filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of FleetCor Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of FleetCor Technologies, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FleetCor Technologies, Inc. and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FleetCor Technologies, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 2, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 2, 2015
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of FleetCor Technologies, Inc. and Subsidiaries
We have audited FleetCor Technologies, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). FleetCor Technologies, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Pacific Pride Services, LLC, FleetCor Deutschland GmbH, and Comdata, Inc., which are included in the 2014 consolidated financial statements of FleetCor Technologies, Inc. and subsidiaries and constituted approximately $4.8 billion of total assets, as of December 31, 2014 and $77 million and $20 million of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of FleetCor Technologies, Inc. and subsidiaries also did not include an evaluation of the internal control over financial reporting of Pacific Pride Services, LLC, FleetCor Deutschland GmbH, and Comdata, Inc.
In our opinion, FleetCor Technologies, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria**.**
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of FleetCor Technologies, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014 of FleetCor Technologies, Inc. and subsidiaries and our report dated March 2, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 2, 2015
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FleetCor Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
| December 31 | ||||||||
| 2014 | 2013 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 477,069 | $ | 338,105 | ||||
| Restricted cash | 135,144 | 48,244 | ||||||
| Accounts receivable (less allowance for doubtful accounts of $23,842 and $22,416, respectively) | 673,797 | 573,351 | ||||||
| Securitized accounts receivable—restricted for securitization investors | 675,000 | 349,000 | ||||||
| Prepaid expenses and other current assets | 74,889 | 40,062 | ||||||
| Deferred income taxes | 101,451 | 4,750 | ||||||
| Total current assets | 2,137,350 | 1,353,512 | ||||||
| Property and equipment | 135,062 | 111,100 | ||||||
| Less accumulated depreciation and amortization | (61,499 | ) | (57,144 | ) | ||||
| Net property and equipment | 73,563 | 53,956 | ||||||
| Goodwill | 3,811,862 | 1,552,725 | ||||||
| Other intangibles, net | 2,437,367 | 871,263 | ||||||
| Equity method investment | 141,933 | — | ||||||
| Other assets | 72,431 | 100,779 | ||||||
| Total assets | $ | 8,674,506 | $ | 3,932,235 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 716,676 | $ | 467,202 | ||||
| Accrued expenses | 178,375 | 114,870 | ||||||
| Customer deposits | 492,257 | 182,541 | ||||||
| Securitization facility | 675,000 | 349,000 | ||||||
| Current portion of notes payable and lines of credit | 749,764 | 662,439 | ||||||
| Other current liabilities | 84,546 | 132,846 | ||||||
| Total current liabilities | 2,896,618 | 1,908,898 | ||||||
| Notes payable and other obligations, less current portion | 2,168,953 | 474,939 | ||||||
| Deferred income taxes | 815,169 | 249,504 | ||||||
| Other noncurrent liabilities | 40,629 | 55,001 | ||||||
| Total noncurrent liabilities | 3,024,751 | 779,444 | ||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $0.001 par value; 25,000,000 shares authorized and no shares issued and outstanding at December 31, 2014 and 2013 | — | — | ||||||
| Common stock, $0.001 par value; 475,000,000 shares authorized, 119,771,155 shares issued and 91,662,043 shares outstanding at December 31, 2014; and 118,206,262 shares issued and 82,471,770 shares outstanding at December 31, 2013 | 120 | 117 | ||||||
| Additional paid-in capital | 1,852,442 | 631,667 | ||||||
| Retained earnings | 1,403,905 | 1,035,198 | ||||||
| Accumulated other comprehensive loss | (156,933 | ) | (47,426 | ) | ||||
| Less treasury stock (28,109,112 shares at December 31, 2014 and 35,734,492 shares at December 31, 2013) | (346,397 | ) | (375,663 | ) | ||||
| Total stockholders’ equity | 2,753,137 | 1,243,893 | ||||||
| Total liabilities and stockholders’ equity | $ | 8,674,506 | $ | 3,932,235 | ||||
See accompanying notes.
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FleetCor Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Share Amounts)
| Year Ended December 31 | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Revenues, net | $ | 1,199,390 | $ | 895,171 | $ | 707,534 | ||||||
| Expenses: | ||||||||||||
| Merchant commissions | 96,254 | 68,143 | 58,573 | |||||||||
| Processing | 173,337 | 134,030 | 115,446 | |||||||||
| Selling | 75,527 | 57,346 | 46,429 | |||||||||
| General and administrative | 205,963 | 142,283 | 110,122 | |||||||||
| Depreciation and amortization | 112,361 | 72,737 | 52,036 | |||||||||
| Other operating, net | (29,501 | ) | — | — | ||||||||
| Operating income | 565,449 | 420,632 | 324,928 | |||||||||
| Other (income) expense, net | (700 | ) | 602 | 1,121 | ||||||||
| Equity method investment loss | 8,586 | — | — | |||||||||
| Interest expense, net | 28,856 | 16,461 | 13,017 | |||||||||
| Loss on early extinguishment of debt | 15,764 | — | — | |||||||||
| Total other expense | 52,506 | 17,063 | 14,138 | |||||||||
| Income before income taxes | 512,943 | 403,569 | 310,790 | |||||||||
| Provision for income taxes | 144,236 | 119,068 | 94,591 | |||||||||
| Net income | $ | 368,707 | $ | 284,501 | $ | 216,199 | ||||||
| Earnings per share: | ||||||||||||
| Basic earnings per share | $ | 4.37 | $ | 3.48 | $ | 2.59 | ||||||
| Diluted earnings per share | $ | 4.24 | $ | 3.36 | $ | 2.52 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic weighted average shares outstanding | 84,317 | 81,793 | 83,328 | |||||||||
| Diluted weighted average shares outstanding | 86,982 | 84,655 | 85,736 | |||||||||
See accompanying notes.
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FleetCor Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands)
| Year Ended December 31 | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Net income | $ | 368,707 | $ | 284,501 | $ | 216,199 | ||||||
| Other comprehensive (loss) income: | ||||||||||||
| Foreign currency translation adjustment (loss) gain, net of tax | (109,507 | ) | (44,080 | ) | 10,370 | |||||||
| Total other comprehensive (loss) income | (109,507 | ) | (44,080 | ) | 10,370 | |||||||
| Total comprehensive income | $ | 259,200 | $ | 240,421 | $ | 226,569 | ||||||
See accompanying notes.
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FleetCor Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In Thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive (Loss) Income | Total | |||||||||||||||||||
| Balance at December 31, 2011 | $ | 114 | $ | 466,203 | $ | 534,498 | $ | (175,663 | ) | $ | (13,716 | ) | $ | 811,436 | ||||||||||
| Net income | — | — | 216,199 | — | — | 216,199 | ||||||||||||||||||
| Other comprehensive income from currency exchange, net of tax of $0 | — | — | — | — | 10,370 | 10,370 | ||||||||||||||||||
| Total comprehensive income | 226,569 | |||||||||||||||||||||||
| Repurchase of common stock | — | — | — | (200,000 | ) | — | (200,000 | ) | ||||||||||||||||
| Issuance of common stock | 2 | 75,815 | — | — | — | 75,817 | ||||||||||||||||||
| Balance at December 31, 2012 | 116 | 542,018 | 750,697 | (375,663 | ) | (3,346 | ) | 913,822 | ||||||||||||||||
| Net income | — | — | 284,501 | — | — | 284,501 | ||||||||||||||||||
| Other comprehensive loss from currency exchange, net of tax of $186 | — | — | — | — | (44,080 | ) | (44,080 | ) | ||||||||||||||||
| Total comprehensive income | 240,421 | |||||||||||||||||||||||
| Issuance of common stock | 1 | 89,649 | — | — | — | 89,650 | ||||||||||||||||||
| Balance at December 31, 2013 | 117 | 631,667 | 1,035,198 | (375,663 | ) | (47,426 | ) | 1,243,893 | ||||||||||||||||
| Net income | — | — | 368,707 | — | — | 368,707 | ||||||||||||||||||
| Other comprehensive loss from currency exchange, net of tax of $4 | — | — | — | — | (109,507 | ) | (109,507 | ) | ||||||||||||||||
| Total comprehensive income | 259,200 | |||||||||||||||||||||||
| Issuance of treasury stock | — | 1,096,698 | — | 29,266 | — | 1,125,964 | ||||||||||||||||||
| Issuance of common stock | 3 | 124,077 | — | — | — | 124,080 | ||||||||||||||||||
| Balance at December 31, 2014 | $ | 120 | $ | 1,852,442 | $ | 1,403,905 | $ | (346,397 | ) | $ | (156,933 | ) | $ | 2,753,137 | ||||||||||
See accompanying notes.
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FleetCor Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
| Year Ended December 31 | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Operating activities | ||||||||||||
| Net income | $ | 368,707 | $ | 284,501 | $ | 216,199 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation | 21,097 | 16,885 | 14,116 | |||||||||
| Stock-based compensation | 37,649 | 26,676 | 19,275 | |||||||||
| Provision for losses on accounts receivable | 24,412 | 18,867 | 21,896 | |||||||||
| Amortization of deferred financing costs | 2,796 | 3,276 | 2,279 | |||||||||
| Loss on extinguishment of debt | 15,764 | — | — | |||||||||
| Amortization of intangible assets | 86,149 | 49,313 | 32,376 | |||||||||
| Amortization of premium on receivables | 3,259 | 3,263 | 3,265 | |||||||||
| Deferred income taxes | (41,716 | ) | (5,453 | ) | (3,337 | ) | ||||||
| Equity method investment loss | 8,586 | — | — | |||||||||
| Fair value adjustment for contingent consideration arrangements | (27,501 | ) | — | — | ||||||||
| Changes in operating assets and liabilities (net of acquisitions): | ||||||||||||
| Restricted cash | 6,625 | 5,430 | 2,088 | |||||||||
| Accounts receivable | 246,465 | (45,005 | ) | (71,102 | ) | |||||||
| Prepaid expenses and other current assets | 2,820 | (74 | ) | (6,847 | ) | |||||||
| Other assets | 12,455 | 38,906 | (46,553 | ) | ||||||||
| Excess tax benefits related to stock-based compensation | (56,790 | ) | (32,535 | ) | (29,355 | ) | ||||||
| Accounts payable, accrued expenses, and customer deposits | (102,443 | ) | 11,635 | (18,840 | ) | |||||||
| Net cash provided by operating activities | 608,334 | 375,685 | 135,460 | |||||||||
| Investing activities | ||||||||||||
| Acquisitions, net of cash acquired | (2,567,017 | )1 | (728,343 | ) | (190,447 | ) | ||||||
| Purchases of property and equipment | (27,070 | ) | (20,785 | ) | (19,111 | ) | ||||||
| Net cash used in investing activities | (2,594,087 | ) | (749,128 | ) | (209,558 | ) | ||||||
| Financing activities | ||||||||||||
| Excess tax benefits related to stock-based compensation | 56,790 | 32,535 | 29,355 | |||||||||
| Repurchase of common stock | — | — | (200,000 | ) | ||||||||
| Proceeds from issuance of common stock | 29,641 | 30,438 | 27,187 | |||||||||
| Borrowings on securitization facility, net | 326,000 | 51,000 | 18,000 | |||||||||
| Deferred financing costs paid | (43,943 | ) | (1,970 | ) | (3,776 | ) | ||||||
| Proceeds from notes payable | 2,320,000 | — | 250,000 | |||||||||
| Principal payments on notes payable | (546,875 | ) | (28,125 | ) | (30,414 | ) | ||||||
| Borrowings from revolver- A Facility | 807,330 | 783,663 | 455,000 | |||||||||
| Payments on revolver- A Facility | (783,600 | ) | (261,516 | ) | (480,000 | ) | ||||||
| Borrowings from foreign revolver- B Facility | — | 16,715 | — | |||||||||
| Payments on foreign revolver- B Facility | (7,337 | ) | (8,552 | ) | — | |||||||
| Payments on acquired debt | — | (164,083 | ) | — | ||||||||
| Borrowings from swing line of credit, net | 4,990 | — | (1,874 | ) | ||||||||
| Other | (731 | ) | (14,380 | ) | (1,490 | ) | ||||||
| Net cash provided by financing activities | 2,162,265 | 435,725 | 61,988 | |||||||||
| Effect of foreign currency exchange rates on cash | (37,548 | ) | (7,826 | ) | 10,600 | |||||||
| Net increase (decrease) in cash | 138,964 | 54,456 | (1,510 | ) | ||||||||
| Cash and cash equivalents at beginning of year | 338,105 | 283,649 | 285,159 | |||||||||
| Cash and cash equivalents at end of year | $ | 477,069 | $ | 338,105 | $ | 283,649 | ||||||
| Supplemental cash flow information | ||||||||||||
| Cash paid for interest | $ | 29,098 | $ | 25,886 | $ | 14,760 | ||||||
| Cash paid for income taxes | $ | 79,124 | $ | 99,308 | $ | 38,169 | ||||||
| 1 | Amounts reported in acquisitions and investment, net of cash acquired, includes debt assumed and immediately repaid in acquisitions. |
|---|
See accompanying notes.
