filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, 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 1, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 1, 2017
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, 2016, 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 Serviços e Tecnologia de Pagamentos S.A. and TravelCard Nederland B.V., which is included in the 2016 consolidated financial statements of FleetCor Technologies, Inc. and subsidiaries and constituted 18% of total assets as of December 31, 2016 and 5% of revenues 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 Serviços e Tecnologia de Pagamentos S.A. and TravelCard Nederland B.V..
In our opinion, FleetCor Technologies, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, 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, 2016 and 2015, 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, 2016 of FleetCor Technologies, Inc. and subsidiaries and our report dated March 1, 2017 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 1, 2017
FleetCor Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
| December 31, | ||||||||
| 2016 | 2015 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 475,018 | $ | 447,152 | ||||
| Restricted cash | 168,752 | 167,492 | ||||||
| Accounts and other receivables (less allowance for doubtful accounts of $32,506 and $21,903, respectively) | 1,202,009 | 638,954 | ||||||
| Securitized accounts receivable—restricted for securitization investors | 591,000 | 614,000 | ||||||
| Prepaid expenses and other current assets | 90,914 | 68,113 | ||||||
| Deferred income taxes | — | 8,913 | ||||||
| Total current assets | 2,527,693 | 1,944,624 | ||||||
| Property and equipment | 253,361 | 163,569 | ||||||
| Less accumulated depreciation and amortization | (110,857 | ) | (82,809 | ) | ||||
| Net property and equipment | 142,504 | 80,760 | ||||||
| Goodwill | 4,195,150 | 3,546,034 | ||||||
| Other intangibles, net | 2,653,233 | 2,183,595 | ||||||
| Equity method investment | 36,200 | 76,568 | ||||||
| Other assets | 71,952 | 58,225 | ||||||
| Total assets | $ | 9,626,732 | $ | 7,889,806 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,151,432 | $ | 669,528 | ||||
| Accrued expenses | 238,812 | 150,677 | ||||||
| Customer deposits | 530,787 | 507,233 | ||||||
| Securitization facility | 591,000 | 614,000 | ||||||
| Current portion of notes payable and lines of credit | 745,506 | 261,100 | ||||||
| Other current liabilities | 38,781 | 44,936 | ||||||
| Total current liabilities | 3,296,318 | 2,247,474 | ||||||
| Notes payable and other obligations, less current portion | 2,521,727 | 2,059,900 | ||||||
| Deferred income taxes | 668,580 | 713,428 | ||||||
| Other noncurrent liabilities | 56,069 | 38,957 | ||||||
| Total noncurrent liabilities | 3,246,376 | 2,812,285 | ||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $0.001 par value; 475,000,000 shares authorized; 121,259,960 shares issued and 91,836,938 shares outstanding at December 31, 2016; and 120,539,041 shares issued and 92,376,335 shares outstanding at December 31, 2015 | 121 | 121 | ||||||
| Additional paid-in capital | 2,074,094 | 1,988,917 | ||||||
| Retained earnings | 2,218,721 | 1,766,336 | ||||||
| Accumulated other comprehensive loss | (666,403 | ) | (570,811 | ) | ||||
| Less treasury stock (29,423,022 shares at December 31, 2016; and 28,162,706 shares at December 31, 2015) | (542,495 | ) | (354,516 | ) | ||||
| Total stockholders’ equity | 3,084,038 | 2,830,047 | ||||||
| Total liabilities and stockholders’ equity | $ | 9,626,732 | $ | 7,889,806 |
See accompanying notes.
FleetCor Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
| Year Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Revenues, net | $ | 1,831,546 | $ | 1,702,865 | $ | 1,199,390 | ||||||
| Expenses: | ||||||||||||
| Merchant commissions | 104,345 | 108,257 | 96,254 | |||||||||
| Processing | 355,414 | 331,073 | 173,337 | |||||||||
| Selling | 131,443 | 109,075 | 75,527 | |||||||||
| General and administrative | 283,625 | 297,715 | 205,963 | |||||||||
| Depreciation and amortization | 203,256 | 193,453 | 112,361 | |||||||||
| Other operating, net | (690 | ) | (4,242 | ) | (29,501 | ) | ||||||
| Operating income | 754,153 | 667,534 | 565,449 | |||||||||
| Equity method investment loss | 36,356 | 57,668 | 8,586 | |||||||||
| Other expense (income), net | 2,982 | 2,523 | (700 | ) | ||||||||
| Interest expense, net | 71,896 | 71,339 | 28,856 | |||||||||
| Loss on early extinguishment of debt | — | — | 15,764 | |||||||||
| Total other expense | 111,234 | 131,530 | 52,506 | |||||||||
| Income before income taxes | 642,919 | 536,004 | 512,943 | |||||||||
| Provision for income taxes | 190,534 | 173,573 | 144,236 | |||||||||
| Net income | $ | 452,385 | $ | 362,431 | $ | 368,707 | ||||||
| Earnings per share: | ||||||||||||
| Basic earnings per share | $ | 4.89 | $ | 3.94 | $ | 4.37 | ||||||
| Diluted earnings per share | $ | 4.75 | $ | 3.85 | $ | 4.24 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic weighted average shares outstanding | 92,597 | 92,023 | 84,317 | |||||||||
| Diluted weighted average shares outstanding | 95,213 | 94,139 | 86,982 |
See accompanying notes.
FleetCor Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands)
| Year Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Net income | $ | 452,385 | $ | 362,431 | $ | 368,707 | ||||||
| Other comprehensive loss: | ||||||||||||
| Foreign currency translation loss, net of tax | (95,592 | ) | (279,303 | ) | (223,691 | ) | ||||||
| Total other comprehensive loss | (95,592 | ) | (279,303 | ) | (223,691 | ) | ||||||
| Total comprehensive income | $ | 356,793 | $ | 83,128 | $ | 145,016 |
See accompanying notes.
FleetCor Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In Thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | |||||||||||||||||||
| Balance at December 31, 2013 | $ | 117 | $ | 631,667 | $ | 1,035,198 | $ | (67,817 | ) | $ | (375,663 | ) | $ | 1,223,502 | ||||||||||
| Net income | — | — | 368,707 | — | — | 368,707 | ||||||||||||||||||
| Other comprehensive loss, net of tax of $4 | — | — | — | (223,691 | ) | — | (223,691 | ) | ||||||||||||||||
| 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 | (291,508 | ) | (346,397 | ) | 2,618,562 | ||||||||||||||||
| Net income | — | — | 362,431 | — | — | 362,431 | ||||||||||||||||||
| Other comprehensive loss, net of tax of $0 | — | — | — | (279,303 | ) | — | (279,303 | ) | ||||||||||||||||
| Acquisition of common stock | — | — | — | — | (8,119 | ) | (8,119 | ) | ||||||||||||||||
| Issuance of common stock | 1 | 136,475 | — | — | — | 136,476 | ||||||||||||||||||
| Balance at December 31, 2015 | 121 | 1,988,917 | 1,766,336 | (570,811 | ) | (354,516 | ) | 2,830,047 | ||||||||||||||||
| Net income | — | — | 452,385 | — | — | 452,385 | ||||||||||||||||||
| Other comprehensive loss, net of tax of $0 | — | — | — | (95,592 | ) | — | (95,592 | ) | ||||||||||||||||
| Acquisition/return of common stock | — | — | — | — | (187,979 | ) | (187,979 | ) | ||||||||||||||||
| Issuance of common stock | — | 85,177 | — | — | — | 85,177 | ||||||||||||||||||
| Balance at December 31, 2016 | $ | 121 | $ | 2,074,094 | $ | 2,218,721 | $ | (666,403 | ) | $ | (542,495 | ) | $ | 3,084,038 |
See accompanying notes.
