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
To the Shareholders and the Board of Directors of FleetCor Technologies, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of FleetCor Technologies, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, 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, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, 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) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, 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, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company‘s auditor since 2002.
Atlanta, Georgia
March 1, 2018
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of FLEETCOR Technologies, Inc. and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited FleetCor Technologies, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2017, 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). In our opinion, FleetCor and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
As indicated in the accompanying Management 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 Cambridge Global Payments, Creative Lodging Solutions, and a fuel card provider in Russia (the “Acquired Entities”), which is included in the 2017 consolidated financial statements of the Company and constituted 11% of total assets as of December 31, 2017 and 3% of revenues for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the Acquired Entities.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the FleetCor Technologies, Inc. and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated March 1, 2018 expressed an unqualified opinion thereon
Basis for Opinion
The Company’s 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 Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 1, 2018
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
| December 31, | ||||||||
| 2017 | 2016 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 913,595 | $ | 475,018 | ||||
| Restricted cash | 217,275 | 168,752 | ||||||
| Accounts and other receivables (less allowance for doubtful accounts of $46,031 and $32,506, respectively) | 1,420,011 | 1,202,009 | ||||||
| Securitized accounts receivable—restricted for securitization investors | 811,000 | 591,000 | ||||||
| Prepaid expenses and other current assets | 187,820 | 90,914 | ||||||
| Total current assets | 3,549,701 | 2,527,693 | ||||||
| Property and equipment, net | 180,057 | 142,504 | ||||||
| Goodwill | 4,715,823 | 4,195,150 | ||||||
| Other intangibles, net | 2,724,957 | 2,653,233 | ||||||
| Investments | 32,859 | 36,200 | ||||||
| Other assets | 114,962 | 71,952 | ||||||
| Total assets | $ | 11,318,359 | $ | 9,626,732 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,437,314 | $ | 1,151,432 | ||||
| Accrued expenses | 238,472 | 238,812 | ||||||
| Customer deposits | 732,171 | 530,787 | ||||||
| Securitization facility | 811,000 | 591,000 | ||||||
| Current portion of notes payable and lines of credit | 805,512 | 745,506 | ||||||
| Other current liabilities | 71,033 | 38,781 | ||||||
| Total current liabilities | 4,095,502 | 3,296,318 | ||||||
| Notes payable and other obligations, less current portion | 2,902,104 | 2,521,727 | ||||||
| Deferred income taxes | 518,912 | 668,580 | ||||||
| Other noncurrent liabilities | 125,319 | 56,069 | ||||||
| Total noncurrent liabilities | 3,546,335 | 3,246,376 | ||||||
| Commitments and contingencies (Note 13) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $0.001 par value; 475,000,000 shares authorized; 122,083,059 shares issued and 89,803,982 shares outstanding at December 31, 2017; and 121,259,960 shares issued and 91,836,938 shares outstanding at December 31, 2016 | 122 | 121 | ||||||
| Additional paid-in capital | 2,214,224 | 2,074,094 | ||||||
| Retained earnings | 2,958,921 | 2,218,721 | ||||||
| Accumulated other comprehensive loss | (551,857 | ) | (666,403 | ) | ||||
| Less treasury stock (32,279,077 shares at December 31, 2017; and 29,423,022 shares at December 31, 2016) | (944,888 | ) | (542,495 | ) | ||||
| Total stockholders’ equity | 3,676,522 | 3,084,038 | ||||||
| Total liabilities and stockholders’ equity | $ | 11,318,359 | $ | 9,626,732 |
See accompanying notes.