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FleetCor Technologies, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2014
1. Description of Business
FleetCor Technologies Inc. and its subsidiaries (the Company) is a leading independent global provider of fuel cards, commercial payment and data solutions, stored value solutions, and workforce payment products and services to businesses, retailers, commercial fleets, major oil companies, petroleum marketers and government entities in countries throughout North America, Latin America, Europe, Australia and New Zealand. The Company’s payment programs enable its customers to better manage and control their commercial payments, card programs, and employee spending and provide card-accepting merchants with a high volume customer base that can increase their sales and customer loyalty. The Company also provides a suite of fleet related and workforce payment solution products, including a mobile telematics service, fleet maintenance management and employee benefit and transportation related payments.
The Company provides its payment products and services in a variety of combinations to create customized payment solutions for customers and partners. The Company sells a range of customized fleet and lodging payment programs directly and indirectly to our customers through partners, such as major oil companies, leasing companies and petroleum marketers. The Company refers to these major oil companies, leasing companies, petroleum marketers, value-added resellers (VARs) and other referral partners with whom we have strategic relationships as our “partners.” The Company provides customers with various card products that typically function like a charge card to purchase fuel, lodging, food, toll, transportation and related products and services at participating locations.
The Company supports our products with specialized issuing, processing and information services that enables the Company to manage card accounts, facilitate the routing, authorization, clearing and settlement of transactions, and provide value-added functionality and data, including customizable card-level controls and productivity analysis tools. In order to deliver payment programs and services and process transactions, the Company owns and operates proprietary “closed-loop” networks through which the Company electronically connects to merchants and captures, analyzes and reports customized information in North America and internationally. The Company also uses third-party networks to deliver payment programs and services in order to broaden card acceptance and use. To support our payment products, the Company also provides a range of services, such as issuing and processing, as well as specialized information services that provide our customers with value-added functionality and data. Customers can use this data to track important business productivity metrics, combat fraud and employee misuse, streamline expense administration and lower overall workforce and fleet operating costs. Depending on customer’s and partner’s needs, the Company provides these services in a variety of outsourced solutions ranging from a comprehensive “end-to-end” solution (encompassing issuing, processing and network services) to limited back office processing services.
The Company’s reportable segments, North America and International, reflect the Company’s global organization. In North America, the Company sells a fuel card product, commercial payment and data solutions, as well as a fleet telematics offering, which allows customers to track the location of mobile workers in field-based businesses, primarily to small and mid-sized fleets, as well as over-the-road trucking fleets. The Company also provides lodging and transportation management services in North America. In its International segment, the Company provides small and mid-sized fleets with fuel cards to control and manage spending. Additionally, the Company provides a similar fuel product in its International segment to over-the-road trucking fleets, shipping fleets and other operators of heavily industrialized equipment, that when utilized at the fueling site and by the vehicle, significantly reduces the likelihood of unauthorized and fraudulent transactions and allows fleet owners to monitor and control fuel consumption. The Company also provides a vehicle maintenance service offering in its International segment that helps fleet customers to better manage their vehicle maintenance, service, and
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repair needs. Furthermore, the Company also provides prepaid fuel, transportation, toll and food vouchers and cards internationally that may be used as a form of payment in restaurants, grocery stores, gas stations, public transportation and toll roads.
In 2014, the Company processed approximately 652 million transactions on our proprietary networks and third-party networks (which includes approximately 270 million transactions related to our SVS product, acquired with Comdata).
2. Summary of Significant Accounting Policies
Revenue Recognition and Presentation
Revenue is derived from the Company’s merchant and network relationships as well as from customers and partners. The Company recognizes revenue on fees generated through services to commercial fleets, commercial businesses, major oil companies, petroleum marketers and leasing companies and records revenue net of the wholesale cost of the underlying products and services based on the following: (i) the Company is not the primary obligor in the arrangement and is not responsible for fulfillment and the acceptability of the product; (ii) the Company has no inventory risk, does not bear the risk of product loss and does not make any changes to the product or have any involvement in the product specifications; (iii) the Company does not have significant latitude with respect to establishing the price for the product (predominantly fuel) and (iv) the amount the Company earns for services is fixed, within a limited range.
Through the Company’s merchant and network relationships the Company provides fuel, prepaid cards, vehicle maintenance, lodging, food, toll, and transportation related services to our customers. The Company derives revenue from its merchant and network relationships based on the difference between the price charged to a customer for a transaction and the price paid to the merchant or network for the same transaction. The Company’s net revenue consists of margin on sales and fees for technical support, processing, communications and reporting. The price paid to a merchant or network may be calculated as (i) the merchant’s wholesale cost of the product plus a markup; (ii) the transaction purchase price less a percentage discount; or (iii) the transaction purchase price less a fixed fee per unit. The difference between the price the Company pays to a merchant and the merchant’s wholesale cost for the underlying products and services is considered a merchant commission and is recognized as expense when the fuel purchase transaction is executed. The Company recognizes revenue from merchant and network relationships when persuasive evidence of an arrangement exists, the services have been provided to the customer, the sales price is fixed or determinable and collectability is reasonably assured. The Company has entered into agreements with major oil companies, petroleum marketers and leasing companies, among others, that specify that a transaction is deemed to be captured when we have validated that the transaction has no errors and have accepted and posted the data to the Company’s records.
The Company also derives revenue from customers and partners from a variety of program fees including transaction fees, card fees, network fees, report fees and other transaction-based fees, which typically are calculated based on measures such as percentage of dollar volume processed, number of transactions processed, or some combination thereof. Such services are provided through proprietary networks or through the use of third-party networks. Transaction fees and other transaction-based fees generated from the Company’s proprietary networks and third-party networks are recognized at the time the transaction is captured. Card fees, network fees and program fees are recognized as the Company fulfills its contractual service obligations. In addition, the Company recognizes revenue from late fees and finance charges. Such fees are recognized net of a provision for estimated uncollectible amounts, at the time the fees and finance charges are assessed and services are provided.
The Company also charges its customers transaction fees to load value onto prepaid fuel, food, toll and transportation vouchers and cards. The Company recognizes fee revenue upon providing the activated fuel, food, toll and transportation vouchers and prepaid cards to the customer. Revenue is recognized from the processing arrangements with merchants when persuasive evidence of an arrangement exists, the services have been
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provided, the sales price is fixed or determinable and collectability is reasonably assured. Revenue is recognized on lodging and transportation management services when the lodging stay or transportation service is completed. Revenue is also derived from the sale of equipment in certain of the Company’s businesses, which is recognized at the time the device is sold and the risks and rewards of ownership have passed. This revenue is recognized gross of the cost of sales related to the equipment in revenues, net within the consolidated statements of income. The related cost of sales for the equipment is recorded within processing expenses. The Company has recorded $15.1 million and $9.3 million of expenses related to sales of equipment within the processing expenses line of the consolidated statements of income for the year ended December 31, 2014 and 2013, respectively.
The Company’s fiscal year ends on December 31. In certain of the Company’s U.K. businesses, the Company records the operating results using a 4-4-5 week accounting cycle with the fiscal year ending on the Friday on or immediately preceding December 31. Fiscal years 2014 and 2012 include 52 weeks for the businesses reporting using a 4-4-5 accounting cycle. Fiscal year 2013 included 53 weeks for business reporting using a 4-4-5 accounting cycle.
The Company delivers both stored value cards and card-based services primarily in the form of gift cards. For multiple-deliverable customer contracts, stored value cards and card-based services are separated into two units of accounting. Store valued cards are generally recognized upon shipment to the customer. Card-based services are recognized when the card services are rendered.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of FleetCor Technologies, Inc. and all of its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Credit Risk and Reserve for Losses on Receivables
The Company controls credit risk by performing periodic credit evaluations of its customers. Payments from customers are generally due within 14 days of billing. The Company routinely reviews its accounts receivable balances and makes provisions for probable doubtful accounts based primarily on the aging of those balances. Accounts receivable are deemed uncollectible and removed from accounts receivable and the allowance for doubtful accounts when internal collection efforts have been exhausted and accounts have been turned over to a third-party collection agency. Recoveries from the third-party collection agency are not significant.
Business Combinations
Business combinations completed by the Company have been accounted for under the acquisition method of accounting. The acquisition method requires that the acquired assets and liabilities, including contingencies, be recorded at fair value determined on the acquisition date and changes thereafter reflected in income. For significant acquisitions, the Company obtains independent third party valuation studies for certain of the assets acquired and liabilities assumed to assist the Company in determining fair value. Goodwill represents the excess of the purchase price over the fair values of the tangible and intangible assets acquired and liabilities assumed. The estimation of the fair values of the assets acquired and liabilities assumed involves a number of estimates and assumptions that could differ materially from the actual amounts recorded. The results of the acquired businesses are included in the Company’s results of operations beginning from the completion date of the applicable transaction.
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Estimates of fair value are revised during an allocation period as necessary when, and if, information becomes available to further define and quantify the fair value of the assets acquired and liabilities assumed. The allocation period does not exceed one year from the date of the acquisition. To the extent additional information to refine the original allocation becomes available during the allocation period, the allocation of the purchase price is adjusted. Should information become available after the allocation period, those items are adjusted through operating results. The direct costs of the acquisition are recorded as operating expenses. Certain acquisitions include contingent consideration related to the performance of the acquired operations following the acquisition. Contingent consideration is recorded at estimated fair value at the date of the acquisition, and is remeasured each reporting period, with any changes in fair value recorded in the consolidated statements of income. The Company estimates the fair value of the acquisition-related contingent consideration using various valuation approaches, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities.
Impairment of Long-Lived Assets and Intangibles
The Company tests its long-lived assets for impairment in accordance with relevant authoritative guidance. The Company evaluates if impairment indicators related to its property, plant and equipment and other long-lived assets are present. These impairment indicators may include a significant decrease in the market price of a long-lived asset or asset group, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group. If impairment indicators are present, the Company estimates the future cash flows for the asset or asset group. The sum of the undiscounted future cash flows attributable to the asset or asset group is compared to its carrying amount. The cash flows are estimated utilizing various projections of revenues and expenses, working capital and proceeds from asset disposals on a basis consistent with management’s intended actions. If the carrying amount exceeds the sum of the undiscounted future cash flows, the Company determines the assets’ fair value by discounting the future cash flows using a discount rate required for a similar investment of like risk and records an impairment charge as the difference between the fair value and the carrying value of the asset group. Generally, the Company performs its testing of the asset group at the business-line level, as this is the lowest level for which identifiable cash flows are available.
The Company completes an asset impairment test of goodwill at least annually or more frequently if facts or circumstances indicate that goodwill might be impaired. Goodwill is tested for impairment at the reporting unit level, and the impairment test consists of two steps, as well as a qualitative assessment, as appropriate. The Company, as appropriate, has performed a qualitative assessment of certain of its reporting units. In this qualitative assessment, the Company individually considered the following items for each reporting unit where the Company determined a qualitative analysis to be appropriate: the macroeconomic conditions, including any deterioration of general conditions, limitations on accessing capital, fluctuations in foreign exchange rates and other developments in equity and credit markets; industry and market conditions, including any deterioration in the environment where the reporting unit operates, increased competition, changes in the products/services and regulator and political developments; cost of doing business; overall financial performance, including any declining cash flows and performance in relation to planned revenues and earnings in past periods; other relevant reporting unit specific facts, such as changes in management or key personnel or pending litigation; events affecting the reporting unit, including changes in the carrying value of net assets, likelihood of disposal and whether there were any other impairment considerations within the business; the overall performance of our share price in relation to the market and our peers; and a quantitative stress test of the previously completed step 1 test from the prior year, updated with current year results, weighted-average cost of capital rates and future projections.