FleetCor Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
| Year Ended Year Ended December 31, | ||||||||||||
| 2016 | 2015 | 2014 | ||||||||||
| Operating activities | ||||||||||||
| Net income | $ | 452,385 | $ | 362,431 | $ | 368,707 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation | 36,456 | 30,462 | 21,097 | |||||||||
| Stock-based compensation | 63,946 | 90,122 | 37,649 | |||||||||
| Provision for losses on accounts receivable | 35,885 | 24,629 | 24,412 | |||||||||
| Amortization of deferred financing costs and discounts | 7,582 | 7,049 | 2,796 | |||||||||
| Loss on extinguishment of debt | — | — | 15,764 | |||||||||
| Amortization of intangible assets | 161,635 | 159,740 | 86,149 | |||||||||
| Amortization of premium on receivables | 5,165 | 3,250 | 3,259 | |||||||||
| Deferred income taxes | (28,681 | ) | 30,626 | 41,716 | ||||||||
| Equity method investment loss | 36,356 | 57,668 | 8,586 | |||||||||
| Other non-cash operating expenses | (690 | ) | (4,242 | ) | (27,501 | ) | ||||||
| Changes in operating assets and liabilities (net of acquisitions): | ||||||||||||
| Restricted cash | (2,306 | ) | (35,676 | ) | 6,625 | |||||||
| Accounts receivable | (338,796 | ) | 40,017 | 246,465 | ||||||||
| Prepaid expenses and other current assets | 5,301 | (12,564 | ) | 2,820 | ||||||||
| Other assets | (20,345 | ) | (2,524 | ) | 12,455 | |||||||
| Excess tax benefits related to stock-based compensation | — | (26,427 | ) | (56,790 | ) | |||||||
| Accounts payable, accrued expenses and customer deposits | 292,019 | 30,023 | (185,875 | ) | ||||||||
| Net cash provided by operating activities | 705,912 | 754,584 | 608,334 | |||||||||
| Investing activities | ||||||||||||
| Acquisitions, net of cash acquired1 | (1,331,985 | ) | (49,069 | ) | (2,395,778 | ) | ||||||
| Purchases of property and equipment | (59,011 | ) | (41,875 | ) | (27,070 | ) | ||||||
| Other | 1,411 | (8,470 | ) | (171,239 | ) | |||||||
| Net cash used in investing activities | (1,389,585 | ) | (99,414 | ) | (2,594,087 | ) | ||||||
| Financing activities | ||||||||||||
| Excess tax benefits related to stock-based compensation | — | 26,427 | 56,790 | |||||||||
| Proceeds from issuance of common stock | 21,231 | 19,926 | 29,641 | |||||||||
| (Payments) borrowings on securitization facility, net | (23,000 | ) | (61,000 | ) | 326,000 | |||||||
| Repurchase of common stock | (187,678 | ) | — | — | ||||||||
| Deferred financing costs paid | (2,272 | ) | — | (43,943 | ) | |||||||
| Proceeds from notes payable | 600,000 | — | 2,320,000 | |||||||||
| Principal payments on notes payable | (118,500 | ) | (103,500 | ) | (546,875 | ) | ||||||
| Borrowings from revolver —A Facility | 1,225,107 | — | 807,330 | |||||||||
| Payments on revolver —A Facility | (786,849 | ) | (486,818 | ) | (783,600 | ) | ||||||
| Payments on foreign revolver —B Facility | — | — | (7,337 | ) | ||||||||
| Borrowings (payments) from swing line of credit, net | 26,606 | (546 | ) | 4,990 | ||||||||
| Payment of contingent consideration | — | (42,177 | ) | — | ||||||||
| Other | (676 | ) | (377 | ) | (731 | ) | ||||||
| Net cash provided by (used in) financing activities | 753,969 | (648,065 | ) | 2,162,265 | ||||||||
| Effect of foreign currency exchange rates on cash | (42,430 | ) | (37,022 | ) | (37,548 | ) | ||||||
| Net increase (decrease) in cash | 27,866 | (29,917 | ) | 138,964 | ||||||||
| Cash and cash equivalents, beginning of year | 447,152 | 477,069 | 338,105 |
| Cash and cash equivalents, end of year | $ | 475,018 | $ | 447,152 | $ | 477,069 | ||||||
| Supplemental cash flow information | ||||||||||||
| Cash paid for interest | $ | 70,339 | $ | 72,537 | $ | 29,098 | ||||||
| Cash paid for income taxes | $ | 101,951 | $ | 83,380 | $ | 79,124 |
1Amounts reported in acquisitions and investment, net of cash acquired, includes debt assumed and immediately repaid in acquisitions.
See accompanying notes.
FleetCor Technologies, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements
December 31, 2016
- Description of Business
FleetCor Technologies, Inc. and its subsidiaries (the Company) is a global provider of workforce payment products. The Company primarily goes to market with its fuel card payments product solutions, corporate payments products, toll products, lodging cards and gift cards. The Company's products are used in 53 countries around the world, with its primary geographies in the U.S., Brazil and the U.K., which accounted for approximately 92% of revenue in 2016. The Company's core products are primarily sold to businesses, retailers, major oil companies and marketers and government entities. 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 products, including mobile telematics services, 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 its 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, lodging and transportation management services, gift card and stored value solutions, as well as a fleet telematics offering. In its International segment, the Company provides fuel card and related fuel services, work force payments, toll and parking payments products and vehicle maintenance management solutions.
- 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 primarily 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. The Company recognizes revenue from merchant and network relationships, processing and other arrangements 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, as more fully described below.
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 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 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, in jurisdictions where permitted under local regulations, primarily in the U.S. and Canada. 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 ceases billing and accruing for late fees and finance charges approximately 30-40 days after the customer’s balance becomes delinquent.
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 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 $91.6 million, $84.1 million and $13.2 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, 2016, 2015 and 2014, respectively.
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. Stored valued cards are generally recognized upon shipment to the customer. Card-based services are recognized when the card services are rendered.
Set forth below is a breakdown of revenue by product for the years ended December 31, 2016 and 2015 (in millions):
| Year Ended December 31, | ||||||||
| 2016 | 2015 | |||||||
| Revenue by Product Category* | Revenues, net | Revenues, net | ||||||
| Fuel cards | $ | 1,124 | $ | 1,116 | ||||
| Gift | 185 | 170 | ||||||
| Corporate payments | 180 | 162 | ||||||
| Tolls | 103 | 9 | ||||||
| Lodging | 101 | 92 | ||||||
| Other | 140 | 154 | ||||||
| Consolidated revenues, net | $ | 1,832 | $ | 1,703 |
- Columns may not calculate due to impact of rounding.
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.
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 2016, 2015 and 2014 include 52 weeks for the businesses reporting using a 4-4-5 accounting cycle.
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 once they age past 90 days and are deemed uncollectible from the customer. The Company also provides an allowance for receivables aged less than 90 days that it expects will be uncollectible based on historical collections experience including accounts that have filed for bankruptcy. At December 31, 2016 and 2015, approximately 95% and 98%, respectively, of outstanding accounts receivable were current. Accounts receivable deemed uncollectible are 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 as of 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 results of the acquired businesses are included in the Company’s results of operations beginning from the completion date of the applicable transaction.
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. Provisional estimates of the fair values of the assets acquired and liabilities assumed involves a number of estimates and assumptions that could differ materially from the final amounts recorded. 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, Goodwill, Intangibles and Equity Method Investment
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 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 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.
In step 1 of the goodwill impairment test for reporting units, 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 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 on October 1, 2016, the Company determined that the fair value of each of our reporting units was 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.
The Company regularly evaluates the carrying value of its equity method investment, which is not carried at fair value, for other-than-temporary impairment. The Company estimates the fair value of its equity method investment 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 discounts 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 our equity method investment in developing the valuation estimate. During the fourth quarters of 2016 and 2015, the Company determined that the performance improvement initiatives in its equity method investment in Masternaut Group Holdings Limited ("Masternaut") will take longer to and be more challenging to implement than originally projected, based on revised cash flow projections provided by the business. As a result, the Company has recorded a $36.1 million and $40 million non-cash impairment charge in its equity method investment for 2016 and 2015, respectively.
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 straight-line method over the estimated useful life of the software. The Company capitalized software costs of $33.1 million, $23.4 million and $17.7 million in 2016, 2015 and 2014, respectively. Amortization expense for software totaled $17.7 million, $11.6 million and $9.2 million in 2016, 2015 and 2014, 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. If in the future these earnings are repatriated to the United States, or if the Company determines that the earnings will be remitted in the foreseeable future, additional tax provisions may be required.
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. The Company includes any estimated interest and penalties on tax related matters in income tax expense.
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 loss of $2.8 million and $2.4 million for the years ended December 31, 2016 and 2015, respectively, and a gain of $1.4 million for the year ended 2014, which are recorded within other expense, 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 subject to forfeiture if employment terminates prior to vesting. The Company has 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 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 of one year. The fair value of restricted stock where the shares vest based on the passage of time or 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 and are included within interest expense. 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. In 2016, the Company capitalized $2.3 million of additional debt issuance costs associated with refinancing its Credit Facility. At December 31, 2016 and 2015, the Company had net deferred financing costs of $13.1 million and $18.1 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 $950 million revolving trade accounts receivable Securitization Facility. Accounts receivable collateralized within our Securitization Facility relate to trade receivables resulting from charge card activity. 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 $950 million 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 financing to reduce 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.
