outflow was $383.5m, and financing cash outflow was $260.5m. Operating cash flow increased from $555.4m, primarily on higher earnings and favorable working-capital timing. Cash and cash equivalents were $1,058.8m and restricted cash was $407.1m at September 30; combined cash and restricted cash was $1,465.9m.
Total notes, credit agreements and securitization facility borrowings were $4,472.7m, including $992.0m outstanding under the receivables securitization facility. The credit facility had approximately $1,285m available; the securitization facility had no additional capacity. The company reported compliance with debt covenants. Its $2.0bn interest-rate swap program hedged a portion of variable-rate debt.
Material changes and notable items
- 2019 acquisitions included NvoicePay for approximately $208m net of acquired cash and two other acquisitions for approximately $104m combined. Acquisition accounting remained preliminary. The October 1, 2019 Travelliance acquisition, for approximately $120m, was disclosed as a subsequent event and was not expected to be material.
- In Q3, revenue was affected by approximately $7m of unfavorable foreign exchange and an estimated $7m negative macroeconomic impact; the prior-year fuel portfolio disposition reduced revenue by approximately $11m. For the nine months, unfavorable foreign exchange reduced revenue by approximately $52m and the disposition by approximately $19m; favorable fuel spreads partly offset these pressures.
- The company recorded a $15.7m investment impairment in Q1 2019 and sold the remaining investment in Q2 at approximately carrying value. A $65m tax benefit arose from the Masternaut disposition and related tax treatment.
- Adoption of lease accounting on January 1, 2019 added operating lease right-of-use assets and liabilities. At September 30, reported right-of-use assets were $81.2m and lease liabilities totaled approximately $95.0m.
- The repurchase authorization was increased by $1bn on October 22, 2019, to as much as $3.1bn through February 1, 2023. The company had repurchased 9.24m shares for $1.6bn cumulatively and reported $1.5bn available under the program.
Outlook, risks and contingencies
No specific revenue or earnings guidance is provided in the supplied filing text. Management said current cash, borrowing capacity and expected operating cash generation should meet liquidity needs for at least the next 12 months. It also expects to continue investing in sales and marketing and pursuing acquisitions; it expects general and administrative costs to decline as a share of revenue over the long term.
Key risks identified include economic conditions, foreign-exchange movements, fuel prices and spreads, customer credit losses, interest rates, acquisition integration, financing access, international operations and litigation or regulatory action. The FTC had proposed resolving potential claims concerning advertising and marketing practices, principally in the North American fuel-card business; no specific redress amount had been proposed. A shareholder securities class action had a $50m settlement term sheet, covered by insurance, pending preliminary court approval after quarter-end. Related derivative cases remained stayed. Management said it could not reliably estimate outcomes or losses for legal matters generally.
Investor verification priorities
- Reconcile reported GAAP growth with management’s organic-growth and adjusted non-GAAP measures, including their exclusions and acquisition/disposition effects.
- Assess whether elevated cash generation is sustainable, given working-capital timing, receivables growth, bad-debt expense and merchant-payment funding needs.
- Review leverage, variable-rate debt exposure, swap costs, covenant headroom and the fully utilized securitization facility.
- Track acquisition integration and returns, especially NvoicePay and the other 2019 acquisitions, alongside the subsequent Travelliance purchase.
- Monitor the FTC matter and settlement approval and insurance coverage for the shareholder class action; evaluate potential exposure beyond recorded amounts.
- Separate recurring tax performance from the Masternaut-related benefit and other discrete tax items.