Business context and reporting period
FleetCor Technologies, Inc. (the registrant named in the filing; the request metadata identifies Corpay, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2017. FleetCor provides commercial payment solutions, including fuel cards, corporate payments, tolls, lodging and gift cards, through North America and International segments.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net revenue | $541.2 million | $417.9 million | $1,061.7 million | $832.2 million |
| Operating income | $216.0 million | $171.2 million | $411.1 million | $347.1 million |
| Operating margin | 39.9% | 41.0% | 38.7% | 41.7% |
| Net income | $131.0 million | $116.3 million | $254.7 million | $227.3 million |
| Diluted EPS | $1.39 | $1.22 | $2.70 | $2.39 |
| Operating cash flow | Not presented quarterly | $179.0 million | $212.0 million |
Q2 revenue rose 29.5%, operating income 26.2%, and net income 12.7% year over year. First-half revenue rose 27.6%, operating income 18.4%, and net income 12.0%. Revenue growth included 2016 acquisitions; management estimated organic growth at approximately 9% in both Q2 and the first half on its stated pro forma and macro-adjusted basis. Those measures are non-GAAP.
Operating-margin compression reflected higher acquired-intangible amortization and depreciation, increased bad-debt expense, and stock-based compensation. First-half interest expense rose 46.4% to $47.0 million, primarily due to acquisition-related borrowings and higher LIBOR. The effective tax rate was 31.2% in Q2 versus 28.4%; it was 28.8% for the first half in both years.
At June 30, cash and cash equivalents were $564.6 million and restricted cash was $201.0 million. Total debt, including the securitization facility, was $3.838 billion, versus $3.858 billion at year-end 2016. The $741 million securitization balance was within a $950 million facility. Management reported approximately $529 million of available credit-facility capacity and $45 million of additional securitization capacity, and believed liquidity would meet needs for at least 12 months. The company reported compliance with its debt covenants.
First-half operating cash flow declined to $179.0 million, principally because working capital used $253.0 million, including higher income-tax payments and the timing and growth of receivables and payables. Capital expenditures were $32.6 million. The allowance for doubtful accounts rose to $47.8 million from $32.5 million at year-end; first-half bad-debt provision was $27.6 million versus $13.7 million.
Material changes and notable items
- International revenue rose 69.8% in Q2 and 70.9% in the first half, substantially reflecting 2016 acquisitions, including Brazil’s STP. International operating margin fell to 40.9% in Q2 from 45.9%, and to 39.9% for the first half from 50.8%.
- North America revenue grew 13.9% in Q2 and 11.3% in the first half. Its operating margin was 39.3% in Q2 versus 39.1%, and 38.0% for the first half versus 38.3%.
- On April 28, 2017, FleetCor agreed to acquire Cambridge Global Payments for approximately $690 million in cash, with closing expected by September 1, 2017.
- The NexTraq sale to Michelin for approximately $320 million closed July 17, 2017. FleetCor expected a third-quarter pretax gain of approximately $155 million and preliminarily estimated related taxes of approximately $64 million.
- FleetCor terminated its planned SVS combination with First Data in July 2017; SVS was no longer classified as held for sale.
- After quarter-end, the company amended its credit agreement, increasing facility capacity by $708.7 million and extending maturities. It also expanded its repurchase authorization; an August 2017 accelerated share repurchase covered $250 million, with approximately 85% of expected shares delivered initially.
Outlook, risks and contingencies
The filing gives no formal earnings or revenue guidance. Management cited fuel prices and fuel-spread volatility, foreign exchange movements, customer credit losses, interest rates, economic conditions, acquisition execution and integration, financing access, and international operations as factors that could affect results. 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 timing and amounts for major contract categories.
A securities class action filed June 14, 2017 and a shareholder derivative action filed July 10, 2017 allege, among other matters, misleading statements concerning fees and business prospects. FleetCor disputes the claims and intends to defend them; it said it could not estimate potential losses. Management did not believe the broader legal matters would materially affect consolidated results or financial condition, but acknowledged a particular-period adverse effect was possible.
Key facts for investors to verify
- Separate acquisition-driven growth from organic growth, and assess the sustainability of management’s non-GAAP growth measures.
- Track bad-debt provisions, receivables quality and working-capital cash conversion, including the effect of tax-payment timing.
- Monitor operating-margin trends, especially acquired-asset amortization and International segment costs.
- Review financing, leverage and liquidity after the Cambridge acquisition, NexTraq sale, credit amendment and share repurchases.
- Follow the securities and derivative litigation, the final NexTraq gain and tax treatment, and the outcome of the revenue-standard implementation assessment.