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 in the year ended December 31, 2014.
The Company’s accounts receivable and securitized accounts receivable include the following at December 31 (in thousands):
| 2016 | 2015 | |||||||
| Gross domestic accounts receivables | $ | 529,885 | $ | 338,275 | ||||
| Gross domestic securitized accounts receivable | 591,000 | 614,000 | ||||||
| Gross foreign receivables | 704,630 | 322,582 | ||||||
| Total gross receivables | 1,825,515 | 1,274,857 | ||||||
| Less allowance for doubtful accounts | (32,506 | ) | (21,903 | ) | ||||
| Net accounts and securitized accounts receivable | $ | 1,793,009 | $ | 1,252,954 |
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):
| 2016 | 2015 | 2014 | ||||||||||
| Allowance for doubtful accounts beginning of year | $ | 21,903 | $ | 23,842 | $ | 22,416 | ||||||
| Provision for bad debts | 35,885 | 24,629 | 24,412 | |||||||||
| Write-offs | (25,282 | ) | (26,568 | ) | (22,986 | ) | ||||||
| Allowance for doubtful accounts end of year | $ | 32,506 | $ | 21,903 | $ | 23,842 |
Foreign receivables are not included in the Company’s receivable securitization program. At December 31, 2016 and 2015, there was $591 million and $614 million, respectively, of short-term debt outstanding under the Company’s accounts receivable Securitization Facility.
Advertising
The Company expenses advertising costs as incurred. Advertising expense was $22.2 million, $19.9 million and $14.4 million for the years ended December 31, 2016, 2015 and 2014, 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 attributable to common shareholders.
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
Going Concern
In August 2013, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 did not have a material impact on the results of operations, financial condition, or cash flows, as it is disclosure based.
Simplification of Guidance on Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-3, “Interest—Imputation of Interest”, which changes the presentation of debt issuance costs in financial statements as a direct deduction from the related debt liability rather than as an asset. This ASU is effective for us for fiscal years ending after December 15, 2015 and interim periods. Early adoption is permitted. In August 2015, the FASB issued ASU 2015-15, “Interest-Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”, which is effective immediately. The SEC staff clarified that entities may continue presenting unamortized debt issuance costs for line-of-credit arrangements as an asset. The Company adopted this new guidance on January 1, 2016. As a result of the adoption of this ASU, $0.6 million and $1.5 million of unamortized debt issuance costs were retrospectively adjusted from prepaid expenses and other current assets to the current portion of notes payable and lines of credit and other assets to notes payable and other obligations, less current portion, respectively, in the Company’s Consolidated Balance Sheet as of December 31, 2015.
Accounting for Employee Stock-Based Payment
In March 2016, the FASB issued ASU 2016-09, "Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting", which requires excess tax benefits recognized on stock-based compensation expense be reflected in the consolidated statements of operations as a component of the provision for income taxes on a prospective basis. ASU 2016-09 also requires excess tax benefits recognized on stock-based compensation expense be classified as an operating activity in the consolidated statements of cash flows rather than a financing activity. Companies can elect to apply this provision retrospectively or prospectively. ASU 2016-09 also requires entities to elect whether to account for forfeitures as they occur or estimate expected forfeitures over the course of a vesting period. This ASU is effective for the Company for annual periods beginning after December 15, 2016. Early adoption is permitted.
During the third quarter of 2016, the Company elected to early adopt ASU 2016-09. The adoption of this ASU resulted in excess tax benefits being recorded as a reduction of income tax expense prospectively for all periods during 2016, rather than additional paid in capital, and an increase in the number of dilutive shares outstanding at the end of each period, which resulted in an increase to diluted earnings per share during the respective period. As required by ASU 2016-09, excess tax benefits recognized on stock-based compensation expense are classified as an operating activity in our consolidated statements of cash flows on a prospective basis within changes in accounts payable, accrued expenses and customer deposits. In accordance with ASU 2016-09, prior periods related to the classification of excess tax benefits have not been adjusted. The Company also elected to account for forfeitures as they occur, rather than estimate expected forfeitures over the course of a vesting period. As a result of the adoption of ASU 2016-09, the net cumulative effect of this change was not material.
The following table shows the impact of retrospectively applying ASU 2016-09 to the previously issued consolidated statements of operations for the three month period ended March 31 and the three and six month periods ended June 30 (in thousands, except per share amounts):
| Three Months Ended March 31, 2016 | Three Months Ended June 30, 2016 | |||||||||||||||||||||||
| As Previously Reported | Adjustments | As Recast | As Previously Reported | Adjustments | As Recast | |||||||||||||||||||
| Income before income taxes | $ | 156,912 | $ | — | $ | 156,912 | $ | 162,348 | $ | — | $ | 162,348 | ||||||||||||
| Provision for income taxes | 46,940 | (1,118 | ) | 45,822 | 48,163 | (2,068 | ) | 46,095 | ||||||||||||||||
| Net income | $ | 109,972 | $ | 1,118 | $ | 111,090 | $ | 114,185 | $ | 2,068 | $ | 116,253 | ||||||||||||
| Earnings per share: | ||||||||||||||||||||||||
| Basic earnings per share | $ | 1.19 | $ | 0.01 | $ | 1.20 | $ | 1.23 | $ | 0.02 | $ | 1.25 | ||||||||||||
| Diluted earnings per share | $ | 1.17 | $ | — | $ | 1.17 | $ | 1.21 | $ | 0.01 | $ | 1.22 | ||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||||||
| Basic | 92,516 | — | 92,516 | 92,665 | — | 92,665 | ||||||||||||||||||
| Diluted | 94,329 | 701 | 95,030 | 94,549 | 729 | 95,279 |
| Six Months Ended June 30, 2016 | ||||||||||||
| As Previously Reported | Adjustments | As Recast | ||||||||||
| Income before income taxes | $ | 319,260 | $ | — | $ | 319,260 | ||||||
| Provision for income taxes | 95,103 | (3,186 | ) | $ | 91,917 | |||||||
| Net income | $ | 224,157 | $ | 3,186 | $ | 227,343 | ||||||
| Earnings per share: | ||||||||||||
| Basic earnings per share | $ | 2.42 | $ | 0.04 | $ | 2.46 | ||||||
| Diluted earnings per share | $ | 2.37 | $ | 0.02 | $ | 2.39 | ||||||
| Weighted average common shares outstanding: | ||||||||||||
| Basic | 92,591 | — | 92,591 | |||||||||
| Diluted | 94,437 | 700 | 95,137 |
The following table shows the impact of retrospectively applying this guidance to the Consolidated Statement of Cash flows for the three months ended March 31, 2016 and six months ended June 30, 2016 (in thousands):
| Three Months Ended March 31, 2016 | Six Months Ended June 30, 2016 | |||||||||||||||||||||||
| As Previously Reported | Adjustments | As Recast | As Previously Reported | Adjustments | As Recast | |||||||||||||||||||
| Net cash provided by operating activities | $ | 121,505 | $ | 1,118 | $ | 122,623 | $ | 208,856 | $ | 3,186 | $ | 212,042 | ||||||||||||
| Net cash used in investing activities | (20,745 | ) | — | (20,745 | ) | (37,924 | ) | — | (37,924 | ) | ||||||||||||||
| Net cash used in financing activities | (157,389 | ) | (1,118 | ) | (158,507 | ) | (118,303 | ) | (3,186 | ) | (121,489 | ) | ||||||||||||
| Effect of foreign currency exchange rates on cash | 8,795 | — | 8,795 | (6,696 | ) | — | (6,696 | ) | ||||||||||||||||
| Net (decrease) increase in cash | $ | (47,834 | ) | $ | — | $ | (47,834 | ) | $ | 45,933 | $ | — | $ | 45,933 |
Simplification of Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”, which requires entities to present deferred tax assets (DTAs) and deferred tax liabilities (DTLs) as noncurrent in a classified balance sheet. It thus simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current or noncurrent in a classified balance sheet. Netting of DTAs and DTLs by tax jurisdiction is still required under the new guidance. This ASU is effective for the Company for annual reporting periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. During the fourth quarter of 2016, the Company elected to early adopt ASU 2015-17 on a prospective basis and prior periods were not retrospectively adjusted. The Company’s adoption of this ASU did not have a material impact on the 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.