The Company completed step 1 of the goodwill impairment testing for certain of our reporting units for which the qualitative assessment was not performed. In this first step, the reporting unit’s carrying amount, including goodwill, is compared to its fair value which is measured based upon, among other factors, a discounted cash
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flow analysis, as well as market multiples for comparable companies. If the carrying amount of the reporting unit is greater than its fair value, goodwill is considered impaired and step two must be performed. Step two measures the impairment loss by comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all the assets and liabilities of that unit (including unrecognized intangibles) as if the reporting unit had been acquired in a business combination. The excess of fair value over the amounts allocated to the assets and liabilities of the reporting unit is the implied fair value of goodwill. The excess of the carrying amount over the implied fair value is the impairment loss.
The Company estimated the fair value of its reporting units using a combination of the income approach and the market approach. The income approach utilizes a discounted cash flow model incorporating management’s expectations for future revenue, operating expenses, earnings before interest, taxes, depreciation and amortization, capital expenditures and an anticipated tax rate. The Company discounted the related cash flow forecasts using an estimated weighted-average cost of capital for each reporting unit at the date of valuation. The market approach utilizes comparative market multiples in the valuation estimate. Multiples are derived by relating the value of guideline companies, based on either the market price of publicly traded shares or the prices of companies being acquired in the marketplace, to various measures of their earnings and cash flow. Such multiples are then applied to the historical and projected earnings and cash flow of the reporting unit in developing the valuation estimate.
Preparation of forecasts and the selection of the discount rates involve significant judgments about expected future business performance and general market conditions. Significant changes in forecasts, the discount rates selected or the weighting of the income and market approach could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.
Based on the goodwill asset impairment analysis performed quantitatively and qualitatively on October 1, 2014, the Company determined that the fair value of each of our reporting units is in excess of the carrying value. No events or changes in circumstances have occurred since the date of this most recent annual impairment test that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The Company also evaluates indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually. The Company also tests for impairment if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying amount. Estimates critical to the Company’s evaluation of indefinite-lived intangible assets for impairment include the discount rate, royalty rates used in its evaluation of trade names, projected average revenue growth and projected long-term growth rates in the determination of terminal values. An impairment charge is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date.
Property, Plant and Equipment and Definite-Lived Intangible Assets
Property, plant and equipment are stated at cost and depreciated on the straight-line basis. Definite-lived intangible assets, consisting primarily of customer relationships, are stated at fair value upon acquisition and are amortized over their estimated useful lives. Customer and merchant relationship useful lives are estimated using historical attrition rates.
The Company develops software that is used in providing processing and information management services to customers. A significant portion of the Company’s capital expenditures are devoted to the development of such internal-use computer software. Software development costs are capitalized once technological feasibility of the software has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed all planning, designing, coding and testing activities that are necessary to determine that the software can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the software is ready for its intended use. Software development costs are amortized using the
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straight-line method over the estimated useful life of the software. The Company capitalized software costs of $17.7 million, $12.8 million and $10.6 million in 2014, 2013 and 2012, respectively. Amortization expense for software totaled $9.2 million, $7.3 million and $5.7 million in 2014, 2013 and 2012, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences became deductible. The Company evaluates on a quarterly basis whether it is more likely than not that its deferred tax assets will be realized in the future and concludes whether a valuation allowance must be established.
The Company does not provide deferred taxes for the undistributed earnings of the Company’s foreign subsidiaries that are considered to be indefinitely reinvested outside of the United States in accordance with authoritative literature. The Company includes any estimated interest and penalties on tax related matters in income tax expense.
Current accounting guidance clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under the relevant authoritative literature, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50 percent likelihood of being sustained.
Cash Equivalents
Cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less. Restricted cash represents customer deposits repayable on demand.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the rates of exchange in effect at period-end. The related translation adjustments are made directly to accumulated other comprehensive income. Income and expenses are translated at the average monthly rates of exchange in effect during the year. Gains and losses from foreign currency transactions of these subsidiaries are included in net income. The Company recognized a foreign exchange gain of $1.4 million for the year ended December 31, 2014 and a foreign exchange loss for each of the years ended December 31, 2013 and 2012 of $0.4 million, respectively, which are recorded within other income, net in the Consolidated Statements of Income.
Stock-Based Compensation
The Company accounts for employee stock options and restricted stock in accordance with relevant authoritative literature. Stock options are granted with an exercise price estimated to be equal to the fair market value on the date of grant as authorized by the Company’s board of directors. Options granted have vesting provisions ranging from one to six years and vesting of the options is generally based on the passage of time or performance. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting. The Company has
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selected the Black-Scholes option pricing model for estimating the grant date fair value of stock option awards granted. The Company has considered the retirement and forfeiture provisions of the options and utilized its historical experience to estimate the expected life of the options. The Company bases the risk-free interest rate on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period based on the number of years for which the requisite service is expected to be rendered.
Awards of restricted stock and restricted stock units are independent of stock option grants and are generally subject to forfeiture if employment terminates prior to vesting. The vesting of shares granted is generally based on the passage of time, performance or market conditions, or a combination of these. Shares vesting based on the passage of time have vesting provisions ranging from one to six years. The fair value of restricted stock shares based on performance is based on the grant date fair value of the Company’s stock. The fair value of restricted stock shares based on market conditions is estimated using the Monte Carlo option pricing model. The risk-free interest rate and volatility assumptions used within the Monte Carlo option pricing model are calculated consistently with those applied in the Black-Scholes options pricing model utilized in determining the fair value of the stock option awards.
For performance-based restricted stock awards and performance based stock option awards, the Company must also make assumptions regarding the likelihood of achieving performance goals. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially affected.
Deferred Financing Costs/Debt Discounts
Costs incurred to obtain financing, net of accumulated amortization, are amortized over the term of the related debt, using the effective interest method. In November 2014, the Company expensed $15.8 million and capitalized $9.2 million of debt issuance costs associated with the refinancing of its Credit Facility. At December 31, 2014 and 2013, the Company had net deferred financing costs of $23.2 million and $6.8 million, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the total of net income and all other changes in equity that result from transactions and other economic events of a reporting period other than transactions with owners.
Accounts Receivable
The Company maintains a $1.2 billion revolving trade accounts receivable Securitization Facility. Pursuant to the terms of the Securitization Facility, the Company transfers certain of its domestic receivables, on a revolving basis, to FleetCor Funding LLC (Funding) a wholly-owned bankruptcy remote subsidiary. In turn, Funding sells, without recourse, on a revolving basis, up to $1.2 billion of undivided ownership interests in this pool of accounts receivable to a multi-seller, asset-backed commercial paper conduit (Conduit). Funding maintains a subordinated interest, in the form of over collateralization, in a portion of the receivables sold to the Conduit. Purchases by the Conduit are financed with the sale of highly-rated commercial paper.
The Company utilizes proceeds from the sale of its accounts receivable as an alternative to other forms of debt, effectively reducing its overall borrowing costs. The Company has agreed to continue servicing the sold receivables for the financial institution at market rates, which approximates the Company’s cost of servicing. The Company retains a residual interest in the accounts receivable sold as a form of credit enhancement. The residual interest’s fair value approximates carrying value due to its short-term nature. Funding determines the level of funding achieved by the sale of trade accounts receivable, subject to a maximum amount.
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The Company’s consolidated balance sheets and statements of income reflect the activity related to securitized accounts receivable and the corresponding securitized debt, including interest income, fees generated from late payments, provision for losses on accounts receivable and interest expense. The cash flows from borrowings and repayments, associated with the securitized debt, are presented as cash flows from financing activities.
On November 14, 2014, the Company extended the term of its asset securitization facility to November 14, 2017. The Company capitalized $3.1 million in deferred financing fees in connection with this extension.
The Company’s accounts receivable and securitized accounts receivable include the following at December 31 (in thousands):
| 2014 | 2013 | |||||||
| Gross domestic accounts receivables | $ | 330,466 | $ | 107,627 | ||||
| Gross domestic securitized accounts receivable | 675,000 | 349,000 | ||||||
| Gross foreign receivables | 367,173 | 488,140 | ||||||
| Total gross receivables | 1,372,639 | 944,767 | ||||||
| Less allowance for doubtful accounts | (23,842 | ) | (22,416 | ) | ||||
| Net accounts and securitized accounts receivable | $ | 1,348,797 | $ | 922,351 | ||||
A rollforward of the Company’s allowance for doubtful accounts related to accounts receivable for the years ended December 31 is as follows (in thousands):
| 2014 | 2013 | 2012 | ||||||||||
| Allowance for doubtful accounts beginning of year | $ | 22,416 | $ | 19,463 | $ | 15,315 | ||||||
| Add: | ||||||||||||
| Provision for bad debts | 24,412 | 18,867 | 21,896 | |||||||||
| Less: | ||||||||||||
| Write-offs | (22,986 | ) | (15,914 | ) | (17,748 | ) | ||||||
| Allowance for doubtful accounts end of year | $ | 23,842 | $ | 22,416 | $ | 19,463 | ||||||
All foreign receivables are Company owned receivables and are not included in the Company’s receivable securitization program. At December 31, 2014 and 2013, there was $675 million and $349 million, respectively, of short-term debt outstanding under the Company’s accounts receivable Securitization Facility.
Purchase of Receivables
The Company recorded a premium on the purchase of receivables in prior years, which represented the amount paid in excess of the fair value of the receivables at the time of purchase. This premium is included in other long-term assets in the Consolidated Balance Sheets and is being amortized over its remaining useful life. At December 31, 2014 and 2013, the remaining net premium on the purchase of receivables was $13.2 million and $16.4 million, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising expense were $14.4 million, $12.3 million and $11.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Earnings Per Share
The Company reports basic and diluted earnings per share. Basic earnings per share is calculated using the weighted average of common stock and non-vested, non-forfeitable restricted shares outstanding, unadjusted for dilution, and net income is adjusted for preferred stock accrued dividends to arrive at income attributable to common shareholders.
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Diluted earnings per share is calculated using the weighted average shares outstanding and contingently issuable shares less weighted average shares recognized during the period. The net outstanding shares have been adjusted for the dilutive effect of common stock equivalents, which consist of outstanding stock options and unvested forfeitable restricted stock units.
Adoption of New Accounting Standards
Foreign Currency
In March 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2013-05 “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity”, which indicates that the entire amount of a cumulative translation adjustment (“CTA”) related to an entity’s investment in a foreign entity should be released when there has been a sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity, loss of a controlling financial interest in an investment in a foreign entity (i.e., the foreign entity is deconsolidated) or step acquisition for a foreign entity (i.e., when an entity has changed from applying the equity method for an investment in a foreign entity to consolidating the foreign entity). The ASU does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. This ASU is effective for the Company for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2013. The adoption of this ASU did not have a material impact on results of operations, financial condition, or cash flows.
Unrecognized Tax Benefit When an NOL Exists
In July 2013, the FASB issued ASU 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”, which indicates that to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective for the Company for fiscal years and interim periods within those fiscal years beginning on or after December 15, 2013. The adoption of this ASU did not have a material impact on the Company’s results of operations, financial condition, or cash flows.
Pending Adoption of Recently Issued Accounting Standards
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company’s management believes that the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s consolidated financial statements upon adoption.
Going Concern
In August 2013, the FASB issued ASU 2014-15 “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern”, which requires entities to perform interim and annual assessments of the entity’s ability to continue as a going concern within one year of the date of issuance of the entity’s financial statements. This ASU is effective for fiscal years ending after December 15, 2016 and interim periods thereafter, with early adoption permitted. The Company’s adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows, as it is disclosure based.