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Revenues, net | $ | 2,249,538 | $ | 1,831,546 | $ | 1,702,865 | ||||||
| Expenses: | ||||||||||||
| Merchant commissions | 113,133 | 104,345 | 108,257 | |||||||||
| Processing | 429,613 | 355,414 | 331,073 | |||||||||
| Selling | 170,717 | 131,443 | 109,075 | |||||||||
| General and administrative | 387,694 | 283,625 | 297,715 | |||||||||
| Depreciation and amortization | 264,560 | 203,256 | 193,453 | |||||||||
| Other operating, net | 61 | (690 | ) | (4,242 | ) | |||||||
| Operating income | 883,760 | 754,153 | 667,534 | |||||||||
| Investment loss | 53,164 | 36,356 | 57,668 | |||||||||
| Other (income) expense, net | (173,436 | ) | 2,982 | 2,523 | ||||||||
| Interest expense, net | 107,146 | 71,896 | 71,339 | |||||||||
| Loss on extinguishment of debt | 3,296 | — | — | |||||||||
| Total other (income) expense | (9,830 | ) | 111,234 | 131,530 | ||||||||
| Income before income taxes | 893,590 | 642,919 | 536,004 | |||||||||
| Provision for income taxes | 153,390 | 190,534 | 173,573 | |||||||||
| Net income | $ | 740,200 | $ | 452,385 | $ | 362,431 | ||||||
| Basic earnings per share | $ | 8.12 | $ | 4.89 | $ | 3.94 | ||||||
| Diluted earnings per share | $ | 7.91 | $ | 4.75 | $ | 3.85 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic shares | 91,129 | 92,597 | 92,023 | |||||||||
| Diluted shares | 93,594 | 95,213 | 94,139 |
See accompanying notes.
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands)
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net income | $ | 740,200 | $ | 452,385 | $ | 362,431 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Foreign currency translation gains (losses), net of tax | 83,165 | (95,592 | ) | (279,303 | ) | |||||||
| Reclassification of foreign currency translation loss to investment, net of tax | 31,381 | — | — | |||||||||
| Total other comprehensive income (loss) | 114,546 | (95,592 | ) | (279,303 | ) | |||||||
| Total comprehensive income | $ | 854,746 | $ | 356,793 | $ | 83,128 |
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, 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 | ||||||||||||||||
| Net income | — | — | 740,200 | — | — | 740,200 | ||||||||||||||||||
| Other comprehensive income, net of tax of $0 | — | — | — | 114,546 | — | 114,546 | ||||||||||||||||||
| Acquisition of common stock | — | — | — | — | (402,393 | ) | (402,393 | ) | ||||||||||||||||
| Issuance of common stock | 1 | 140,130 | — | — | — | 140,131 | ||||||||||||||||||
| Balance at December 31, 2017 | $ | 122 | $ | 2,214,224 | $ | 2,958,921 | $ | (551,857 | ) | $ | (944,888 | ) | $ | 3,676,522 |
See accompanying notes.
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
| Year Ended Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Operating activities | ||||||||||||
| Net income | $ | 740,200 | $ | 452,385 | $ | 362,431 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation | 46,599 | 36,456 | 30,462 | |||||||||
| Stock-based compensation | 93,297 | 63,946 | 90,122 | |||||||||
| Provision for losses on accounts receivable | 44,857 | 35,885 | 24,629 | |||||||||
| Amortization of deferred financing costs and discounts | 6,952 | 7,582 | 7,049 | |||||||||
| Amortization of intangible assets | 211,849 | 161,635 | 159,740 | |||||||||
| Amortization of premium on receivables | 6,112 | 5,165 | 3,250 | |||||||||
| Loss on extinguishment of debt | 3,296 | — | — | |||||||||
| Deferred income taxes | (247,712 | ) | (28,681 | ) | 30,626 | |||||||
| Investment loss | 53,164 | 36,356 | 57,668 | |||||||||
| Gain on disposition of business | (174,983 | ) | — | — | ||||||||
| Other non-cash operating income | (61 | ) | (690 | ) | (4,242 | ) | ||||||
| Changes in operating assets and liabilities (net of acquisitions and disposition): | ||||||||||||
| Restricted cash | (4,335 | ) | (2,306 | ) | (35,676 | ) | ||||||
| Accounts receivable and other receivables | (431,003 | ) | (338,796 | ) | 40,017 | |||||||