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Codification ("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. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers: Deferral of the Effective Date”, which defers the effective date of the new revenue recognition standard by one year. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, which clarifies how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. In April 2016, the FASB issued ASU 2016-10, "Identifying Performance Obligations and Licensing", which clarifies the accounting for intellectual property licenses and identifying performance obligations. In May 2016, the FASB issued ASU 2016-11, "Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting", which rescinds certain SEC guidance in response to announcements made by the SEC staff at the EITF's March 3, 2016 meeting and ASU 2016-12, "Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients", which clarifies the guidance on collectibility, non-cash consideration, the presentation of sales and other similar taxes collected from customers and contract modifications and completed contracts at transition. Additionally, ASU 2016-12 clarifies that entities electing the full retrospective transition method would no longer be required to disclose the effect of the change in accounting principle on the period of adoption; however, entities would still be required to disclose the effects on preadoption periods that were retrospectively adjusted. These ASUs are effective for the Company for reporting periods beginning after December 15, 2017, but permit companies the option to adopt as of the original effective date. In 2016, the Company continued its assessment of the new standard with a focus on identifying the performance obligations included within its revenue arrangements with customers and evaluating its methods of estimating the amount of and timing of variable consideration. The guidance permits the use of either a retrospective or cumulative effect transition method. The Company anticipates selecting the modified retrospective method, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to contracts in process as of the adoption date. Under this method, the Company would not restate the prior financial statements presented, therefore the new standard requires the Company to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes, if any. The Company continues its assessment to evaluate the impact of the provisions of ASC 606 on the results of operations, financial condition, and cash flows.
Accounting for Leases
In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. This ASU also requires disclosures to provide additional information about the amounts recorded in the financial statements. This ASU is effective for the Company for annual periods beginning after December 15, 2018 and interim periods therein. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance for leases that exist or are entered into after the beginning of the earliest comparative period presented. The Company is currently evaluating the impact of this ASU on the results of operations, financial condition, or cash flows.
Accounting for Breakage
In March 2016, the FASB issued ASU 2016-04, “Liabilities-Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products”, which requires entities that sell prepaid stored value products redeemable for goods, services or cash at third-party merchants to derecognize liabilities related to those products for breakage. This ASU is effective for the Company for reporting periods beginning after December 15, 2017. Early adoption is permitted. The ASU must be adopted using either a modified retrospective approach with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption or a full retrospective approach. 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.
Cash Flow Classification
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments", which amends the guidance in ASC 230, Statement of Cash Flows. This amended guidance reduces the diversity in practice that has resulted from the lack of consistent principles related to the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for the Company for reporting periods beginning after December 15, 2017. Early adoption is permitted. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. 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.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash", which amends the guidance in ASC 230, Statement of Cash Flows, on the classification and presentation of restricted cash in the statement of cash flows. This ASU is effective for the Company for reporting periods beginning after December 15, 2017. Early adoption is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this ASU should be applied using a retrospective transition method to each period presented. 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.
- 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. |
| • | 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. |
| • | 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. |
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, 2016 and 2015, (in thousands):
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| December 31, 2016 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Repurchase agreements | $ | 232,131 | $ | — | $ | 232,131 | $ | — | ||||||||
| Money market | 50,179 | — | 50,179 | — | ||||||||||||
| Certificates of deposit | 48 | — | 48 | — | ||||||||||||
| Total cash equivalents | $ | 282,358 | $ | — | $ | 282,358 | $ | — | ||||||||
| December 31, 2015 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Repurchase agreements | $ | 144,082 | $ | — | $ | 144,082 | $ | — | ||||||||
| Money market | 55,062 | — | 55,062 | — | ||||||||||||
| Certificates of deposit | 9,373 | — | 9,373 | — | ||||||||||||
| Total cash equivalents | $ | 208,517 | $ | — | $ | 208,517 | $ | — |
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, money markets and certificates of deposit. The value of overnight repurchase agreements is determined based upon the quoted market prices for the treasury securities associated with the repurchase agreements. The value of money market instruments is the financial institutions' month-end statement, as these instruments are not tradeable and must be settled directly by us with the respective financial institution. 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 each quarter. There were no transfers between fair value levels during 2016 and 2015.
The Company’s nonfinancial assets that are measured at fair value on a nonrecurring basis include those in connection with periodic testing for impairment including property, plant and equipment, equity method investment, goodwill and other intangible assets. While completing the preliminary acquisition accounting in 2016, the Company generally uses projected cash flows, discounted as appropriate, to estimate the fair values of the assets acquired and liabilities assumed 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.
The Company regularly evaluates the carrying value of its equity method investment and during the fourth quarters of 2016 and 2015, the Company determined that the fair value of its 44% investment in Masternaut had declined as a result of the performance improvement initiatives taking longer than projected to implement. As a result, the Company determined that the carrying value of its investment exceeded its fair value and concluded that this decline in value was other than temporary. The Company recorded a $36.1 million and $40 million non-cash impairment charge during 2016 and 2015, respectively, which is included in the equity method investment loss in the accompanying Consolidated Statement of Income.
The fair 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.
- Stockholders' Equity
On November 14, 2014, the Company acquired all of Comdata’s outstanding shares for a total payment of $3.4 billion, net of cash acquired, which included cash consideration of $2.4 billion and the issuance of 7,625,380 shares of the Company’s common stock from treasury shares to the former shareholders of Comdata.
On February 4, 2016, the Company’s Board of Directors approved a stock repurchase program (the "Program") under which the Company may begin purchasing up to $500 million of its common stock over the next 18 months period. Any stock repurchases may be made at times and in such amounts as deemed appropriate. The timing and amount of stock repurchases, if any, will depend on a variety of factors including the stock price, market conditions, corporate and regulatory requirements, and any additional constraints related to material inside information the Company may possess. Any repurchases are expected to be funded by available cash flow from the business and working capital. There were 1,259,145 common shares totaling $187.7 million repurchased under the Program during 2016.
- Stock 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 Stock Incentive 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, 2016, 2015 and 2014, 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 2,968,584 additional shares remaining available for grant under the Plans at December 31, 2016.
The table below summarizes the expense recognized related to share-based payments recognized for the years ended December 31 (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Stock options | $ | 35,234 | $ | 44,260 | $ | 13,267 | ||||||
| Restricted stock | 28,712 | 45,862 | 24,382 | |||||||||
| Stock-based compensation | $ | 63,946 | $ | 90,122 | $ | 37,649 |
The tax benefits recorded on stock based compensation were $35.0 million, $35.7 million and $13.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The following table summarizes the Company’s total unrecognized compensation cost related to stock-based compensation as of December 31, 2016 (cost in thousands):
| Unrecognized Compensation Cost | Weighted Average Period of Expense Recognition (in Years) | |||||
| Stock options | $ | 53,026 | 1.48 | |||
| Restricted stock | 2,965 | 0.96 | ||||
| Total | $ | 55,991 |
Stock Options
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, 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 | |||||||||||||||||
| Granted | 654 | 154.56 | $ | 35.32 | ||||||||||||||||||
| Exercised | (586 | ) | 33.97 | 63,863 | ||||||||||||||||||
| Forfeited | (196 | ) | 95.16 | |||||||||||||||||||
| Outstanding at December 31, 2015 | 5,003 | 72.72 | 2,545 | 26.82 | 351,277 | |||||||||||||||||
| Granted | 1,780 | 133.33 | $ | 28.61 | ||||||||||||||||||
| Exercised | (500 | ) | 42.36 | 49,592 | ||||||||||||||||||
| Forfeited | (137 | ) | 140.67 | |||||||||||||||||||
| Outstanding at December 31, 2016 | 6,146 | $ | 91.20 | 3,429 | $ | 55.00 | $ | 309,238 | ||||||||||||||
| Expected to vest at December 31, 2016 | 6,146 | $ | 91.20 |
The following table summarizes information about stock options outstanding at December 31, 2016 (shares in thousands):
| Exercise Price | Options Outstanding | Weighted Average Remaining Vesting Life in Years | Options Exercisable | |||||
| $10.00 – 58.02 | 2,536 | 0.00 | 2,527 | |||||
| 74.99 – 111.09 | 159 | 0.77 | 71 | |||||
| 114.90 – 138.47 | 1,382 | 1.28 | 113 | |||||
| 144.59 – 149.68 | 935 | 1.15 | 653 | |||||
| 151.16 – 158.24 | 772 | 2.44 | 65 | |||||
| 172.68 – 174.35 | 362 | 3.82 | — | |||||
| 6,146 | 3,429 |
The aggregate intrinsic value of stock options exercisable at December 31, 2016 was $296.7 million. The weighted average remaining contractual term of options exercisable at December 31, 2016 was 5.0 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 grants or modifications during the years ended December 31 as follows:
| 2016 | 2015 | 2014 | |||||||
| Risk-free interest rate | 1.08 | % | 1.47 | % | 1.24 | % | |||
| Dividend yield | — | — | — | ||||||
| Expected volatility | 27.29 | % | 27.77 | % | 34.61 | % | |||
| Expected life (in years) | 3.47 | 4.46 | 3.90 |
The weighted-average remaining contractual life for options outstanding was 6.7 years at December 31, 2016.