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Discontinued Operations Reporting
In April 2014, the FASB issued an ASU 2014-08, “Discounted Operations Reporting” that changes the requirements for reporting discontinued operations. This update will have the impact of reducing the frequency of disposals reported as discontinued operations, by requiring such a disposal to represent a strategic shift that has a major effect on an entity’s operations and financial results. This update also expands the disclosures for discontinued operations, and requires new disclosures related to individually significant disposals that do not qualify as discontinued operations. This new guidance becomes effective for the Company prospectively in the first quarter of 2015. This amended guidance will only have a potential impact to the extent that the Company discontinues any operations in future periods.
Revenue Recognition
In May 2014, the FASB issued ASC 606, “Revenue from Contracts with Customers”, which amends the guidance in former ASC 605, Revenue Recognition. This amended guidance requires revenue to be recognized in an amount that reflects the consideration to which the company expects to be entitled for those goods and services when the performance obligation has been satisfied. This amended guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and related cash flows arising from contracts with customers. This ASU is effective for the Company for fiscal years ending after December 15, 2016 and interim periods, with early adoption not permitted. The Company is currently evaluating the impact of the provisions of ASC 606.
Stock-Based Payment Awards with Performance Targets
In June 2014, the FASB issued ASU 2014-12, “Share-Based Payment Awards With Performance Targets That Are Attainable After the Requisite Service Period”, for companies that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. This new guidance becomes effective for the Company beginning in the first quarter of 2015, but early adoption is permitted. This new guidance is not expected to have a material impact on the Company’s consolidated financial position or results of operations.
3. Fair Value Measurements
Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. GAAP discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.
As the basis for evaluating such inputs, a three-tier value hierarchy prioritizes the inputs used in measuring fair value as follows:
| • | Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets. |
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| • | Level 2: Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
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| • | Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. |
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The Company estimates the fair value of acquisition-related contingent consideration using various valuation approaches including the Monte Carlo Simulation approach and the probability-weighted discounted cash flow approach. Acquisition related contingent consideration liabilities are classified as Level 3 liabilities because the Company uses unobservable inputs to value them, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities. A change in the unobservable inputs could result in a significantly higher or lower fair value measurement. Changes in the fair value of acquisition related contingent consideration are recorded as (income) expense in the Consolidated Statements of Income. The acquisition related contingent consideration liabilities are recorded in other current liabilities.
The following table presents the Company’s financial assets and liabilities which are measured at fair values on a recurring basis as of December 31, 2014 and 2013, (in thousands).
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| December 31, 2014 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Repurchase agreements | $ | 196,616 | $ | — | $ | 196,616 | $ | — | ||||||||
| Money market | 50,000 | — | 50,000 | — | ||||||||||||
| Certificates of deposit | 3,570 | — | 3,570 | — | ||||||||||||
| Total cash equivalents | $ | 250,186 | $ | — | $ | 250,186 | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Acquisition related contingent consideration | $ | 43,486 | $ | — | $ | — | $ | 43,486 | ||||||||
| December 31, 2013 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Repurchase agreements | $ | 162,126 | $ | — | $ | 162,126 | $ | — | ||||||||
| Certificates of deposit | 9,038 | — | 9,038 | — | ||||||||||||
| Total cash equivalents | $ | 171,164 | $ | — | $ | 171,164 | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Acquisition related contingent consideration | $ | 80,476 | $ | — | $ | — | $ | 80,476 |
The Company has highly liquid investments classified as cash equivalents, with original maturities of 90 days or less, included in our Consolidated Balance Sheets. The Company utilizes Level 2 fair value determinations derived from directly or indirectly observable (market based) information to determine the fair value of these highly liquid investments. The Company has certain cash and cash equivalents that are invested on an overnight basis in repurchase agreements. The value of overnight repurchase agreements is determined based upon the quoted market prices for the treasury securities associated with the repurchase agreements. Certificates of deposit are valued at cost, plus interest accrued. Given the short term nature of these instruments, the carrying value approximates fair value.
The level within the fair value hierarchy and the measurement technique are reviewed quarterly. Transfers between levels are deemed to have occurred at the end of the quarter. There were no transfers between fair value levels during 2014 and 2013.
The Company’s nonfinancial assets that are measured at fair value on a nonrecurring basis include property, plant and equipment, equity method investment, goodwill and other intangible assets. As necessary, the Company generally uses projected cash flows, discounted as appropriate, to estimate the fair values of the assets using key inputs such as management’s projections of cash flows on a held-and-used basis (if applicable), management’s projections of cash flows upon disposition and discount rates. Accordingly, these fair value measurements are in Level 3 of the fair value hierarchy. These assets and liabilities are measured at fair value on a nonrecurring basis as part of the Company’s annual impairment assessments and as impairment indicators are identified.
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The carrying value of the Company’s cash, accounts receivable, securitized accounts receivable and related facility, prepaid expenses and other current assets, accounts payable, accrued expenses, customer deposits and short-term borrowings approximate their respective carrying values due to the short-term maturities of the instruments. The carrying value of the Company’s debt obligations approximates fair value as the interest rates on the debt are variable market based interest rates that reset on a quarterly basis. These are each level 2 fair value measurements, except for cash, which is a level 1 fair value measurement.
4. Stock Transactions
Common Stock
On November 26, 2012, the Company entered into a stock repurchase agreement (the “Repurchase Agreement”) with investment funds associated with Summit Partners and Bain Capital (the “Repurchase Stockholders”), related party affiliates, to repurchase up to $200,000,000 of the Company’s common stock directly from the Repurchase Stockholders (the “Share Repurchase”) in a private transaction at a price per share equal to the price paid by the underwriter in the underwritten secondary offering announced on November 26, 2012 by the Company.
On December 3, 2012, the Company repurchased approximately 3.9 million shares of its common stock from the Repurchase Stockholders at $51.91 per share. The repurchase of shares from the Repurchase Stockholders was approved pursuant to the Company’s policy regarding related party transactions. The Company funded the Share Repurchase with borrowings under its credit facilities. The repurchased shares are included with Treasury Stock within the Consolidated Balance Sheets.
On November 14, 2014, FleetCor acquired all of Comdata’s outstanding shares for a total payment of $3.42 billion, net of cash acquired, which included cash consideration of $2.4 billion and the issuance of 7,625,380 shares of FleetCor’s common stock from treasury shares to the former shareholders of Comdata.
5. Share Based Compensation
The Company accounts for stock-based compensation pursuant to relevant authoritative guidance, which requires measurement of compensation cost for all stock awards at fair value on the date of grant and recognition of compensation, net of estimated forfeitures, over the requisite service period for awards expected to vest. The Company has Equity Compensation Plans (the Plans) pursuant to which the Company’s board of directors may grant stock options or restricted stock to employees. The Company is authorized to issue grants of restricted stock and stock options to purchase up to 26,963,150 shares for the years ended December 31, 2014, 2013 and 2012, respectively. On May 13, 2013, the Company’s stockholders authorized an increase of 6,500,000 shares of common stock available for grant pursuant to the 2010 Equity Compensation Plan. Giving effect to this increase, there were 5,180,697 additional shares remaining available for grant under the Plans at December 31, 2014.
The table below summarizes the expense related to share-based payments for the years ended December 31 (in thousands):
| 2014 | 2013 | 2012 | ||||||||||
| Stock options | $ | 13,267 | $ | 11,677 | $ | 10,341 | ||||||
| Restricted stock | 24,382 | 14,999 | 8,934 | |||||||||
| Stock-based compensation | $ | 37,649 | $ | 26,676 | $ | 19,275 | ||||||
The tax benefits recorded on stock based compensation were $13.0 million, $9.8 million and $6.8 million for the years ended December 31, 2014, 2013 and 2012, respectively.
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The following table summarizes the Company’s total unrecognized compensation cost related to stock-based compensation as of December 31, 2014:
| Unrecognized Compensation Cost | Weighted Average Period of Expense Recognition (in Years) | |||||||
| Stock options | $ | 70,502 | 2.05 | |||||
| Restricted stock | 37,692 | 1.56 | ||||||
| Total | $ | 108,194 | ||||||
Stock Options
Stock options are granted with an exercise price estimated to be equal to the fair market value on the date of grant, as authorized by the Company’s board of directors. Options granted have vesting provisions ranging from one to six years. Stock option grants are generally subject to forfeiture if employment terminates prior to vesting. The Company issues new shares upon stock option exercises.
The following summarizes the changes in the number of shares of common stock under option for the following periods (shares and aggregate intrinsic value in thousands):
| Shares | Weighted Average Exercise Price | Options Exercisable at End of Year | Weighted Average Exercise Price of Exercisable Options | Weighted Average Fair Value of Options Granted During the Year | Aggregate Intrinsic Value | |||||||||||||||||||
| Outstanding at December 31, 2011 | 8,341 | $ | 15.51 | 4,394 | $ | 10.13 | $ | 119,802 | ||||||||||||||||
| Granted | 1,223 | 36.94 | $ | 10.82 | ||||||||||||||||||||
| Exercised | (2,925 | ) | 9.38 | 129,488 | ||||||||||||||||||||
| Forfeited | (74 | ) | 20.43 | |||||||||||||||||||||
| Outstanding at December 31, 2012 | 6,565 | 22.17 | 2,666 | 14.71 | 206,636 | |||||||||||||||||||
| Granted | 307 | 80.77 | 23.00 | |||||||||||||||||||||
| Exercised | (1,425 | ) | 21.13 | 136,807 | ||||||||||||||||||||
| Forfeited | (116 | ) | 28.68 | |||||||||||||||||||||
| Outstanding at December 31, 2013 | 5,331 | 25.68 | 2,589 | 16.57 | 487,673 | |||||||||||||||||||
| Granted | 1,544 | 135.16 | $ | 42.77 | ||||||||||||||||||||
| Exercised | (1,429 | ) | 20.75 | 182,904 | ||||||||||||||||||||
| Forfeited | (315 | ) | 41.72 | |||||||||||||||||||||
| Outstanding at December 31, 2014 | 5,131 | $ | 58.71 | 2,370 | $ | 21.75 | $ | 461,770 | ||||||||||||||||
| Vested and expected to vest at December 31, 2014 | 5,131 | $ | 58.71 |
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The following table summarizes information about stock options outstanding at December 31, 2014 (shares in thousands):
| Exercise Price | Options Outstanding | Weighted Average Remaining Vesting Life in Years | Options Exercisable | |||||||||
| $5.20 – 6.548 | 9 | — | 9 | |||||||||
| 10.00 – 14.00 | 803 | — | 803 | |||||||||
| 18.00 – 23.00 | 1,515 | 0.56 | 996 | |||||||||
| 27.83 – 34.72 | 190 | 0.83 | 86 | |||||||||
| 35.04 – 40.65 | 974 | 1.49 | 447 | |||||||||
| 47.63 – 58.02 | 24 | 1.91 | — | |||||||||
| 74.99 – 111.09 | 325 | 2.70 | 29 | |||||||||
| 115.45 – 149.68 | 1,291 | 3.17 | — | |||||||||
| 5,131 | 2,370 | |||||||||||
The aggregate intrinsic value of options exercisable at December 31, 2014 was $300.9 million. The weighted average remaining contractual term of options exercisable at December 31, 2014 was 5.7 years.
The fair value of stock option awards granted was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for the years ended December 31 as follows:
| 2014 | 2013 | 2012 | ||||||||||
| Risk-free interest rate | 1.24 | % | 0.76 | % | 0.59 | % | ||||||
| Dividend yield | — | — | — | |||||||||
| Expected volatility | 34.61 | % | 34.95 | % | 36.49 | % | ||||||
| Expected life (in years) | 3.90 | 4.00 | 4.00 |
The Company considered the retirement and forfeiture provisions of the options and utilized its historical experience to estimate the expected life of the options.
The Company utilizes the volatility of the share price of the Company’s common stock to estimate the volatility assumption for the Black-Scholes option pricing model.
The risk-free interest rate is based on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant.
The weighted-average remaining contractual life for options outstanding was 6.9 and 6.7 years at December 31, 2014 and 2013, respectively.
Restricted Stock
Awards of restricted stock and restricted stock units are independent of stock option grants and are generally subject to forfeiture if employment terminates prior to vesting. The vesting of the shares is generally based on the passage of time, performance or market conditions, or a combination of these. Shares vesting based on the passage of time have vesting provisions ranging from one to four years. The fair value of restricted stock shares based on performance is based on the grant date fair value of the Company’s stock.
