FLEETCOR Technologies, Inc. (now identified in the request as Corpay, Inc.) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The filing’s registrant name is FleetCor Technologies, Inc.; the supplied filing text does not identify it as Corpay, Inc.
Business context
FleetCor provides business payment solutions, including fuel, corporate payments, tolls, lodging and gift products. It reports North America and International segments. Figures below are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Net revenue | $647.1 million | $585.0 million | +10.6% |
| Operating income | $297.3 million | $264.8 million | +12.3% |
| Operating margin | 45.9% | 45.3% | +0.6 percentage points |
| Net income | $261.7 million | $176.9 million | +47.9% |
| Diluted EPS | $2.90 | $1.91 | +51.8% |
| Adjusted net income (non-GAAP) | $256.7 million | $237.8 million | +8.0% |
| Adjusted diluted EPS (non-GAAP) | $2.85 | $2.57 | +10.9% |
For the first six months, revenue was $1.269 billion (+8.4%), operating income $581.5 million (+10.8%), net income $433.8 million (+23.3%), and diluted EPS $4.84 versus $3.78. Adjusted net income was $495.2 million versus $471.3 million.
Q2 revenue growth reflected approximately 13% organic growth on management’s constant-currency, fuel and acquisition-adjusted basis, plus about $8 million from 2019 acquisitions. Management estimated foreign exchange reduced Q2 revenue by about $17 million and broader macroeconomic effects by about $10 million; favorable fuel spreads added about $6 million. Corporate payments revenue increased 28% to $127.1 million. North America revenue rose 12.7%; International revenue rose 7.1%.
Cash flow, debt and liquidity
- Six-month operating cash flow was $550.0 million, versus $275.1 million a year earlier. Investing used $282.9 million, including acquisition spending; financing used $151.5 million. Capital expenditures were $32.0 million.
- At June 30, cash and cash equivalents were $1.170 billion and restricted cash was $318.3 million. Management reported $1.489 billion in combined cash and restricted cash; restricted amounts are not generally available for corporate use.
- Total debt, including the receivables securitization facility, was $4.609 billion, compared with $4.819 billion at year-end 2018. This includes $974 million outstanding under the $1.2 billion securitization facility, which had no additional availability at quarter-end.
- Approximately $478 million was available under the credit facility. Management said cash, borrowing capacity and operating cash generation should meet liquidity needs for at least the next 12 months. The company reported compliance with debt covenants at June 30.
- Interest expense rose 19.2% in Q2 to $39.5 million, primarily due to borrowings for repurchases and acquisitions and higher LIBOR. Three interest-rate swaps hedge $2.0 billion of variable-rate debt.
Material changes, outlook and risks
- Net income growth materially benefited from a $65 million discrete tax benefit associated with the disposition of the Masternaut investment and use of its capital loss against a previously recorded gain. Management said the Q2 effective tax rate would have been 23.6% excluding this item, rather than the reported negative 1.7%.
- The company recorded a $15.7 million first-quarter impairment of its telematics investment; it sold the investment in Q2 for approximately carrying value. Q2 general and administrative expenses included about $3.5 million of legal settlements. Processing expense included higher bad-debt costs; the first-half increase was approximately $14 million.
- Acquisitions included NvoicePay, acquired April 1 for approximately $219 million, and a small international business for approximately $32 million. After quarter-end, the company acquired SOLE Financial for approximately $74 million. On August 2, it amended its credit agreement to add a $700 million Term A loan and change leverage definitions and an indebtedness covenant.
- The company provided no specific earnings or revenue guidance in the supplied filing text. It described organic growth, acquisitions, foreign exchange, fuel prices and spreads, customer credit losses, interest rates and international operations as important performance factors.
- A shareholder securities class action received class certification on July 17, 2019; the company disputes the allegations and intends to defend itself. The filing says potential losses from the described litigation cannot presently be reasonably estimated. A separate Fuelman customer class action was dismissed without prejudice after the company’s motion to compel arbitration was granted.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported earnings growth reflects the one-time tax benefit, versus operating performance; compare GAAP results with the company’s reconciled non-GAAP measures.
- Whether organic growth and corporate-payments momentum continue after adjusting for acquisitions, foreign exchange, fuel prices and spreads.
- Bad-debt trends, receivables quality and the adequacy of the allowance, which increased to $68.3 million from $60.0 million at year-end.
- Debt and liquidity following the post-quarter $700 million Term A borrowing, including updated leverage, interest costs and covenant headroom.
- Developments in the certified shareholder class action and other litigation, for which the company could not estimate possible losses.