Restricted Stock
There were no restricted stock shares granted with performance based conditions or market conditions in 2016, 2015 and 2014. 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, 2013 | 634 | $ | 67.83 | ||||
| Granted | 467 | 146.12 | |||||
| Cancelled | (76 | ) | 31.48 | ||||
| Issued | (309 | ) | 74.56 | ||||
| Outstanding at December 31, 2014 | 716 | 121.38 | |||||
| Granted | 126 | 151.33 | |||||
| Cancelled | (52 | ) | 135.92 | ||||
| Issued | (293 | ) | 85.40 | ||||
| Outstanding at December 31, 2015 | 497 | 149.40 | |||||
| Granted | 152 | 128.90 | |||||
| Cancelled | (41 | ) | 145.25 | ||||
| Issued | (229 | ) | 151.72 | ||||
| Outstanding at December 31, 2016 | 379 | $ | 140.39 |
- Acquisitions
2016 Acquisitions
During 2016, the Company completed acquisitions with an aggregate purchase price of $1.3 billion, net of cash acquired of $51.3 million, which includes deferred payments made during the period related to prior acquisitions of $6.1 million.
During 2016, the Company made additional investments of $7.9 million related to its equity method investment at Masternaut. The Company also received a $9.2 million return of its investment in Masternaut in 2016.
STP
On August 31, 2016, the Company acquired all of the outstanding stock of Serviços e Tecnologia de Pagamentos S.A. (“STP”), for approximately $1.23 billion, net of cash acquired of $40.2 million. STP is an electronic toll payments company in Brazil and provides cardless fuel payments at a number of Shell sites throughout Brazil. The purpose of this acquisition was to expand our presence in the toll market in Brazil. The Company financed the acquisition using a combination of existing cash and borrowings under its existing credit facility. Results from the acquired business have been reported in the Company's international segment since the date of acquisition. The following table summarizes the preliminary acquisition accounting for STP (in thousands):
| Trade and other receivables | $ | 243,157 | |
| Prepaid expenses and other | 6,998 | ||
| Deferred tax assets | 9,365 | ||
| Property and equipment | 38,732 | ||
| Other long term assets | 5,785 | ||
| Goodwill | 659,288 | ||
| Customer relationships and other identifiable intangible assets | 584,274 | ||
| Liabilities assumed | (320,110 | ) | |
| Aggregate purchase price | $ | 1,227,489 | |
Along with the Company's acquisition of STP, the Company signed noncompete agreements with certain parties for approximately $21.6 million. The estimated fair value of intangible assets acquired and the related estimated useful lives consisted of the following (in thousands):
| Useful Lives (in Years) | Value | |||
| Customer relationships | 8.5-17 | $ | 349,310 | |
| Trade names and trademarks - indefinite | N/A | 189,547 | ||
| Technology | 6 | 45,417 | ||
| $ | 584,274 |
In connection with the STP acquisition, the Company recorded contingent liabilities aggregating $20.0 million in the consolidated balance sheet, recorded within other noncurrent liabilities and accrued expenses in the consolidated balance sheet at the date of acquisition. A portion of these acquired liabilities have been indemnified by the respective sellers. As a result, an indemnification asset of $4.8 million was recorded within other long term assets in the consolidated balance sheet. The contingent liabilities and the indemnification asset are included in the preliminary acquisition accounting for STP at the date of acquisition. The potential range of acquisition related contingent liabilities that the Company estimates would be incurred and ultimately recoverable is still being evaluated.
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 STP and assembled workforce. The allocation of the goodwill to the reporting units has not been completed. The goodwill and definite lived intangibles acquired with this business is expected to be deductible for tax purposes.
Other
During 2016, the Company acquired additional fuel card portfolios in the U.S. and the United Kingdom, additional Shell fuel card markets in Europe and Travelcard in the Netherlands totaling approximately $76.7 million, net of cash acquired of $11.1 million. The following table summarizes the preliminary acquisition accounting for these acquisitions (in thousands):
| Trade and other receivables | $ | 27,810 | |
| Prepaid expenses and other | 5,097 | ||
| Property and equipment | 992 | ||
| Goodwill | 28,540 | ||
| Other intangible assets | 61,823 | ||
| Deferred tax asset | 146 | ||
| Deferred tax liabilities | (5,123 | ) | |
| Liabilities assumed | (42,550 | ) | |
| Aggregate purchase prices | $ | 76,735 |
The estimated fair value of intangible assets acquired and the related estimated useful lives consisted of the following (in thousands):
| Useful Lives (in Years) | Value | |||
| Customer relationships and other identifiable intangible assets | 10-18 | $ | 61,823 | |
| $ | 61,823 |
These other 2016 acquisitions were not material individually or in the aggregate to the Company’s consolidated financial statements. The accounting for certain of these acquisitions is preliminary as the Company is still completing the valuation of intangible assets, income taxes and evaluation of acquired contingencies.
2015 Acquisitions
During 2015, the Company completed acquisitions of Shell portfolios related to our fuel card businesses in Europe, as well as a small acquisition internationally, with an aggregate purchase price of $46.3 million, made additional investments of $8.4 million related to its equity method investment at Masternaut and deferred payments of $3.4 million related to acquisitions occurring in prior years. The following table summarizes the final acquisition accounting for the acquisitions completed during 2015 (in thousands):
| Trade and other receivables | $ | 521 | ||
| Prepaid expenses and other | 996 | |||
| Property and equipment | 197 | |||
| Goodwill | 9,561 | |||
| Other intangible assets | 39,791 | |||
| Deferred tax liabilities | (2,437 | ) | ||
| Liabilities assumed | (2,331 | ) | ||
| Aggregate purchase prices | $ | 46,298 |
The final estimated fair value of intangible assets acquired and the related estimated useful lives consisted of the following (in thousands):
| Useful Lives (in Years) | Value | |||||
| Customer relationships | 14-20 | $ | 39,791 | |||
| $ | 39,791 |
These acquisitions were not material individually or in the aggregate to the Company’s consolidated financial statements. The accounting for certain of these acquisitions is preliminary pending completing the valuation of intangible assets, income taxes and evaluation of acquired contingencies.
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, 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 for $3.4 billion, net of cash acquired. Comdata is a business-to-business provider of innovative electronic payment solutions. As an issuer and a processor, Comdata provides fleet, virtual card and gift card solutions. This acquisition complemented the Company’s current fuel card business in the U.S. and added a new product with the virtual payments business. 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. 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. The following table summarizes the final acquisition accounting for Comdata (in thousands):
| Restricted cash | $ | 93,312 | ||
| Trade and other receivables | 638,137 | |||
| Prepaid expenses and other | 15,443 | |||
| Property and equipment | 17,984 | |||
| Goodwill | 2,253,348 | |||
| Other intangible assets | 1,630,700 | |||
| Notes and other liabilities assumed | (804,032 | ) | ||
| Deferred tax liabilities | (423,977 | ) | ||
| Other long term liabilities | (6,841 | ) | ||
| Aggregate purchase price | $ | 3,414,074 |
The final estimated fair value of intangible assets acquired and the related estimated useful lives consisted of the following (in thousands):
| Useful Lives (in Years) | Value | |||||
| Customer relationships | 19 | $ | 1,269,700 | |||
| Trade names and trademarks—indefinite | N/A | 237,100 | ||||
| Software | 4 – 7 | 123,300 | ||||
| Non-competes | 3 | 600 | ||||
| $ | 1,630,700 |
Other
During 2014, the Company acquired Pacific Pride, a U.S. fuel card business, and a fuel card business from Shell in Germany. The following table summarizes the final acquisition accounting for these acquisitions during 2014 (in thousands):
| Trade and other receivables | $ | 62,604 | ||
| Prepaid expenses and other | 232 | |||
| Property and equipment | 71 | |||
| Goodwill | 30,596 | |||
| Other intangible assets | 47,974 | |||
| Notes and other liabilities assumed | (66,499 | ) | ||
| Aggregate purchase prices | $ | 74,978 |
The final estimated fair value of intangible assets acquired and the related estimated useful lives consisted of the following (in thousands):
| Useful Lives (in Years) | Value | |||||
| Customer relationships | 8 | $ | 15,574 | |||
| Trade names and trademarks—indefinite | N/A | 2,900 | ||||
| Franchisee agreements | 20 | 29,500 | ||||
| $ | 47,974 |
These acquisitions were not material individually or in the aggregate to the Company’s consolidated financial statements.