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The fair value of restricted stock shares granted with performance based market conditions was estimated using the Monte Carlo option pricing model with the following assumptions during 2013. There were no restricted stock shares granted based with performance based market conditions in 2014 and 2012.
| 2013 | ||||
| Risk-free interest rate | 0.42 | % | ||
| Dividend yield | — | |||
| Expected volatility | 30.00 | % | ||
| Expected life (in years) | 1.75 |
The risk-free interest rate and volatility assumptions were calculated consistently with those applied in the Black-Scholes options pricing model utilized in determining the fair value of the stock option awards.
The following table summarizes the changes in the number of shares of restricted stock and restricted stock units for the following periods (shares in thousands):
| Shares | Weighted Average Grant Date Fair Value | |||||||
| Outstanding at December 31, 2011 | 840 | 23.15 | ||||||
| Granted | 131 | 41.69 | ||||||
| Cancelled | (25 | ) | 33.49 | |||||
| Issued | (474 | ) | 22.05 | |||||
| Outstanding at December 31, 2012 | 472 | 28.98 | ||||||
| Granted | 358 | 92.16 | ||||||
| Cancelled | (31 | ) | 35.42 | |||||
| Issued | (165 | ) | 30.93 | |||||
| Outstanding at December 31, 2013 | 634 | 67.83 | ||||||
| Granted | 467 | 146.12 | ||||||
| Cancelled | (76 | ) | 31.48 | |||||
| Issued | (309 | ) | 74.56 | |||||
| Outstanding at December 31, 2014 | 716 | $ | 121.38 | |||||
6. Acquisitions
2014 Acquisitions
During 2014, the Company completed acquisitions with an aggregate purchase price of $3.67 billion, net of cash acquired of $165.8 million.
Equity Method Investment in Masternaut
On April 28, 2014, the Company completed an equity method investment in Masternaut Group Holdings Limited (“Masternaut”), Europe’s largest provider of telematics solutions to commercial fleets. The Company owns 44% of the outstanding equity of Masternaut. This investment is included in “Equity method investment” in the Company’s consolidated balance sheets.
Comdata
On November 14, 2014, the Company acquired Comdata Inc. (“Comdata”) from Ceridian LLC, a portfolio company of funds affiliated with Thomas H. Lee Partners, L.P. (“THL”) and Fidelity National Financial Inc. (NYSE: FNF), for $3.42 billion, net of cash acquired. Comdata is a business-to-business provider of innovative
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electronic payment solutions. As an issuer and a processor, Comdata provides fleet, virtual card and gift card solutions. This acquisition will complement the Company’s current fuel card business in the U.S. and add a new product with the virtual payments business. FleetCor financed the acquisition with approximately $2.4 billion of new debt and the issuance of approximately 7.6 million shares of FleetCor common stock, including amounts applied at the closing to the repayment of Comdata’s debt. Results from the acquired business have been reported in the Company’s North America segment since the date of acquisition. This acquisition resulted in $69.8 million of revenues, net and $19.1 million of net loss during 2014.
The following table summarizes the preliminary allocation of the purchase price for Comdata (in thousands):
| Restricted cash | $ | 93,312 | ||
| Trade and other receivables | 637,242 | |||
| Prepaid expenses and other | 16,077 | |||
| Property and equipment | 17,984 | |||
| Goodwill | 2,269,743 | |||
| Other intangible assets | 1,630,700 | |||
| Notes and other liabilities assumed | (802,112 | ) | ||
| Deferred tax liabilities | (435,830 | ) | ||
| Other long term liabilities | (6,841 | ) | ||
| Aggregate purchase prices | $ | 3,420,275 | ||
Intangible assets allocated in connection with the purchase price allocations consisted of the following (in thousands):
| Useful Lives (in Years) | Value | |||||||
| Customer relationships | 20 | $ | 1,269,700 | |||||
| Trade names and trademarks—indefinite | N/A | 237,100 | ||||||
| Software | 4 – 7 | 123,300 | ||||||
| Non-competes | 3 | 600 | ||||||
| $ | 1,630,700 | |||||||
The purchase price allocation related to this acquisition is preliminary as the Company is still completing the valuation for intangible assets, income taxes, certain acquired contingencies and the working capital adjustment period remains open. Goodwill recognized is comprised primarily of expected synergies from combining the operations of the Company and Comdata and assembled workforce. The goodwill acquired with this business is not deductible for tax purposes.
The following unaudited pro forma statements of income for the years ended December 31, 2014 and 2013 have been prepared to give effect to the Comdata acquisition described above assuming that it occurred on January 1, 2013. The pro forma statements of income are presented for illustrative purposes only and are not necessarily indicative of the results of operations that would have been obtained had this transaction actually occurred at the beginning of the periods presented, nor do they intend to be a projection of future results of operations. The pro forma statements of income have been prepared from the Company’s and Comdata’s historical audited consolidated statements of income for the years ended December 31, 2014 and 2013.
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The pro forma information is based on estimates and assumptions that have been made solely for purposes of developing such pro forma information, including without limitations, purchase accounting adjustments. The pro forma financial information presented below also includes depreciation and amortization based on the valuation of Comdata’s tangible and intangible assets resulting from the acquisition. The pro forma financial information does not include any synergies or operating cost reductions that may be achieved from the combined operations.
| Pro forma statements of income for the year ended December 31 (unaudited) (in thousands except per share data) | ||||||||
| 2014 | 2013 | |||||||
| Income statement data: | ||||||||
| Revenues, net | $ | 1,715,090 | $ | 1,430,463 | ||||
| Income before income taxes | 594,746 | 364,582 | ||||||
| Net income | 421,693 | 226,667 | ||||||
| Earnings per share: | ||||||||
| Basic | $ | 4.64 | $ | 2.53 | ||||
| Diluted | 4.51 | 2.46 | ||||||
| Weighted average shares outstanding: | ||||||||
| Basic | 90,940 | 89,418 | ||||||
| Diluted | 93,604 | 92,280 |
Pro forma net income for 2013 at Comdata includes the impact of a nonrecurring $100.0 million legal settlement.
Other
During 2014, the Company has also acquired Pacific Pride, a U.S. fuel card business, and a fuel card portfolio from Shell in Germany. The following table summarizes the preliminary allocation of the purchase price for these remaining acquisitions during 2014 (in thousands):
| Trade and other receivables | $ | 62,260 | ||
| Prepaid expenses and other | 232 | |||
| Property and equipment | 71 | |||
| Goodwill | 32,833 | |||
| Other intangible assets | 48,343 | |||
| Notes and other liabilities assumed | (66,524 | ) | ||
| Aggregate purchase prices | $ | 77,215 | ||
Intangible assets allocated in connection with the purchase price allocations consisted of the following (in thousands):
| Useful Lives (in Years) | Value | |||||||
| Customer relationships | 14 –20 | $ | 15,943 | |||||
| Trade names and trademarks—indefinite | N/A | 2,900 | ||||||
| Franchisee Agreements | 20 | 29,500 | ||||||
| $ | 48,343 | |||||||
The purchase price allocation related to these acquisitions is preliminary as the Company is still completing the valuation for intangible assets and certain acquired contingencies and the working capital adjustment period remains open. These other business acquisitions were not material individually or in the aggregate to the Company’s consolidated financial statements.
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The Company incurred and expensed acquisition related costs of $29.2 million in 2014, which are included within general and administrative expenses in the Consolidated Statement of Income for the year ended December 31, 2014.
2013 Acquisitions
During 2013, the Company completed acquisitions with an aggregate purchase price of $839.3 million, net of cash acquired of $35.6 million, which included deferred payments of $36.8 million and the estimated fair value of contingent consideration of $83.1 million. During 2014, the Company made deferred payments of purchase price related to 2013 acquisitions of $23.2 million.
For certain acquisitions in 2013, the consideration transferred includes contingent consideration based on achieving specific financial metrics in future periods. The contingent consideration agreements (the “agreements”) require the Company to pay the respective prior owners if earnings before interest, taxes, depreciation and amortization (EBITDA) and revenues grow at a specified rate over the most recent corresponding specified period, based on a sliding scale. The fair value of the arrangements included in the acquisition consideration was estimated using a Monte Carlo Simulation approach and the probability-weighted discounted cash flow approach and considered historic expenses, historic EBITDA and revenue growth and current projections for the respective acquired entities.
During 2014, the Company recorded adjustments to the estimated fair value of contingent consideration of $28.1 million, based on actual results of the business, which included the impact of an unfavorable tax judgment against VB during the fourth quarter of 2014. Adjustments are recorded within other operating, net within our consolidated statements of income. At December 31, 2014, the Company has recorded $42.9 million of contingent consideration, which was paid on February 13, 2015.
Fleet Card
On March 25, 2013, the Company acquired certain fuel card assets from GE Capital Australia’s Custom Fleet leasing business. The consideration for the transaction was paid using the Company’s existing cash and credit facilities. GE Capital’s “Fleet Card” is a multi-branded fuel card product with wide acceptance in fuel outlets and automotive service and repair centers across Australia. Through this transaction, the Company acquired the Fleet Card product, brand, acceptance network contracts, supplier contracts, and approximately one-third of the customer relationships with regards to fuel cards (together, “Fleet Card”). The remaining customer relationships were retained by Custom Fleet, and are comprised of companies which have commercial relationships with Custom Fleet beyond fueling, such as fleet management and leasing. The purpose of this acquisition was to establish the Company’s presence in the Australian marketplace. Results from the acquired business have been reported in the Company’s International segment since the date of acquisition. This business acquisition was not material individually or in the aggregate with other current year acquisitions to the Company’s consolidated financial statements. The goodwill related to this acquisition is not deductible for tax purposes.
CardLink
On April 29, 2013, the Company acquired all of the outstanding stock of CardLink. The consideration for the transaction was paid using the Company’s existing cash and credit facilities. CardLink provides a proprietary fuel card program with acceptance at retail fueling stations across New Zealand. CardLink markets its fuel cards directly to mostly small-to-midsized businesses, and provides processing and outsourcing services to oil companies and other partners. With this transaction, the Company entered into a $12.0 million New Zealand dollar ($9.4 million) revolving line of credit, which will be used to fund the working capital needs of the CardLink business. The purpose of this acquisition was to enter the Australia and New Zealand regions and follows the Company’s recent purchase of GE Capital’s Fleet Card business in Australia. Results from the
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acquired business have been reported in the Company’s International segment since the date of acquisition. This business acquisition was not material individually or in the aggregate with other current year acquisitions to the Company’s consolidated financial statements. The goodwill related to this acquisition is not deductible for tax purposes.
VB
On August 9, 2013, the Company acquired all of the outstanding stock of VB Servicos, Comercio e Administracao LTDA (“VB”), a provider of transportation cards and vouchers in Brazil. The consideration for the transaction was paid using the Company’s existing cash and credit facilities. VB is a provider of transportation cards in Brazil where employers are required by legislation to provide certain employees with prepaid public transportation cards to subsidize their commuting expenses. VB also markets food cards. The purpose of this acquisition was to strengthen the Company’s presence in the Brazilian marketplace. Results from the acquired business have been reported in the Company’s International segment since the date of acquisition. This business acquisition was not material individually or in the aggregate with other current year acquisitions to the Company’s consolidated financial statements. The goodwill related to this acquisition is deductible for tax purposes.
Epyx
On October 1, 2013, the Company acquired all of the outstanding stock of Epyx, a provider to the fleet maintenance, service and repair marketplace in the UK. Epyx provides an internet based system and a vehicle repair network service garages to fleet operators in the UK. The Epyx service helps its customers better manage their vehicle maintenance, service, and repair needs. The Epyx service automates repair authorization, schedules service appointments, controls costs, and simplifies overall vehicle service administration. Epyx earns transaction fees on each of the millions of service incidents that it supports each year. The purpose of this acquisition is to allow the Company to extend beyond fleet fueling, in the UK marketplace, to fleet maintenance services, a complementary service to existing fleet customers. Results from the acquired business have been reported in the Company’s International segment since the date of acquisition. This business acquisition was not material individually or in the aggregate with other current year acquisitions to the Company’s consolidated financial statements. The goodwill acquired with this business is not deductible for tax purposes.
