CORPAY, INC. quarterly report, Q3 FY2016

Business context and reporting period

FleetCor Technologies, Inc. (the registrant named in this filing; not “Corpay, Inc.”) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. FleetCor provides fuel cards, commercial payments, stored-value and related workforce and fleet services, reported in North America and International segments.

Financial performance

Amounts below are in millions of U.S. dollars, except per-share data and where noted.

• Q3 revenue rose 7.3%; net income rose 11.0%. Nine-month revenue rose 3.5%; net income rose 15.3%. Net margin was 26.8% in Q3 2016 versus 25.9% a year earlier, and 27.1% for the nine months versus 24.3%.
• Q3 North America revenue increased 3.3% to $345.9 million; International revenue increased 18.9% to $138.6 million. Nine-month segment revenues rose 3.5% in North America and 3.4% Internationally.
• Q3 transactions increased 19.5% to 498.6 million, but reported consolidated revenue per transaction declined 10.2% to $0.97, reflecting acquisition and product mix, fuel economics and currency effects. For the nine months, transactions rose 13.0% while revenue per transaction fell 8.5% to $0.91.
• Operating income growth lagged revenue growth in Q3 as expenses increased, including selling, general and administrative, and depreciation and amortization costs. Segment operating margins were 39.3% in North America and 39.9% Internationally, versus 39.5% and 48.1%, respectively, in Q3 2015.

Cash flow, liquidity and debt

• Nine-month operating cash flow was $404.3 million, down from $524.5 million, primarily due to working-capital movements, including receivables. Investing cash outflow was $1,371.5 million, largely reflecting acquisitions; financing cash inflow was $976.4 million. Cash and cash equivalents ended at $405.4 million, down from $447.2 million at year-end 2015.
• Total cash including restricted cash was $604.8 million; $199.3 million was restricted, principally to meet customer deposit obligations. Management reported approximately $438 million available under the credit facility and approximately $75 million of additional securitization capacity, and expected liquidity and operating cash generation to cover needs for at least 12 months.
• Total debt, including the securitization facility, was $3,936.1 million at September 30, 2016, compared with $2,935.0 million at December 31, 2015. This included $656.0 million under the receivables securitization facility. The company said it complied with applicable debt covenants.

Material changes and notable items

• FleetCor acquired Brazilian toll-payment company STP on August 31 for approximately $1.25 billion net of acquired cash, financing the transaction with existing cash and borrowings. Total 2016 acquisition spending, net of acquired cash, was $1.33 billion. The STP purchase-price allocation remained preliminary; it included $621.7 million of goodwill and $642.0 million of identifiable intangible assets.
• Management estimated that Q3 macroeconomic effects reduced consolidated revenue by about $28 million, including approximately $18 million from lower fuel prices and spreads and $10 million from foreign exchange. For the nine months, management estimated an approximately $90 million revenue headwind, including $58 million from fuel prices and spreads and $32 million from foreign exchange. These are management estimates, not separately audited measurements.
• FleetCor early adopted stock-compensation accounting guidance in Q3. Excess tax benefits reduced income-tax expense, contributing to lower effective tax rates: 23.9% in Q3 2016 versus 29.4% in Q3 2015, and 27.1% for nine months versus 31.2%. Adoption also increased diluted share counts; management said the cumulative effect was not material.
• Nine-month results included a nonrecurring net recovery/gain related to the Masternaut equity-method investment of approximately $10.8 million; the filing cites approximately $9.3 million in its acquisition discussion. Equity-method results were income of $2.2 million for the period, compared with a $13.9 million loss in 2015.
• The board authorized a $500 million share repurchase program for an 18-month period. FleetCor repurchased 259,145 shares for $35.5 million during the first nine months of 2016; $464.5 million remained authorized at quarter-end.

Outlook, risks and contingencies

• The filing provides no specific revenue, earnings or EPS guidance. Management described acquisition-led growth and continued investment in sales and marketing, while expecting general and administrative expense to decline as a percentage of revenue over time.
• Key stated exposures include fuel prices and spread volatility, customer credit risk and bad debts, foreign exchange, interest rates, economic conditions, acquisition integration and financing availability, competition, key partner relationships, regulation, and international operations, including uncertainty related to the U.K.’s referendum to leave the EU.
• Management said pending ordinary-course legal matters were not expected to have a material adverse effect on financial position, results or liquidity; no material legal proceedings or governmental investigations were reported as of filing. The filing reports no material change in market risk and says disclosure controls were effective.

Important facts for investors to verify

1. Confirm the intended issuer: this filing is for FleetCor Technologies, Inc., not Corpay, Inc.
2. Assess whether acquired STP and other businesses can deliver expected growth and whether the preliminary purchase accounting, goodwill and intangible-asset valuations change.
3. Monitor leverage and debt maturities, available revolver and securitization capacity, covenant compliance, and the impact of acquisition financing on interest costs.
4. Track working-capital swings and receivable quality; the allowance for doubtful accounts rose to $30.1 million from $21.9 million at year-end 2015.
5. Separate underlying operating trends from fuel-price, spread, foreign-exchange and acquisition-mix effects, and evaluate the company’s non-GAAP adjusted measures alongside GAAP results.