The Company expensed acquisition related expenses related to its acquisitions of $3.3 million, $1.7 million and $3.2 million in the years ending December 31, 2016, 2015 and 2014, respectively.
- 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, 2015 | Acquisitions | Acquisition Accounting Adjustments | Foreign Currency | December 31, 2016 | ||||||||||||||||
| Segment | ||||||||||||||||||||
| North America | $ | 2,640,409 | $ | — | $ | — | $ | — | $ | 2,640,409 | ||||||||||
| International | 905,625 | 687,828 | (521 | ) | (38,191 | ) | 1,554,741 | |||||||||||||
| $ | 3,546,034 | $ | 687,828 | $ | (521 | ) | $ | (38,191 | ) | $ | 4,195,150 |
| December 31, 2014 | Acquisitions | Acquisition Accounting Adjustments | Foreign Currency | December 31, 2015 | ||||||||||||||||
| Segment | ||||||||||||||||||||
| North America | $ | 2,659,417 | $ | — | $ | (19,008 | ) | $ | — | $ | 2,640,409 | |||||||||
| International | 1,053,765 | 10,082 | (2,237 | ) | (155,985 | ) | 905,625 | |||||||||||||
| $ | 3,713,182 | $ | 10,082 | $ | (21,245 | ) | $ | (155,985 | ) | $ | 3,546,034 |
At December 31, 2016 and 2015, approximately $362.6 million and $351.0 million of the Company’s goodwill is deductible for tax purposes, respectively. Acquisition accounting adjustments recorded in 2016 and 2015 are a result of the Company completing its acquisition accounting and working capital adjustment periods for certain prior year acquisitions.
Other intangible assets consisted of the following at December 31 (in thousands):
| 2016 | 2015 | |||||||||||||||||||||||||
| 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 | 17.0 | $ | 2,449,389 | $ | (458,118 | ) | $ | 1,991,271 | $ | 2,071,928 | $ | (329,664 | ) | $ | 1,742,264 | |||||||||||
| Trade names and trademarks—indefinite lived | N/A | 510,952 | — | 510,952 | 318,048 | — | 318,048 | |||||||||||||||||||
| Trade names and trademarks—other | 14.7 | 2,746 | (2,021 | ) | 725 | 3,067 | (2,058 | ) | 1,009 | |||||||||||||||||
| Software | 5.3 | 211,331 | (85,167 | ) | 126,164 | 170,085 | (54,250 | ) | 115,835 | |||||||||||||||||
| Non-compete agreements | 5.0 | 35,191 | (11,070 | ) | 24,121 | 15,209 | (8,770 | ) | 6,439 | |||||||||||||||||
| Total other intangibles | $ | 3,209,609 | $ | (556,376 | ) | $ | 2,653,233 | $ | 2,578,337 | $ | (394,742 | ) | $ | 2,183,595 |
Changes in foreign exchange rates resulted in an $36.8 million decrease to the carrying values of other intangible assets in the year ended December 31, 2016. Amortization expense related to intangible assets for the years ended December 31, 2016, 2015 and 2014 was $161.6 million, $159.7 million and $86.1 million, respectively.
The future estimated amortization of intangibles at December 31, 2016 is as follows (in thousands):
| 2017 | $ | 203,845 | ||
| 2018 | 200,021 | |||
| 2019 | 186,792 | |||
| 2020 | 167,136 | |||
| 2021 | 163,586 | |||
| Thereafter | 1,220,901 |
- Property, Plant and Equipment
Property, plant and equipment, net consisted of the following at December 31 (in thousands):
| Estimated Useful Lives (in Years) | 2016 | 2015 | ||||||||
| Computer hardware and software | 3 to 5 | $ | 197,958 | $ | 131,409 | |||||
| Card-reading equipment | 4 to 6 | 25,553 | 10,887 | |||||||
| Furniture, fixtures, and vehicles | 2 to 10 | 15,418 | 10,291 | |||||||
| Buildings and improvements | 5 to 50 | 14,432 | 10,982 | |||||||
| Property, plant and equipment, gross | 253,361 | 163,569 | ||||||||
| Less: accumulated depreciation | (110,857 | ) | (82,809 | ) | ||||||
| Property, plant and equipment, net | $ | 142,504 | $ | 80,760 |
Depreciation expense related to property and equipment for the years ended December 31, 2016, 2015 and 2014 was $36.5 million, $30.5 million and $21.1 million, respectively. Depreciation expense includes $17.7 million, $11.6 million and $9.2 million, for capitalized computer software costs for the years ended December 31, 2016, 2015 and 2014, respectively. At December 31, 2016 and 2015, the Company had unamortized computer software costs of $60.2 million and $44.9 million, respectively.
- Accrued Expenses
Accrued expenses consisted of the following at December 31 (in thousands):
| 2016 | 2015 | |||||||
| Accrued bonuses | $ | 15,866 | $ | 11,995 | ||||
| Accrued payroll and severance | 10,704 | 6,479 | ||||||
| Accrued taxes | 104,623 | 5,977 | ||||||
| Accrued commissions/rebates | 43,467 | 49,157 | ||||||
| Other | 64,152 | 77,069 | ||||||
| $ | 238,812 | $ | 150,677 |
- 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):
| 2016 | 2015 | |||||||
| Term notes payable—domestic(a), net of discounts | $ | 2,639,279 | $ | 2,157,376 | ||||
| Revolving line of credit A Facility—domestic(a) | 465,000 | 160,000 | ||||||
| Revolving line of credit A Facility—foreign(a) | 123,412 | — | ||||||
| Revolving line of credit A Facility—swing line(a) | 26,608 | — | ||||||
| Other(c) | 12,934 | 3,624 | ||||||
| Total notes payable and other obligations | 3,267,233 | 2,321,000 | ||||||
| Securitization Facility(b) | 591,000 | 614,000 | ||||||
| Total notes payable, credit agreements and Securitization Facility | $ | 3,858,233 | $ | 2,935,000 | ||||
| Current portion | $ | 1,336,506 | $ | 875,100 | ||||
| Long-term portion | 2,521,727 | 2,059,900 | ||||||
| Total notes payable, credit agreements and Securitization Facility | $ | 3,858,233 | $ | 2,935,000 |
| (a) | On October 24, 2014, the Company entered into a $3.36 billion 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 A loan facility in the amount of $2.02 billion and (d) a term loan B facility in the amount $300 million. Proceeds from the 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 B loan ) 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 arrears. On August 22, 2016, the Company entered into the first Amendment to the existing New Credit Agreement, which established an incremental term A loan in the amount of $600 million under the New Credit Agreement accordion feature. The proceeds from the additional $600 million in term A loans were used to partially finance the STP acquisition. The amendment also established an accordion feature for borrowing an additional $500 million in term A, term B or revolver A debt. On January 20, 2017, the Company entered into the second amendment to the New Credit Agreement, which established a new term B loan ("term B-2 loan") in the amount of $245 million to replace the existing Term B loan. Interest on the Term B-2 loan facility accrues based on the Eurocurrency Rate or the Base Rate, except that the applicable margin is fixed at 2.25% for Eurocurrency Loans and at 1.25% 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, 2016, the interest rate on the term A loan and the domestic revolving A facility was 2.52%, the interest rate on the foreign revolving A facility was 2.01%, the interest rate on the revolving A facility swing line of credit was 1.97% and the interest rate on the term B-2 loan was 3.77%. The unused credit facility was 0.35% for all facilities at
December 31, 2016. The stated maturity dates for the term A loan, revolving loans, and letters of credit under the New Credit Agreement is November 14, 2019 and November 14, 2021 for the term B loan.
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.