DB
On October 15, 2013, the Company acquired all of the outstanding stock of DB Trans S.A. (“DB”), a provider of payment solutions for independent truckers in Brazil. The purpose of this acquisition is to strengthen the Company’s presence in the Brazilian marketplace. Results from the acquired business have been reported in the Company’s International segment since the date of acquisition. This business acquisition was not material individually or in the aggregate with other current year acquisitions to the Company’s consolidated financial statements. The goodwill acquired with this business is not deductible for tax purposes.
NexTraq
On October 17, 2013, the Company acquired all of the outstanding stock of NexTraq, a U.S. based provider of telematics solutions to small and mid-sized businesses. NexTraq provides fleet operators with an internet based system that enhances workforce productivity through real time vehicle tracking, route optimization, job dispatch, and fuel usage monitoring. The purpose of this acquisition is to provide the Company with a cross marketing opportunity due to the similarity of the commercial fleet customer base. Results from the acquired business have been reported in the Company’s North America segment since the date of acquisition. This business acquisition was not material individually or in the aggregate with other current year acquisitions to the Company’s consolidated financial statements. The goodwill acquired with this business is not deductible for tax purposes.
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2013 Totals
The following table summarizes the preliminary allocation of the purchase price for all acquisitions during 2013 (in thousands):
| Trade and other receivables | $ | 71,767 | ||
| Prepaid expenses and other | 12,151 | |||
| Property and equipment | 5,791 | |||
| Other long term assets | 53,737 | |||
| Goodwill | 641,361 | |||
| Other intangible assets | 473,000 | |||
| Notes and other liabilities assumed | (284,974 | ) | ||
| Deferred tax liabilities | (83,470 | ) | ||
| Other long term liabilities | (50,092 | ) | ||
| Aggregate purchase prices | $ | 839,271 | ||
Intangible assets allocated in connection with the purchase price allocations consisted of the following (in thousands):
| Useful Lives (in Years) | Value | |||||||
| Customer relationships | 3 – 20 | $ | 357,260 | |||||
| Trade names and trademarks—indefinite | N/A | 46,900 | ||||||
| Trade names and trademarks | 15 | 200 | ||||||
| Merchant network | 10 | 16,750 | ||||||
| Software | 3 – 10 | 36,890 | ||||||
| Non-competes | 5 | 15,000 | ||||||
| $ | 473,000 | |||||||
Goodwill recognized is comprised primarily of expected synergies from combining the operations of the Company and the acquired businesses. The Company incurred and expensed acquisition related costs of $6.0 million in 2013, which are included within general and administrative expenses in the Consolidated Statement of Income for the year ended December 31, 2013. Included within the purchase price allocation above for 2013 are certain indemnification assets and liabilities related to acquired businesses.
In connection with 2013 acquisitions, the Company has uncertain tax positions aggregating $11.3 million and contingent liabilities aggregating $49.2 million. The Company has been indemnified by the respective sellers for a portion of these acquired liabilities. As a result, an indemnification asset of $45.3 million was recorded. The reasonably possible range of acquisition related contingent liabilities that the Company estimates would be incurred is $60.4 million at the low end of the range to $89.6 million at the high end of the range.
2012 Acquisitions
During 2012, the Company completed several foreign acquisitions with an aggregate purchase price of $207.4 million, net of cash acquired, which includes deferred payments of $11.3 million and contingent consideration payments of $4.9 million. The Company has estimated the fair value of remaining payments related to this contingent consideration of $0.5 million at December 31, 2014.
Russian Fuel Card Company
On June 15, 2012, the Company acquired all of the outstanding stock of a leading Russian fuel card company. The consideration for the transaction was paid using the Company’s existing cash and credit facilities. In connection with the transaction, a final payment of $11.3 million was paid in December 2013. The acquired
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company is a Russian leader in fuel card systems and serves major oil clients and hundreds of independent fuel card issuers. Its technology allows issuers to share their retail network, thereby expanding the reach of their networks. Results from the acquired Russian business have been reported in the Company’s International segment since the date of acquisition. The purpose of this acquisition was to further expand the Company’s presence in the Russian fuel card marketplace. This business acquisition was not material to the Company’s consolidated financial statements. Goodwill recognized is comprised primarily of expected synergies from combining the operations of the Company and the Russian fuel card company. This business acquisition was not material individually or in the aggregate with other current year acquisitions to the Company’s consolidated financial statements. The goodwill acquired with this business is not deductible for tax purposes.
CTF Technologies, Inc.
On July 3, 2012, the Company acquired all of the outstanding stock of CTF Technologies, Inc. (“CTF”), a British Columbia organization, for $156 million. The consideration for the transaction was paid using the Company’s existing cash and credit facilities. CTF Technologies Do Brasil Ltda and certain of the Company’s other subsidiaries are wholly-owned entities of CTF. The acquisition was carried out pursuant to a plan of arrangement under the Business Corporations Act (British Columbia) and was approved by final order of the Supreme Court of British Columbia. The purpose of the transaction was to establish the Company’s presence in the Brazilian marketplace.
CTF provides fuel payment processing services for over-the-road fleets, ships, mining equipment, and railroads in Brazil. CTF’s payment platform links together fleet operators, banks, and oil companies. CTF earns revenue primarily from a recurring transaction fee paid by the oil companies who purchase services for their fleet customers under multi-year customer contracts. This business acquisition was not material individually or in the aggregate with other current year acquisitions to the Company’s consolidated financial statements. The goodwill acquired with this business is not deductible for tax purposes.
2012 Totals
The following table summarizes the allocation of the purchase price for all acquisitions during 2012, net of cash acquired (in thousands):
| Trade and other receivables | $ | 13,197 | ||
| Prepaid expenses and other | 6,014 | |||
| Property and equipment | 6,701 | |||
| Goodwill | 165,477 | |||
| Other intangible assets | 109,782 | |||
| Notes and other liabilities assumed | (42,845 | ) | ||
| Deferred tax liabilities | (50,936 | ) | ||
| Aggregate purchase prices | $ | 207,390 | ||
The purchase price is net of cash and cash equivalents acquired, totaling $1.9 million, and also included deferred payments of $11.3 million and a contingent consideration of $4.9 million.
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Intangible assets allocated in connection with the purchase price allocations consisted of the following (in thousands):
| Weighted Average Useful Lives (in Years) | Value | |||||||
| Customer relationships | 10 – 20 | $ | 77,678 | |||||
| Trade names and trademarks—indefinite | N/A | 16,900 | ||||||
| Merchant network | 10 | 4,604 | ||||||
| Software | 3 – 10 | 9,800 | ||||||
| Non-compete | 2 – 6 | 800 | ||||||
| $ | 109,782 | |||||||
Goodwill recognized is comprised primarily of expected synergies from combining the operations of the Company and the acquired businesses. The Company incurred acquisition related costs of $2.5 million in 2012, which are included within general and administrative expenses in the Consolidated Statements of Income. These acquisitions did not materially affect revenues and earnings during 2012.
7. Goodwill and Other Intangible Assets
A summary of changes in the Company’s goodwill by reportable business segment is as follows (in thousands):
| December 31, 2013 | Acquisitions | Purchase Price Adjustments | Foreign Currency | December 31, 2014 | ||||||||||||||||
| Segment | ||||||||||||||||||||
| North America | $ | 366,594 | $ | 2,290,657 | $ | 2,166 | $ | — | $ | 2,659,417 | ||||||||||
| International | 1,186,131 | 11,918 | (7,361 | ) | (38,243 | ) | 1,152,445 | |||||||||||||
| $ | 1,552,725 | $ | 2,302,575 | $ | (5,195 | ) | $ | (38,243 | ) | $ | 3,811,862 | |||||||||
| December 31, 2012 | Acquisitions | Purchase Price Adjustments | Foreign Currency | December 31, 2013 | ||||||||||||||||
| Segment | ||||||||||||||||||||
| North America | $ | 276,714 | $ | 89,880 | $ | — | $ | — | $ | 366,594 | ||||||||||
| International | 649,895 | 556,676 | 80 | (20,520 | ) | 1,186,131 | ||||||||||||||
| $ | 926,609 | $ | 646,556 | $ | 80 | $ | (20,520 | ) | $ | 1,552,725 | ||||||||||
Goodwill and other intangible asset purchase price adjustments in 2014 and 2013 are related to working capital adjustments in prior year foreign acquisitions. At December 31, 2014 and 2013, approximately $387.9 million and $412.7 million of the Company’s goodwill is deductible for tax purposes, respectively. Purchase priced adjustments recorded in 2014 are a result of the Company completing the purchase price allocations and working capital adjustment periods for certain prior year acquisitions.
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Other intangible assets consisted of the following at December 31 (in thousands):
| 2014 | 2013 | |||||||||||||||||||||||||
| Weighted- Avg Useful Life (Years) | Gross Carrying Amounts | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amounts | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| Customer and vendor agreements | 15.1 | $ | 2,139,339 | $ | (205,365 | ) | $ | 1,933,974 | $ | 850,809 | $ | (134,998 | ) | $ | 715,811 | |||||||||||
| Trade names and trademarks | indefinite | 337,467 | — | 337,467 | 99,690 | — | 99,690 | |||||||||||||||||||
| Trade names and trademarks | 15.0 | 3,332 | (1,847 | ) | 1,485 | 3,341 | (1,635 | ) | 1,706 | |||||||||||||||||
| Software | 5.0 | 174,507 | (21,511 | ) | 152,996 | 47,778 | (9,090 | ) | 38,688 | |||||||||||||||||
| Non-compete agreements | 5.6 | 17,724 | (6,279 | ) | 11,445 | 18,499 | (3,131 | ) | 15,368 | |||||||||||||||||
| Total other intangibles | $ | 2,672,369 | $ | (235,002 | ) | $ | 2,437,367 | $ | 1,020,117 | $ | (148,854 | ) | $ | 871,263 | ||||||||||||
Amortization expense related to intangible assets for the years ended December 31, 2014, 2013 and 2012, was $86.1 million, $49.3 million and $32.4 million, respectively.
The future estimated amortization of intangibles at December 31, 2014 is as follows (in thousands):
| 2015 | $ | 159,990 | ||
| 2016 | 160,074 | |||
| 2017 | 156,908 | |||
| 2018 | 153,232 | |||
| 2019 | 137,495 | |||
| Thereafter | 1,332,201 |
8. Property, Plant and Equipment
Property, plant and equipment, net consisted of the following at December 31 (in thousands):
| Estimated Useful Lives (in Years) | 2014 | 2013 | ||||||||
| Computer hardware and software | 3 to 7 | $ | 100,383 | $ | 78,460 | |||||
| Card-reading equipment | 5 | 13,066 | 12,649 | |||||||
| Furniture, fixtures, and vehicles | 3 to 6 | 10,319 | 9,420 | |||||||
| Buildings and improvements | 10 to 30 | 11,294 | 10,571 | |||||||
| Property, plant and equipment, gross | 135,062 | 111,100 | ||||||||
| Less: accumulated depreciation | (61,499 | ) | (57,144 | ) | ||||||
| Property, plant and equipment, net | $ | 73,563 | $ | 53,956 | ||||||
Depreciation expense related to property and equipment for the years ended December 31, 2014, 2013 and 2012 was $21.1 million $16.9 million and $14.1 million, respectively. Depreciation expense includes $9.2 million, $7.3 million and $5.7 million, for capitalized computer software costs for the years ended December 31, 2014, 2013 and 2012, respectively. At December 31, 2014 and 2013, the Company had unamortized computer software costs of $33.0 million and $24.6 million, respectively.
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9. Accrued Expenses
Accrued expenses consisted of the following at December 31 (in thousands):
| 2014 | 2013 | |||||||
| Accrued bonuses | $ | 7,677 | $ | 7,912 | ||||
| Accrued interest | 3,558 | 314 | ||||||
| Accrued payroll and severance | 19,958 | 3,640 | ||||||
| Accrued taxes | 28,974 | 63,202 | ||||||
| Accrued commissions/rebates | 40,991 | 1,734 | ||||||
| Other | 77,217 | 38,068 | ||||||
| $ | 178,375 | $ | 114,870 | |||||
Prior year figures have been reclassified to conform to current year presentation.