| Prepaid expenses and other current assets | 26,102 | 5,301 | (12,564 | ) | ||||||||
| Other assets | (20,957 | ) | (20,345 | ) | (2,524 | ) | ||||||
| Excess tax benefits related to stock-based compensation | — | — | (26,427 | ) | ||||||||
| Accounts payable, accrued expenses and customer deposits | 322,346 | 292,019 | 30,023 | |||||||||
| Net cash provided by operating activities | 675,723 | 705,912 | 754,584 | |||||||||
| Investing activities | ||||||||||||
| Acquisitions, net of cash acquired1 | (705,257 | ) | (1,331,985 | ) | (49,069 | ) | ||||||
| Purchases of property and equipment | (70,093 | ) | (59,011 | ) | (41,875 | ) | ||||||
| Proceeds from disposal of a business | 316,501 | — | — | |||||||||
| Other | (38,953 | ) | 1,411 | (8,470 | ) | |||||||
| Net cash used in investing activities | (497,802 | ) | (1,389,585 | ) | (99,414 | ) | ||||||
| Financing activities | ||||||||||||
| Excess tax benefits related to stock-based compensation | — | — | 26,427 | |||||||||
| Proceeds from issuance of common stock | 44,690 | 21,231 | 19,926 | |||||||||
| Borrowings (payments) on securitization facility, net | 220,000 | (23,000 | ) | (61,000 | ) | |||||||
| Repurchase of common stock | (402,393 | ) | (187,678 | ) | — | |||||||
| Deferred financing costs paid and debt discount | (12,908 | ) | (2,272 | ) | — | |||||||
| Proceeds from issuance of notes payable | 780,656 | 600,000 | — | |||||||||
| Principal payments on notes payable | (423,156 | ) | (118,500 | ) | (103,500 | ) | ||||||
| Borrowings from revolver | 1,100,000 | 1,225,107 | — | |||||||||
| Payments on revolver | (1,031,722 | ) | (786,849 | ) | (486,818 | ) | ||||||
| Borrowings (payments) on swing line of credit, net | (23,686 | ) | 26,606 | (546 | ) | |||||||
| Payment of contingent consideration | — | — | (42,177 | ) | ||||||||
| Other | 457 | (676 | ) | (377 | ) | |||||||
| Net cash provided by (used in) financing activities | 251,938 | 753,969 | (648,065 | ) | ||||||||
| Effect of foreign currency exchange rates on cash | 8,718 | (42,430 | ) | (37,022 | ) | |||||||
| Net increase (decrease) in cash | 438,577 | 27,866 | (29,917 | ) | ||||||||
| Cash and cash equivalents, beginning of year | 475,018 | 447,152 | 477,069 | |||||||||
| Cash and cash equivalents, end of year | $ | 913,595 | $ | 475,018 | $ | 447,152 | ||||||
| Supplemental cash flow information | ||||||||||||
| Cash paid for interest | $ | 113,416 | $ | 70,339 | $ | 72,537 | ||||||
| Cash paid for income taxes | $ | 392,192 | $ | 101,951 | $ | 83,380 | ||||||
| Non cash investing activity, notes assumed in acquisitions | $ | 29,341 | $ | — | $ | — |
| 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 Consolidated Financial Statements
December 31, 2017
- Description of Business
FLEETCOR Technologies, Inc. and its subsidiaries (the Company) is a leading global provider of commercial payment solutions. The Company helps businesses of all sizes control, simplify and secure payment of various domestic and cross-border payables using specialized payment products. The Company serves businesses, merchants and partners in North America, Latin America, Europe, and Australasia.
The Company has two reportable segments, North America and International. The Company reports these two segments as they align with its senior executive organizational structure, reflect how the Company organizes and manages its employees around the world, manages operating performance, contemplates the differing regulatory environments in North America versus other geographies, and helps the Company isolate the impact of foreign exchange fluctuations on its financial results.
The Company's payment solutions provide its customers with a payment method designed to be superior and more robust and effective than what they use currently, whether they use a competitor’s product or another alternative method such as cash or check. The Company's solutions are comprised of payment products, networks and associated services.
