Business context and reporting period
This is FleetCor Technologies, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2017, signed November 9, 2017. The request metadata names Corpay, Inc.; the filing itself identifies the registrant as FleetCor Technologies, Inc. FleetCor provides commercial payment solutions, including fuel cards, corporate payments, tolls, lodging and gift cards, and reports North America and International segments.
The company acquired Cambridge Global Payments in August 2017 to expand corporate payments, acquired a fuel card provider in Russia in September, and completed the acquisition of Creative Lodging Solutions after quarter-end. It sold NexTraq in July as part of its plan to exit telematics.
Financial results and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $577.9 million | $484.4 million | $1,639.5 million | $1,316.6 million |
| Operating income | $232.6 million | $191.1 million | $643.7 million | $538.2 million |
| Operating margin | 40.3% | 39.4% | 39.3% | 40.9% |
| Net income | $202.8 million | $129.6 million | $457.5 million | $357.0 million |
| Diluted EPS | $2.18 | $1.36 | $4.87 | $3.75 |
| Adjusted diluted EPS (non-GAAP) | $2.18 | $1.92 | $6.12 | $5.03 |
- Growth: Revenue rose 19.3% in Q3 and 24.5% year to date. Management attributed much of the reported growth to acquisitions; estimated organic growth on a constant-macroeconomic and pro forma basis was approximately 8% for Q3 and 9% year to date.
- Segments: Q3 North America revenue increased 5.4% to $364.4 million; International revenue increased 54.0% to $213.4 million. Q3 segment operating margins were 38.1% in North America and 44.0% International. International’s reported growth included acquisition contributions.
- Cash flow: Nine-month operating cash flow was $419.5 million, versus $404.3 million. Investing cash outflow was $341.6 million, versus $1,371.5 million, reflecting lower acquisition spending and NexTraq sale proceeds. Financing provided $250.1 million, versus $976.4 million. Capital expenditures were $49.5 million.
- Liquidity: September 30 cash and cash equivalents were $834.8 million, with $183.5 million of restricted cash. Management reported approximately $612 million of available capacity under the credit facility and no additional availability under the securitization facility, and believed liquidity sources would cover needs for at least 12 months.
- Debt: Total notes, credit agreements and securitization facility borrowings were $4.54 billion, up from $3.86 billion at year-end 2016. The securitization facility balance was $794 million against a $950 million limit. The filing reports covenant compliance. Interest expense rose 64.7% in Q3 and 52.9% year to date, primarily due to acquisition-related borrowing and higher LIBOR.
- Balance sheet: Total assets were $11.33 billion and stockholders’ equity was $3.43 billion at September 30, 2017. Goodwill was $4.64 billion, including preliminary acquisition goodwill.
Material changes versus prior comparable periods
- Q3 net income increased 56.5%, but results included a $175.0 million pretax gain from the NexTraq sale and a $44.6 million Masternaut impairment. The gain was recorded in other income; the impairment was recorded as investment loss. These items materially affect comparisons and tax expense.
- Q3 GAAP operating margin improved to 40.3% from 39.4%; nine-month operating margin declined to 39.3% from 40.9%, with higher amortization, acquired-business bad debts and stock compensation among the pressures.
- International revenue and transaction volumes grew sharply, partly reflecting STP and other acquisitions. Consolidated transactions increased 37% in Q3, while revenue per transaction decreased to $0.85 from $0.97; management cited changes in product, geography and acquisition mix.
- Accounts and other receivables rose to $1.46 billion from $1.20 billion; the allowance for doubtful accounts increased to $47.8 million from $32.5 million. Management cited $11 million of additional year-to-date bad debt expense, primarily associated with acquired STP.
- The company repurchased $402.4 million of shares during the first nine months, including a $250 million accelerated share repurchase. On November 1, after quarter-end, the board expanded total repurchase authorization to $1.1 billion.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no formal earnings or revenue guidance. Management stated that cash, available borrowing capacity and expected operating cash generation should meet liquidity needs for at least the next 12 months.
- Financing to monitor: The filing stated that the $950 million securitization facility expired November 14, 2017. It does not provide the outcome of any subsequent renewal or replacement.
- Acquisitions and accounting: Cambridge purchase accounting remained preliminary, including valuations and allocation of goodwill. The company planned to adopt the new revenue recognition standard on January 1, 2018, using the modified retrospective method; its assessment was incomplete, though management preliminarily expected similar revenue amounts and timing for major contract categories.
- Market and operating risks: Results are exposed to fuel prices and spreads, interest rates, foreign exchange rates, customer credit risk, global trade and economic conditions, acquisition integration, and reliance on banking and commercial relationships.
- Cambridge derivatives: The business writes foreign exchange forwards and options for customers and economically hedges net exposure. The filing reports $6.55 billion of derivative notional amount and identifies counterparty, customer-credit and regulatory risks. New or evolving derivatives rules could add costs or require registration.
- Litigation: A shareholder class action alleges misleading statements regarding fees and business performance; a related derivative action alleges securities-law and fiduciary-duty violations. FleetCor disputes the claims, intends to defend them, and said it could not reasonably estimate possible losses.
- Non-GAAP measures: Adjusted revenue, adjusted net income and adjusted EPS are supplemental measures. Investors should consider the reconciliations and the substantial exclusions, including stock compensation, amortization, the NexTraq gain and the Masternaut impairment.
Important facts for investors to verify
- Confirm the registrant identity and relationship to the “Corpay, Inc.” name in the request; this filing is for FleetCor Technologies, Inc.
- Verify whether the securitization facility expiring November 14, 2017 was renewed or replaced, and on what terms.
- Assess the sustainability of reported earnings by separating core operating performance from the NexTraq disposal gain, Masternaut impairment, acquisition effects and tax items.
- Review acquisition integration, preliminary Cambridge purchase accounting, acquired receivable quality and the increase in the bad-debt allowance.
- Monitor total debt, interest costs, covenant compliance, share repurchases and the extent to which buybacks or acquisitions are funded with borrowing.
- Track the shareholder litigation and developments in derivatives regulation, customer credit exposure and counterparty risk.