10. Debt
The Company’s debt instruments at December 31 consist primarily of term notes, revolving lines of credit and a Securitization Facility as follows (in thousands):
| 2014 | 2013 | |||||||
| Term note payable—domestic(a), net of discounts | $ | 2,261,005 | $ | 496,875 | ||||
| Revolving line of credit A Facility—domestic(a) | 595,000 | 425,000 | ||||||
| Revolving line of credit A Facility—foreign(a) | 53,204 | 202,839 | ||||||
| Revolving line of credit B Facility—foreign(a) | — | 7,099 | ||||||
| Revolving line of credit—New Zealand(c) | — | — | ||||||
| Other debt(d) | 9,508 | 5,565 | ||||||
| Total notes payable and other obligations | 2,918,717 | 1,137,378 | ||||||
| Securitization facility(b) | 675,000 | 349,000 | ||||||
| Total notes payable, credit agreements and Securitization Facility | $ | 3,593,717 | $ | 1,486,378 | ||||
| Current portion | $ | 1,424,764 | $ | 1,011,439 | ||||
| Long-term portion | 2,168,953 | 474,939 | ||||||
| Total notes payable, credit agreements and Securitization Facility | $ | 3,593,717 | $ | 1,486,378 | ||||
| (a) | On October 24, 2014, the Company entered into a new $3.355 billion Credit Agreement (the New Credit Agreement), which provides for senior secured credit facilities consisting of (a) a revolving A credit facility in the amount of $1.0 billion, with sublimits for letters of credit, swing line loans and multicurrency borrowings, (b) a revolving B facility in the amount of $35 million for loans in Australian Dollars or New Zealand Dollars, (c) a term loan A facility in the amount of $2.02 billion and (d) a term loan B facility in the amount $300 million. The New Credit Agreement also contains an accordion feature for borrowing an additional $500 million in term A or revolver A and term B. Proceeds from the New Credit Facility may be used for working capital purposes, acquisitions, and other general corporate purposes. Interest on amounts outstanding under the New Credit Agreement (other than the term loan B facility) accrues based on the British Bankers Association LIBOR Rate (the Eurocurrency Rate), plus a margin based on a leverage ratio, or our option, the Base Rate (defined as the rate equal to the highest of (a) the Federal Funds Rate plus 0.50%, (b) the prime rate announced by Bank of America, N.A., or (c) the Eurocurrency Rate plus 1.00%) plus a margin based on a leverage ratio. Interest is payable quarterly in |
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| arrears. Interest on the term loan B facility accrues based on the Eurocurrency Rate or the Base Rate, as described above, except that the applicable margin is fixed at 3% for Eurocurency Loans and at 2% for Base Rate Loans. In addition, the Company pays a quarterly commitment fee at a rate per annum ranging from 0.20% to 0.40% of the daily unused portion of the credit facility. At December 31, 2014, the interest rate on the term loan A and domestic revolving A facility was 2.16%, the interest rate on the foreign revolving A facility was 2.50% and the interest rate on the term loan B facility was 3.75%. The unused credit facility was 0.40% for all facilities at December 31, 2014. The stated maturity date for the term loan A, revolving loans, and letters of credit under the New Credit Agreement is November 14, 2019 and November 14, 2021 for the term loan B. The term loans are payable in quarterly installments and are due on the last business day of each March, June, September, and December with the final principal payment due on the respective maturity date. Borrowings on the revolving line of credit are repayable at the option of one, two, three or nine months after borrowing, depending on the term of the borrowing on the facility. Borrowings on the foreign swing line of credit are due no later than ten business days after such loan is made. There were no borrowings outstanding at December 31, 2014 on the foreign revolving B facility or the foreign swing line of credit. The New Credit Agreement replaced the Existing Credit Agreement, which was entered into on June 22, 2011. On March 20, 2013, the Company entered into a third amendment to the Existing Credit Agreement to extend the term of the facility for an additional five years from the amendment date, with a new maturity date of March 20, 2018, separated the revolver into two tranches (a $815 million Revolving A facility and a $35 million Revolving B facility), added a designated borrower in Australia and another in New Zealand with the ability to borrow in local currency and US Dollars under the Revolving B facility and removed a cap to allow for additional investments in certain business relationships. The revolving line of credit contains a $20 million sublimit for letters of credit, a $20 million sublimit for swing line loans and sublimits for multicurrency borrowings in Euros, Sterling, Japanese Yen, Australian Dollars and New Zealand Dollars. On November 14, 2014 in order to finance a portion of the Comdata Acquisition and to refinance the Company’s Existing Credit Agreement, the Company made initial borrowings under the New Credit Agreement. The Company has unamortized debt discounts of $7.6 million related to the term A facility and $1.4 million related to the term B facility at December 31, 2014. The effective interest rate incurred on term loans as 2.78% during 2014, related to the discount on debt. |
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Principal payments of $546.9 million were made on the term loans during 2014.
| (b) | The Company is party to a $1.2 billion receivables purchase agreement (Securitization Facility) that was amended and restated for the Fifth time on November 14, 2014 in connection with the Comdata acquisition. The Securitization Facility was amended and restated to increase the commitments from $500 million to $1.2 billion, to extend the term of the facility to November 14, 2017, to add financial covenants and to add additional purchasers to the facility. There is a program fee equal to one month LIBOR and the Commercial Paper Rate of 0.18% plus 0.90% and 0.17% plus 0.675% as of December 31, 2014 and 2013, respectively. The unused facility fee is payable at a rate of 0.40% and 0.30% per annum as of December 31, 2014 and 2013, respectively. The Securitization Facility provides for certain termination events, which includes nonpayment, upon the occurrence of which the administrator may declare the facility termination date to have occurred, may exercise certain enforcement rights with respect to the receivables, and may appoint a successor servicer, among other things. |
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| (c) | In connection with the Company’s acquisition in New Zealand, the Company entered into a $12 million New Zealand dollar ($9.4 million) facility that is used for local working capital needs. This facility is a one year facility that matures on April 30, 2015. A line of credit charge of 0.025% times the facility limit is charged each month plus interest on outstanding borrowings is charged at the Bank Bill Mid-Market (BKBM) settlement rate plus a margin of 1.0%. The Company did not have an outstanding unpaid balance on this facility at December 31, 2014. |
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| (d) | Other debt includes the long term portion of contingent consideration and deferred payments associated with certain of our businesses. |
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The Company was in compliance with all financial covenants at December 31, 2014.
The contractual maturities of the Company’s notes payable at December 31, 2014 are as follows (in thousands):
| 2015 | $ | 749,764 | ||
| 2016 | 109,582 | |||
| 2017 | 102,915 | |||
| 2018 | 203,131 | |||
| 2019 | 1,516,215 | |||
| Thereafter | 237,110 |
11. Income Taxes
Income before the provision for income taxes is attributable to the following jurisdictions (in thousands) for years ended December 31:
| 2014 | 2013 | 2012 | ||||||||||
| United States | $ | 233,933 | $ | 205,033 | $ | 186,301 | ||||||
| Foreign | 279,010 | 198,536 | 124,489 | |||||||||
| Total | $ | 512,943 | $ | 403,569 | $ | 310,790 | ||||||
The provision (benefit) for income taxes for the years ended December 31 consists of the following (in thousands):
| 2014 | 2013 | 2012 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 39,168 | $ | 72,909 | $ | 62,886 | ||||||
| State | 8,208 | 7,369 | 4,551 | |||||||||
| Foreign | 55,144 | 46,026 | 29,551 | |||||||||
| Total current | 102,520 | 126,304 | 96,988 | |||||||||
| Deferred: | ||||||||||||
| Federal | 41,814 | (1,287 | ) | 2,295 | ||||||||
| State | (596 | ) | 130 | 417 | ||||||||
| Foreign | 498 | (6,079 | ) | (5,109 | ) | |||||||
| Total deferred | 41,716 | (7,236 | ) | (2,397 | ) | |||||||
| Total provision | $ | 144,236 | $ | 119,068 | $ | 94,591 | ||||||
The provision for income taxes differs from amounts computed by applying the U.S. federal tax rate of 35% to income before income taxes for the years ended December 31 due to the following (in thousands):
| 2014 | 2013 | 2012 | ||||||||||||||||||||||
| Computed “expected” tax expense | $ | 179,530 | 35.00 | % | $ | 141,249 | 35.00 | % | $ | 108,777 | 35.00 | % | ||||||||||||
| Changes resulting from: | ||||||||||||||||||||||||
| Foreign income tax differential | (24,972 | ) | (4.87 | ) | (16,021 | ) | (3.97 | ) | (11,695 | ) | (3.76 | ) | ||||||||||||
| State taxes net of federal benefits | 4,492 | 0.88 | 4,744 | 1.18 | 3,858 | 1.24 | ||||||||||||||||||
| Foreign-sourced nontaxable income | (8,128 | ) | (1.59 | ) | (11,967 | ) | (2.97 | ) | (8,840 | ) | (2.84 | ) | ||||||||||||
| Other | (6,685 | ) | (1.32 | ) | 1,063 | 0.26 | 2,491 | 0.76 | ||||||||||||||||
| Provision for income taxes | $ | 144,236 | 28.10 | % | $ | 119,068 | 29.50 | % | $ | 94,591 | 30.40 | % | ||||||||||||
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The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31 are as follows (in thousands):
| 2014 | 2013 | |||||||
| Deferred tax assets: | ||||||||
| Accounts receivable, principally due to the allowance for doubtful accounts | $ | 7,434 | $ | 4,451 | ||||
| Accrued expenses not currently deductible for tax | 5,610 | — | ||||||
| Stock based compensation | 16,405 | 12,022 | ||||||
| Income tax credit | 3,830 | 1,349 | ||||||
| Net operating loss carry forwards | 127,487 | 4,438 | ||||||
| Fixed assets | 3,483 | 4,135 | ||||||
| Basis Difference In Equity Investment | 3,262 | — | ||||||
| Accrued Escheat | 12,058 | — | ||||||
| Other | 9,385 | 541 | ||||||
| Deferred tax assets before valuation allowance | 188,954 | 26,936 | ||||||
| Valuation allowance | (27,082 | ) | (1,450 | ) | ||||
| Deferred tax assets, net | 161,872 | 25,486 | ||||||
| Deferred tax liabilities: | ||||||||
| Property and equipment, principally due to differences between book and tax depreciation | (868 | ) | (4,180 | ) | ||||
| Intangibles—including goodwill | (833,910 | ) | (226,396 | ) | ||||
| Basis difference in investment in foreign subsidiaries | (23,128 | ) | (25,145 | ) | ||||
| Other | (17,684 | ) | (14,519 | ) | ||||
| Deferred tax liabilities | (875,590 | ) | (270,240 | ) | ||||
| Net deferred tax liabilities | $ | (713,718 | ) | $ | (244,754 | ) | ||
The Company’s deferred tax balances are classified in its balance sheets based on net current items and net non-current items as of December 31 as follows (in thousands):
| 2014 | 2013 | |||||||
| Current deferred tax assets and liabilities: | ||||||||
| Current deferred tax assets | $ | 101,451 | $ | 4,750 | ||||
| Long term deferred tax assets and liabilities: | ||||||||
| Long term deferred tax assets | 60,421 | 20,736 | ||||||
| Long term deferred tax liabilities | (875,590 | ) | (270,240 | ) | ||||
| Net long term deferred tax liabilities | (815,169 | ) | (249,504 | ) | ||||
| Net deferred tax liabilities | $ | (713,718 | ) | $ | (244,754 | ) | ||
We reduce federal and state income taxes payable by the tax benefits associated with the exercise of certain stock options. To the extent realized tax deductions for options exceed the amount previously recognized as deferred tax benefits related to share-based compensation for these option awards, we record an excess tax benefit in stockholders’ equity. We recorded excess tax benefits of $56.8 million, $32.5 million and $29.4 million in the years ended 2014, 2013 and 2012, respectively.