The Company's payment products function like a charge card or prepaid card and tend to be specialized for specific spend categories, such as fuel or lodging, and/or specific customer groups, such as long haul transportation. The Company's five primary product lines are Fuel, Lodging, Tolls, Corporate Payments and Gift. Additionally, the Company provides other payment products including fleet maintenance, employee benefits and long haul transportation-related services. The Company's products are used in 56 countries around the world, with its primary geographies being the U.S., Brazil and the United Kingdom, which combined accounted for approximately 90% of the Company's revenue in 2017.
The Company uses both proprietary and third-party networks to deliver its payment solutions. FLEETCOR owns and operates proprietary networks with brands throughout the world, bringing incremental sales and loyalty to affiliated merchants. Third-party networks are used to broaden payment product acceptance and use.
The Company markets its products directly through multiple sales channels, including field sales, telesales and digital marketing, and indirectly through its partners, which include major oil companies, leasing companies, petroleum marketers, value-added resellers (VARs) and referral partners.
- 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; 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, service 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 and cards 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 in the Consolidated Statements of Income. The Company has recorded $96.8 million, $91.6 million and $84.1 million of expenses related to sales of equipment within the processing expenses line of the Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015, respectively. Sales commissions paid to personnel are expensed as incurred.
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.
The Company presents taxes assessed by the government imposed concurrent with a revenue producing transaction between us and our customers (e.g. VAT) on a net basis within revenues, net.
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 2017, 2016 and 2015 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 or less 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, 2017 and 2016, approximately 96% and 95%, 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 Investments
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, 2017, the Company determined that the fair value of each of its 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 investments, which are not carried at fair value, for other-than-temporary impairment. The Company estimates the fair value of its investments 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 the Company's investments in developing the valuation estimate.
On September 30, 2017, the Company entered into an amended Masternaut Group Holdings Limited ("Masternaut") investment agreement that resulted in the loss of significant influence, and the Company began accounting for the Masternaut investment by applying the cost method. The Company regularly evaluates the carrying value of its investment and during the third quarter of 2017, the Company determined that the fair value of its 44% investment in Masternaut had declined as a result of the Company's loss of significant influence and the operating results of Masternaut. 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 during the third quarter of 2017. The Company recorded a $44.6 million impairment loss in the Masternaut investment that includes adjustment for $31.4 million of currency losses previously recognized in accumulated other comprehensive income, in the year ended December 31, 2017, in the accompanying Consolidated Statements of Income. During the fourth quarters of 2016 and 2015, the Company determined that the performance improvement initiatives in its investment in Masternaut were
taking longer to and were more challenging to implement than originally projected, based on revised cash flow projections provided by the business. As a result, the Company recorded a $36.1 million and $40 million non-cash impairment charge in its Masternaut 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 $37.4 million, $33.1 million and $23.4 million in 2017, 2016 and 2015, respectively. Amortization expense for software totaled $21.8 million, $17.7 million and $11.6 million in 2017, 2016 and 2015, 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 become 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.
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.
In the fourth quarter of 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). As a result of Tax Act, the U.S. federal corporate tax rate was reduced from 35% to 21%. The Tax Act also includes provisions for a tax on all previously undistributed earnings in foreign jurisdictions. The Company has provisionally recorded a $210 million deferred tax benefit for the benefit for the corporate rate reduction on our deferred tax assets and liabilities. Additionally, in 2017, the Company has provisionally recorded an $81.8 million charge on all previously undistributed earnings in foreign jurisdictions. The Company is currently evaluating the remaining undistributed foreign earnings for which it has not provided deferred taxes for foreign withholding tax, as these earnings are considered to be indefinitely reinvested. The amount of these unrecorded deferred taxes is not expected to be material. If in the future these earnings are repatriated to the United States, or if we determine that the earnings will be remitted in the foreseeable future, additional tax provisions may be required. See Note 11 for further information regarding income taxes.
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 $0.2 million, $2.8 million and $2.4 million for the years ended December 31, 2017, 2016 and 2015 respectively, which are recorded within other expense, net in the Consolidated Statements of Income.