At December 31, 2016, the Company had $2.4 billion in borrowings outstanding on term A loan, excluding the related debt discount, $245.0 million in borrowings outstanding on term B-2 loan, excluding the related debt discount, $465.0 million in borrowings outstanding on the domestic revolving A facility, $123.4 million in borrowings outstanding on the foreign revolving A facility and $26.6 million in borrowings outstanding on the swing line revolving A facility. The Company has unamortized debt discounts of $6.2 million related to the term A facility and $1.0 million related to the term B facility at December 31, 2016. The effective interest rate incurred on term loans was 2.57% and 2.04% during 2016 and 2015, respectively, related to the discount on debt. Principal payments of $118.5 million were made on the term loans during 2016.
| (b) | The Company is party to a $950 million receivables purchase agreement (Securitization Facility) that was amended and restated for the fifth time on November 14, 2014 in connection with the Comdata acquisition to increase the commitments from $500.0 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. On November 5, 2015, the first amendment to the fifth amended and restated receivables purchase agreement was entered into which allowed the Company to enter into a new contract with BP and modified the eligible receivables definition and on December 1, 2015, the second amendment to the fifth amended and restated receivables purchase agreement was entered into which reduced the commitments from $1.2 billion to $950 million. There is a program fee equal to one month LIBOR and the Commercial Paper Rate of 0.85% plus 0.90% and 0.43% plus 0.90% as of December 31, 2016 and 2015, respectively. The unused facility fee is payable at a rate of 0.40% as of December 31, 2016 and 2015. 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. |
| (c) | Other includes the long term portion of contingent consideration and deferred payments associated with certain of our businesses. |
The Company was in compliance with all financial and non-financial covenants at December 31, 2016.
The contractual maturities of the Company’s notes payable and other obligations at December 31, 2016 are as follows (in thousands):
| 2017 | $ | 745,506 | ||
| 2018 | 273,223 | |||
| 2019 | 2,010,302 | |||
| 2020 | 1,734 | |||
| 2021 | 235,518 | |||
| Thereafter | 950 |
- Income Taxes
Income before the provision for income taxes is attributable to the following jurisdictions (in thousands) for years ended December 31:
| 2016 | 2015 | 2014 | ||||||||||
| United States | $ | 383,427 | $ | 304,743 | $ | 233,933 | ||||||
| Foreign | 259,492 | 231,261 | 279,010 | |||||||||
| Total | $ | 642,919 | $ | 536,004 | $ | 512,943 |
The provision for income taxes for the years ended December 31 consists of the following (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 147,406 | $ | 82,926 | $ | 39,168 | ||||||
| State | 10,725 | 8,051 | 8,208 | |||||||||
| Foreign | 61,084 | 51,970 | 55,144 | |||||||||
| Total current | 219,215 | 142,947 | 102,520 | |||||||||
| Deferred: | ||||||||||||
| Federal | (18,723 | ) | 36,723 | 41,814 | ||||||||
| State | 1,608 | 1,525 | (596 | ) | ||||||||
| Foreign | (11,566 | ) | (7,622 | ) | 498 | |||||||
| Total deferred | (28,681 | ) | 30,626 | 41,716 | ||||||||
| Total provision | $ | 190,534 | $ | 173,573 | $ | 144,236 |
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):
| 2016 | 2015 | 2014 | |||||||||||||||||||
| Computed “expected” tax expense | $ | 225,022 | 35.0 | % | $ | 187,601 | 35.0 | % | $ | 179,530 | 35.0 | % | |||||||||
| Changes resulting from: | |||||||||||||||||||||
| Change in valuation allowance | 11,952 | 1.9 | 20,243 | 3.8 | (53 | ) | — | ||||||||||||||
| Foreign income tax differential | (25,533 | ) | (4.0 | ) | (23,718 | ) | (4.4 | ) | (24,972 | ) | (4.9 | ) | |||||||||
| State taxes net of federal benefits | 9,439 | 1.5 | 6,711 | 1.2 | 4,492 | 0.9 | |||||||||||||||
| Foreign-sourced nontaxable income | (7,961 | ) | (1.2 | ) | (10,573 | ) | (2.0 | ) | (8,128 | ) | (1.6 | ) | |||||||||
| IRC Section 199 deduction | (7,731 | ) | (1.2 | ) | (10,221 | ) | (1.9 | ) | — | — | |||||||||||
| Excess tax benefits related to stock-based compensation | (11,974 | ) | (1.9 | ) | — | — | — | — | |||||||||||||
| Other | (2,680 | ) | (0.4 | ) | 3,530 | 0.7 | (6,633 | ) | (1.3 | ) | |||||||||||
| Provision for income taxes | $ | 190,534 | 29.7 | % | $ | 173,573 | 32.4 | % | $ | 144,236 | 28.1 | % |
The adoption of ASU 2016-09, "Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting" resulted in excess tax benefits being recorded as a reduction of income tax expense during 2016, rather than additional paid in capital as discussed in the summary of significant accounting policies footnote.
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):
| 2016 | 2015 | |||||||
| Deferred tax assets: | ||||||||
| Accounts receivable, principally due to the allowance for doubtful accounts | $ | 7,148 | $ | 6,277 | ||||
| Accrued expenses not currently deductible for tax | 2,647 | 5,797 | ||||||
| Stock based compensation | 41,415 | 35,066 | ||||||
| Income tax credits | 376 | 3,830 | ||||||
| Net operating loss carry forwards | 45,969 | 39,970 | ||||||
| Equity investment | 53,379 | 38,760 | ||||||
| Accrued escheat | 7,290 | 13,497 | ||||||
| Fixed assets, intangibles and other | 15,622 | 14,191 | ||||||
| Deferred tax assets before valuation allowance | 173,846 | 157,388 | ||||||
| Valuation allowance | (76,395 | ) | (62,605 | ) | ||||
| Deferred tax assets, net | 97,451 | 94,783 | ||||||
| Deferred tax liabilities: | ||||||||
| Intangibles—including goodwill | (687,443 | ) | (732,017 | ) | ||||
| Basis difference in investment in foreign subsidiaries | (48,354 | ) | (47,737 | ) | ||||
| Prepaid expenses | (3,644 | ) | — | |||||
| Property and equipment, principally due to differences between book and tax depreciation, and other | (24,157 | ) | (19,544 | ) | ||||
| Deferred tax liabilities | (763,598 | ) | (799,298 | ) | ||||
| Net deferred tax liabilities | $ | (666,147 | ) | $ | (704,515 | ) |
The Company’s deferred tax balances are classified in its balance sheets as of December 31 as follows (in thousands):
| 2016 | 2015 | |||||||
| Current deferred tax assets and liabilities: | ||||||||
| Current deferred tax assets | $ | — | $ | 9,585 | ||||
| Current deferred tax liabilities | — | (672 | ) | |||||
| Net current deferred taxes | — | 8,913 | ||||||
| Long term deferred tax assets and liabilities: | ||||||||
| Long term deferred tax assets | 2,433 | 1,639 | ||||||
| Long term deferred tax liabilities | (668,580 | ) | (715,067 | ) | ||||
| Net long term deferred taxes | (666,147 | ) | (713,428 | ) | ||||
| Net deferred tax liabilities | $ | (666,147 | ) | $ | (704,515 | ) |
The Company elected to early adopt Accounting Standards Update 2015-17, "Balance Sheet Classification of Deferred Taxes". The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The guidance may be applied either prospectively, for all deferred tax assets and liabilities, or retrospectively (i.e., by reclassifying the comparative balance sheet). The Company elected to apply the new guidance prospectively.
We reduce federal and state income taxes payable by the tax benefits associated with the exercise of certain stock options. Prior to the adoption of ASU 2016-09, we recorded an excess tax benefit in stockholders’ equity to the extent realized tax deductions for options exceeded the amount recognized as deferred tax benefits related to share-based compensation for these option awards. We recorded excess tax benefits of $26.4 million and $56.8 million in the years ended 2015 and 2014, respectively.
For 2016, as a result of the adoption of ASU 2016-09, the excess tax benefit was recorded as a reduction of income tax expense rather than as additional paid in capital. The excess tax benefit recorded in 2016 was $12.0 million.
At December 31, 2016, 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.
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 $1,356.6 million at December 31, 2016. 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, 2016 and 2015 was $76.4 million and $62.6 million, respectively. The valuation allowance relates to foreign and state net operating loss carry forwards, basis differences related to an equity method investment and foreign tax credit carry forwards. The net change in the total valuation allowance for the years ended December 31, 2016 and 2015 was an increase of $13.8 million and $35.5 million, respectively. The increases in 2016 and 2015 were primarily due to changes in our deferred tax asset related to basis differences in an equity method investment.