At December 31, 2014, U.S. taxes were not provided on earnings of the Company’s foreign subsidiaries. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when it would be tax effective through the utilization of foreign tax credits. If in the future these earnings are repatriated to the U.S, or if the Company determines that the earnings will be remitted in the foreseeable future, an additional tax provision and related liability may be required. If such earnings were distributed, U.S. income taxes would be partially reduced by available credits for taxes paid to the jurisdictions in which the income was earned.
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Cumulative undistributed earnings of non-U.S. subsidiaries for which U.S. taxes have not been provided are included in consolidated retained earnings in the amount of approximately $865.8 million, $568.8 million and $388.3 million at December 31, 2014, 2013 and 2012, respectively. Because of the availability of United States foreign tax credits, it is not practicable to determine the domestic federal income tax liability that would be payable if such earnings were not reinvested indefinitely.
The valuation allowance for deferred tax assets at December 31, 2014 and 2013 was $27.1 million and $1.5 million, respectively. The valuation allowance relates to foreign and state net operating loss carry forwards and foreign tax credit carry forwards. The net change in the total valuation allowance for the years ended December 31, 2014 and 2013 was an increase of $25.6 million and $0.1 million, respectively. The increase was primarily due to the state net operating loss carry forwards and foreign tax credit carry forwards acquired with Comdata in 2014.
As of December 31, 2014, the Company had a net operating loss carryforward for federal income tax purposes of $237.4 million that is available to offset federal taxable income through 2033. The Company had a net operating loss carryforwards for state income tax purposes of approximately $869.0 million that are available to offset future state taxable income through 2026. Additionally, the Company had $4.4 million net operating loss carryforwards for foreign income tax purposes that are available to offset future foreign taxable income. The foreign net operating loss carryforwards will not expire in future years.
The Company recognizes interest and penalties on unrecognized tax benefits (including interest and penalties calculated on uncertain tax positions on which the Company believes it will ultimately prevail) within the provision for income taxes on continuing operations in the consolidated financial statements. This policy is a continuation of the Company’s policy prior to adoption of the guidance regarding uncertain tax positions. During 2014, 2013 and 2012, the Company had recorded accrued interest and penalties related to the unrecognized tax benefits of $7.4 million, $8.8 million and $1.5 million, respectively.
The Company files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The statute of limitations for the Company’s U.S. federal income tax returns has expired for years prior to 2011. The statute of limitations for the Company’s U.K. income tax returns has expired for years prior to 2012. The statute of limitations has expired for years prior to 2010 for the Company’s Czech Republic income tax returns, 2011 for the Company’s Russian income tax returns, 2009 for the Company’s Mexican income tax returns, 2009 for the Company’s Brazilian income tax returns, 2009 for the Company’s Luxembourg income tax returns, 2010 for the Company’s New Zealand income tax returns, and 2013 for the Company’s Australian income tax returns.
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A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits including interest for the years ended December 31, 2014, 2013 and 2012 is as follows (in thousands):
| Unrecognized tax benefits at December 31, 2011 | $ | 4,994 | ||
| Additions based on tax provisions related to the current year | 1,870 | |||
| Additions based on tax provisions related to the prior year | 716 | |||
| Deductions based on settlement/expiration of prior year tax positions | (503 | ) | ||
| Unrecognized tax benefits at December 31, 2012 | 7,077 | |||
| Additions based on tax provisions related to the current year | 1,337 | |||
| Additions based on tax provisions related to the prior year | 15,249 | |||
| Deductions based on settlement/expiration of prior year tax positions | (2,062 | ) | ||
| Unrecognized tax benefits at December 31, 2013 | 21,601 | |||
| Additions based on tax provisions related to the current year | 1,676 | |||
| Deductions based on settlement/expiration of prior year tax positions | (4,636 | ) | ||
| Unrecognized tax benefits at December 31, 2014 | $ | 18,641 | ||
As of December 31, 2014 the Company had total unrecognized tax benefits of $18.6 million of which $7.3 million, if recognized, would affect its effective tax rate. It is not anticipated that there are any unrecognized tax benefits that will significantly increase or decrease within the next twelve months.
12. Leases
The Company enters into noncancelable operating lease agreements for equipment, buildings and vehicles. The minimum lease payments for the noncancelable operating lease agreements are as follows (in thousands):
| 2015 | $ | 12,425 | ||
| 2016 | 8,549 | |||
| 2017 | 6,808 | |||
| 2018 | 5,658 | |||
| 2019 | 2,752 | |||
| Thereafter | 5,427 |
Rent expense for noncancelable operating leases approximated $12.5 million, $9.8 million and $8.5 million, for the years ended December 31, 2014, 2013 and 2012, respectively. The leases are generally renewable at the Company’s option for periods of one to five years.
13. Commitments and Contingencies
In the ordinary course of business, the Company is involved in various pending or threatened legal actions. The Company has recorded reserves for certain legal proceedings. The amounts recorded are estimated and as additional information becomes available, the Company will reassess the potential liability related to its pending litigation and revise its estimate in the period that information becomes known. In the opinion of management, the amount of ultimate liability, if any, with respect to these actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
In connection with 2013 acquisitions, the Company has uncertain tax positions aggregating $11.3 million and contingent liabilities aggregating $49.2 million. The Company has been indemnified by the respective sellers for a portion of these acquired liabilities. As a result, an indemnification asset of $45.3 million was recorded. The
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internal estimates recorded for the contingent liabilities are subject to change based on our final evaluation of the information available at the acquisition date. Any changes to the contingent liability based on our final conclusion will be accompanied by a corresponding change to the indemnification asset. It is reasonably possible that future events related to an amnesty program offered by the Brazilian government for certain tax contingencies may result in confirmation of the estimated loss recorded in the first half of 2015.
14. Earnings Per Share
The Company reports basic and diluted earnings per share. Basic earnings per share is computed by dividing net income attributable to shareholders of the Company by the weighted average number of common shares outstanding during the reported period. Diluted earnings per share reflect the potential dilution related to equity-based incentives using the if-converted and treasury stock method. There were no anti-dilutive securities in 2014, 2013 and 2012. The calculation and reconciliation of basic and diluted earnings per share for the years ended December 31 (in thousands, except per share data):
| 2014 | 2013 | 2012 | ||||||||||
| Net income | $ | 368,707 | $ | 284,501 | $ | 216,199 | ||||||
| Denominator for basic earnings per share | 84,317 | 81,793 | 83,328 | |||||||||
| Dilutive securities | 2,665 | 2,862 | 2,408 | |||||||||
| Denominator for diluted earnings per share | 86,982 | 84,655 | 85,736 | |||||||||
| Basic earnings per share | $ | 4.37 | $ | 3.48 | $ | 2.59 | ||||||
| Diluted earnings per share | 4.24 | 3.36 | 2.52 |
Basic shares includes the impact of share-based payment awards classified as participating securities, which are not material to the calculation of basic shares. There were no antidilutive shares for 2014, 2013 or 2012.
15. Segments
The Company reports information about its operating segments in accordance with the authoritative guidance related to segments. The Company’s reportable segments represent components of the business for which separate financial information is evaluated regularly by the chief operating decision maker in determining how to allocate resources and in assessing performance. The Company operates in two reportable segments, North America and International. Certain operating segments are aggregated in both our North America and International reportable segments. The Company has aggregated these operating segments due to commonality of the products in each of their business lines having similar economic characteristics, services, customers and processes. There were no significant intersegment sales.
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The Company’s segment results are as follows as of and for the years ended December 31 (in thousands):
| 2014 | 2013 | 2012 | ||||||||||
| Revenues, net: | ||||||||||||
| North America | $ | 668,328 | $ | 460,705 | $ | 400,164 | ||||||
| International | 531,062 | 434,466 | 307,370 | |||||||||
| $ | 1,199,390 | $ | 895,171 | $ | 707,534 | |||||||
| Operating income: | ||||||||||||
| North America | $ | 287,303 | $ | 220,526 | $ | 196,677 | ||||||
| International | 278,146 | 200,106 | 128,251 | |||||||||
| $ | 565,449 | $ | 420,632 | $ | 324,928 | |||||||
| Depreciation and amortization: | ||||||||||||
| North America | $ | 39,275 | $ | 22,267 | $ | 20,289 | ||||||
| International | 73,086 | 50,470 | 31,747 | |||||||||
| $ | 112,361 | $ | 72,737 | $ | 52,036 | |||||||
| Capital expenditures: | ||||||||||||
| North America | $ | 9,407 | $ | 6,132 | $ | 7,735 | ||||||
| International | 17,663 | 14,653 | 11,376 | |||||||||
| $ | 27,070 | $ | 20,785 | $ | 19,111 | |||||||
| Long-lived assets (excluding goodwill): | ||||||||||||
| North America | $ | 1,833,311 | $ | 173,608 | $ | 152,516 | ||||||
| International | 750,051 | 852,390 | 447,391 | |||||||||
| $ | 2,583,362 | $ | 1,025,998 | $ | 599,907 | |||||||
The Company attributes revenues, net from external customers to individual countries based upon the country in which the related services were rendered. The table below presents certain financial information related to the Company’s significant foreign operations as of and for the years ended December 31 (in thousands):
| 2014 | 2013 | 2012 | ||||||||||
| Revenues, net: | ||||||||||||
| United States (country of domicile) | $ | 667,878 | $ | 460,111 | $ | 399,573 | ||||||
| United Kingdom | 262,613 | 198,762 | 153,305 |
| 2014 | 2013 | |||||||
| Long-lived assets (excluding goodwill): | ||||||||
| United States (country of domicile) | $ | 1,833,311 | $ | 173,354 | ||||
| United Kingdom | 342,023 | 352,538 | ||||||
| Brazil | 227,812 | 293,055 |
No single customer represented more than 10% of the Company’s consolidated revenue in 2014, 2013 and 2012.
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16. Selected Quarterly Financial Data (Unaudited)
| Fiscal Quarters Year Ended December 31, 2014 | First | Second | Third | Fourth | ||||||||||||
| Revenues, net | $ | 253,908 | $ | 273,502 | $ | 295,283 | $ | 376,697 | ||||||||
| Operating income | 114,136 | 134,484 | 144,207 | 172,622 | ||||||||||||
| Net income | 75,109 | 88,549 | 95,509 | 109,540 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic earnings per share | $ | 0.91 | $ | 1.07 | $ | 1.14 | $ | 1.25 | ||||||||
| Diluted earnings per share | 0.88 | 1.03 | 1.11 | 1.21 | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic weighted average shares outstanding | 82,737 | 82,996 | 83,611 | 87,877 | ||||||||||||
| Diluted weighted average shares outstanding | 85,695 | 85,817 | 86,134 | 90,240 |
| Fiscal Quarters Year Ended December 31, 2013 | First | Second | Third | Fourth | ||||||||||||
| Revenues, net | $ | 193,651 | $ | 220,869 | $ | 225,150 | $ | 255,501 | ||||||||
| Operating income | 94,253 | 109,074 | 111,255 | 106,050 | ||||||||||||
| Net income | 64,662 | 73,099 | 78,620 | 68,120 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic earnings per share | $ | 0.80 | $ | 0.90 | $ | 0.96 | $ | 0.83 | ||||||||
| Diluted earnings per share | 0.77 | 0.87 | 0.93 | 0.80 | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic weighted average shares outstanding | 81,222 | 81,573 | 81,974 | 82,388 | ||||||||||||
| Diluted weighted average shares outstanding | 83,960 | 84,461 | 84,905 | 85,277 |
The sum of the quarterly earnings per common share amounts for 2014 and 2013 may not equal the earnings per common share for the 2014 and 2013 due to rounding.
The fourth quarter of 2014 includes unusual favorable items totally $29.5 million. This represents a $28.1 million favorable impact of fair value adjustments recorded related to contingent consideration arrangements for the Company’s acquisition of VB in Brazil and the net favorable impact of $1.4 million from the reversal of other various contingent liabilities related to the Company’s acquisitions of DB and VB in Brazil. The fourth quarter of 2014 also includes a $15.8 million loss on extinguishment of debt related to the Company’s write-off of debt issuance costs associated with the refinancing of the Existing Credit Facility and entry into the New Credit Agreement, along with the Company’s recent acquisition of Comdata.
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