Derivatives
With its acquisition of Cambridge Global Payments ("Cambridge") in August 2017, the Company uses derivatives to facilitate cross-currency corporate payments by writing derivatives to customers, which are not designated as hedging instruments. The majority of Cambridge's revenue is from exchanges of currency at spot rates, which enable customers to make cross-currency payments. In addition, Cambridge also writes foreign currency forward and option contracts for its customers to facilitate future payments. The duration of these derivative contracts at inception is generally less than one year. The Company aggregates its foreign exchange exposures arising from customer contracts, including forwards, options and spot exchanges of currency, and hedges (economic hedge) the resulting net currency risks by entering into offsetting contracts with established financial institution counterparties. The changes in fair value related to these contracts are recorded in revenues, net in the Consolidated Statements of Income.
The Company recognizes all derivatives in "prepaid expenses and other current assets" and "other current liabilities" in the accompanying Consolidated Balance Sheets at their fair value. All cash flows associated with derivatives are included in cash flows from operating activities in the Consolidated Statements of Cash Flows.
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 five 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. Option forfeitures are accounted for upon occurrence. 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 to three years. 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.
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. The Company capitalized additional debt issuance costs of $12.9 million associated with refinancing its Credit Facility and Securitization Facility in 2017 and $2.3 million with refinancing its Credit Facility in 2016. At December 31, 2017 and 2016, the Company had net deferred financing costs of $16.3 million and $13.1 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 in the U.S. 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, 2017, the Company extended the term of its asset Securitization Facility to November 14, 2020. The Company capitalized $1.7 million in fees in connection with this extension.
The Company’s accounts receivable and securitized accounts receivable include the following at December 31 (in thousands):
| 2017 | 2016 | |||||||
| Gross domestic accounts receivables | $ | 661,677 | $ | 529,885 | ||||
| Gross domestic securitized accounts receivable | 811,000 | 591,000 | ||||||
| Gross foreign receivables | 804,365 | 704,630 | ||||||
| Total gross receivables | 2,277,042 | 1,825,515 | ||||||
| Less allowance for doubtful accounts | (46,031 | ) | (32,506 | ) | ||||
| Net accounts and securitized accounts receivable | $ | 2,231,011 | $ | 1,793,009 |
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):
| 2017 | 2016 | 2015 | ||||||||||
| Allowance for doubtful accounts beginning of year | $ | 32,506 | $ | 21,903 | $ | 23,842 | ||||||
| Provision for bad debts | 44,857 | 35,885 | 24,629 | |||||||||
| Write-offs | (31,332 | ) | (25,282 | ) | (26,568 | ) | ||||||
| Allowance for doubtful accounts end of year | $ | 46,031 | $ | 32,506 | $ | 21,903 |
Advertising
The Company expenses advertising costs as incurred. Advertising expense was $26.1 million, $22.2 million and $19.9 million for the years ended December 31, 2017, 2016 and 2015, 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.
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.
Tax Act
The SEC staff issued Staff Accounting Bulletin No. 118, "Income Tax Accounting Implications of the Tax Cuts and Jobs Act" ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP and permits the use of either the retrospective or modified retrospective transition method. The update requires significant additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09, as amended by ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date", is effective for years beginning after December 15, 2017, including interim periods, with early adoption permitted for years beginning after December 15, 2016. Since the issuance of ASU 2014-09, the FASB has issued additional interpretive guidance, including new accounting standards updates, that clarifies certain points of the standard and modifies certain requirements.
The Company has performed a review of the requirements of the new revenue standard and is monitoring the activity of the FASB and the transition resource group as it relates to specific interpretive guidance. The Company established an implementation team to assess the effects of the new revenue standard in a multi-phase approach. In the first phase, the Company analyzed customer contracts for its most significant contract categories, applied the five-step model of the new standard to each contract category and comparing the results to our current accounting practices. The second phase, which includes quantifying the potential effects identified during the first phase, assessing additional contract categories and principal versus agent considerations, revising accounting policies and considering the effects on related disclosures and/or internal control over financial reporting is ongoing and expected to be concluded during the first quarter of 2018.