As of December 31, 2016, the Company had a net operating loss carryforward for state income tax purposes of approximately $697.0 million that is available to offset future state taxable income through 2028. Additionally, the Company had $43.5 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. During 2016 and 2015, the Company had recorded accrued interest and penalties related to the unrecognized tax benefits of $5.9 million and $5.4 million, respectively.
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, 2016, 2015 and 2014 is as follows (in thousands):
| 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 | |||
| Additions based on tax provisions related to the current year | 9,079 | |||
| Additions based on tax provisions related to the prior year | 477 | |||
| Deductions based on settlement/expiration of prior year tax positions | (6,363 | ) | ||
| Unrecognized tax benefits at December 31, 2015 | 21,834 | |||
| Additions based on tax provisions related to the current year | 3,332 | |||
| Additions based on tax provisions related to the prior year | 2,496 | |||
| Deductions based on settlement/expiration of prior year tax positions | (1,507 | ) | ||
| Unrecognized tax benefits at December 31, 2016 | $ | 26,155 |
As of December 31, 2016, the Company had total unrecognized tax benefits of $26.2 million of which $20.7 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.
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 2013. The statute of limitations for the Company’s U.K. income tax returns has expired for years prior to 2014. The statute of
limitations has expired for years prior to 2013 for the Company’s Czech Republic income tax returns, 2013 for the Company’s Russian income tax returns, 2011 for the Company’s Mexican income tax returns, 2011 for the Company’s Brazilian income tax returns, 2011 for the Company’s Luxembourg income tax returns, 2012 for the Company’s New Zealand income tax returns, and 2014 for the Company’s Australian income tax returns.
- 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):
| 2017 | $ | 18,145 | ||
| 2018 | 14,408 | |||
| 2019 | 10,561 | |||
| 2020 | 8,029 | |||
| 2021 | 7,604 | |||
| Thereafter | 23,033 |
Rent expense for noncancelable operating leases approximated $15.1 million, $14.1 million and $12.5 million for the years ended December 31, 2016, 2015 and 2014, respectively. The leases are generally renewable at the Company’s option for periods of one to five years.
- 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.
- 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 treasury stock method. The calculation and reconciliation of basic and diluted earnings per share for the years ended December 31 (in thousands, except per share data) follows:
| 2016 | 2015 | 2014 | ||||||||||
| Net income | $ | 452,385 | $ | 362,431 | $ | 368,707 | ||||||
| Denominator for basic earnings per share | 92,597 | 92,023 | 84,317 | |||||||||
| Dilutive securities | 2,616 | 2,116 | 2,665 | |||||||||
| Denominator for diluted earnings per share | 95,213 | 94,139 | 86,982 | |||||||||
| Basic earnings per share | $ | 4.89 | $ | 3.94 | $ | 4.37 | ||||||
| Diluted earnings per share | 4.75 | 3.85 | 4.24 |
There were 0.1 million antidilutive shares for the year ended December 31, 2016. Diluted earnings per share for the years ended December 31, 2016 and 2015 excludes the effect of 0.4 million and 1.4 million shares, respectively, of common stock that may be issued upon the exercise of employee stock options because such effect would be antidilutive. There were no antidilutive shares for 2014. Diluted earnings per share also excludes the effect of 0.2 million, 0.2 million and 0.5 million shares of performance based restricted stock for which the performance criteria have not yet been achieved for the years ended December 31, 2016, 2015 and 2014, respectively.
- 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. There were no intersegment sales.
The Company’s segment results are as follows as of and for the years ended December 31 (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Revenues, net: | ||||||||||||
| North America | $ | 1,279,102 | $ | 1,231,957 | $ | 668,328 | ||||||
| International | 552,444 | 470,908 | 531,062 | |||||||||
| $ | 1,831,546 | $ | 1,702,865 | $ | 1,199,390 | |||||||
| Operating income: | ||||||||||||
| North America | $ | 506,414 | $ | 442,052 | $ | 287,303 | ||||||
| International | 247,739 | 225,482 | 278,146 | |||||||||
| $ | 754,153 | $ | 667,534 | $ | 565,449 | |||||||
| Depreciation and amortization: | ||||||||||||
| North America | $ | 129,653 | $ | 127,863 | $ | 39,275 | ||||||
| International | 73,603 | 65,590 | 73,086 | |||||||||
| $ | 203,256 | $ | 193,453 | $ | 112,361 | |||||||
| Capital expenditures: | ||||||||||||
| North America | $ | 39,000 | $ | 19,883 | $ | 9,407 | ||||||
| International | 20,011 | 21,992 | 17,663 | |||||||||
| $ | 59,011 | $ | 41,875 | $ | 27,070 | |||||||
| Long-lived assets (excluding goodwill): | ||||||||||||
| North America | $ | 1,664,224 | $ | 1,719,639 | $ | 1,833,311 | ||||||
| International | 1,203,465 | 602,941 | 698,925 | |||||||||
| $ | 2,867,689 | $ | 2,322,580 | $ | 2,532,236 |
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 operations as of and for the years ended December 31 (in thousands):
| 2016 | 2015 | 2014 | ||||||||||
| Revenues, net by location: | ||||||||||||
| United States (country of domicile) | $ | 1,278,828 | $ | 1,231,641 | $ | 667,878 | ||||||
| Brazil | 167,769 | 85,124 | 117,485 | |||||||||
| United Kingdom | 229,125 | 248,598 | 262,613 |
| 2016 | 20151 | |||||||
| Long-lived assets (excluding goodwill): | ||||||||
| United States (country of domicile) | $ | 1,664,224 | $ | 1,719,541 | ||||
| Brazil | 784,816 | 146,596 | ||||||
| United Kingdom | 286,928 | 332,788 |
1Reflects the impact of the Company's adoption of ASU 2015-03, "Interest—Imputation of Interest”, which changes the presentation of debt issuance costs in financial statements as a direct deduction from the related debt liability rather than as an asset.
No single customer represented more than 10% of the Company’s consolidated revenue in 2016, 2015 and 2014.
- Selected Quarterly Financial Data (Unaudited)
| Fiscal Quarters Year Ended December 31, 2016* | First | Second | Third | Fourth | ||||||||||||
| Revenues, net | $ | 414,262 | $ | 417,905 | $ | 484,426 | $ | 514,953 | ||||||||
| Operating income | 175,955 | 171,168 | 191,055 | 215,975 | ||||||||||||
| Net income | 111,090 | 116,253 | 129,618 | 95,424 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic earnings per share | $ | 1.20 | $ | 1.25 | $ | 1.40 | $ | 1.03 | ||||||||
| Diluted earnings per share | 1.17 | 1.22 | 1.36 | 1.00 | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic weighted average shares outstanding | 92,516 | 92,665 | 92,631 | 92,574 | ||||||||||||
| Diluted weighted average shares outstanding | 95,030 | 95,279 | 95,307 | 95,235 |
| Fiscal Quarters Year Ended December 31, 2015 | First | Second | Third | Fourth | ||||||||||||
| Revenues, net | $ | 416,166 | $ | 404,605 | $ | 451,493 | $ | 430,601 | ||||||||
| Operating income | 163,774 | 169,151 | 188,460 | 146,149 | ||||||||||||
| Net income | 94,153 | 98,678 | 116,770 | 52,830 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic earnings per share | $ | 1.03 | $ | 1.07 | $ | 1.27 | $ | 0.57 | ||||||||
| Diluted earnings per share | 1.00 | 1.05 | 1.24 | 0.56 | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic weighted average shares outstanding | 91,750 | 91,904 | 92,110 | 92,321 | ||||||||||||
| Diluted weighted average shares outstanding | 93,934 | 94,050 | 94,157 | 94,350 |
*2016 quarterly amounts reflect the impact of the Company's adoption of Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payments Accounting, to simplify several aspects of the accounting for share-based compensation, including the income tax consequences.
The sum of the quarterly earnings per common share amounts for 2016 and 2015 may not equal the earnings per common share for the 2016 and 2015 due to rounding.
The fourth quarter of 2016 includes unusual net unfavorable items totaling $4.3 million. This represents a $36.1 million impairment charge related to the Company’s minority investment in Masternaut, partially offset by a $31.8 million decrease in non-cash stock based compensation expense.
The fourth quarter of 2015 includes unusual unfavorable items totaling $74.4 million. This represents a $40.0 million impairment charge related to the Company’s minority investment in Masternaut and a $34.4 million increase in non-cash stock based compensation expense.
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