The new standard could change the amount and timing of revenue and expenses to be recognized under certain of our arrangement types. In addition, it could also increase the administrative burden on our operations to account for customer contracts and provide the more expansive required disclosures. More judgment and estimates may be required within the process of applying the requirements of the new standard than are required under existing GAAP, such as identifying performance obligations in contracts, estimating the amount of variable consideration to include in transaction price, allocating transaction price to each separate performance obligation and estimating expected customer lives. The Company is in the process of finalizing its assessment and completing the quantification of the effect the new guidance will have on its consolidated financial statements, related disclosures and/or internal control over financial reporting. This conclusion will be made over the remainder of the first quarter of 2018 and will include finalizing its evaluation of the application of the principal
vs. agent guidance, specifically as it relates to products where we utilize a third-party payment network and in certain businesses where we pay merchant commissions. However, the Company's preliminary view is that the expected amount and timing of revenue to be recognized under ASU 2014-09 for our most significant contract categories, fuel card payments, lodging payments, toll payments, corporate payments, and gift cards, will be similar to the amount and timing of revenue recognized under its current accounting practices, except as it relates to the presentation of certain costs where the Company may be determined to be an agent in the processing relationship under the new guidance, resulting in recording such costs as a reduction of revenue. The Company will be required to capitalize additional costs to obtain contracts with customers, and, in some cases, may be required to amortize these costs over a contractual time period. Finally, the Company expects disclosures about its revenues and related customer acquisition costs to be more extensive.
The Company plans to adopt ASU 2014-09, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, on January 1, 2018. The Company will apply the modified retrospective transition method, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to contracts that are not completed at the date of initial application. 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.
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 ASU 2016-02 on its consolidated financial statements; however, the Company expect to recognize right of use assets and liabilities for operating leases in the Consolidated Balance Sheet upon adoption.
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 or financial condition.
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 is evaluating what impact, if any, the adoption of this ASU will have on the results of operations, financial condition, or cash flows.
Intangibles - Goodwill and Other Impairment
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment", which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on Step 1). The standard has tiered effective dates, starting in 2020 for
calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for interim and annual goodwill impairment testing dates after January 1, 2017. 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, unless a goodwill impairment is identified.
Definition of a Business
In January 2017, the FASB issued ASU 2017-01, "Clarifying the Definition of a Business", which amends the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The guidance is effective for the Company for reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company’s adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows, however it could result in accounting for acquisitions as asset acquisitions versus business combinations upon adoption.
Accounting for Modifications to Stock-Based Compensation
In May 2017, the FASB issued ASU 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting", which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. The guidance is effective for the Company for reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company's adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
Accounting for Derivative Financial Instruments
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which amends the hedge accounting recognition and presentation requirements in ASC 815. The FASB issued accounting guidance to better align hedge accounting with a company’s risk management activities, simplify the application of hedge accounting and improve the disclosures of hedging arrangements. The guidance is effective for the Company for reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company's adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
- Fair Value Measurements
Fair value is a market-based measurement that reflects 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 following table presents the Company’s financial assets and liabilities which are measured at fair values on a recurring basis as of December 31, 2017 and 2016, (in thousands):
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| December 31, 2017 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Repurchase agreements | $ | 420,838 | $ | — | $ | 420,838 | $ | — | ||||||||
| Money market | 50,423 | — | 50,423 | — | ||||||||||||
| Certificates of deposit | 7,417 | — | 7,417 | — | ||||||||||||
| Foreign exchange contracts | 39,045 | 10 | 39,035 | — | ||||||||||||
| Total cash equivalents | $ | 517,723 | $ | 10 | $ | 517,713 | $ | — | ||||||||
| Cash collateral for foreign exchange contracts | $ | 12,540 | $ | — | $ | — | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange contracts | $ | 26,888 | $ | 67 | $ | 26,821 | $ | — | ||||||||
| Total liabilities | $ | 26,888 | $ | 67 | $ | 26,821 | $ | — | ||||||||
| Cash collateral obligation for foreign exchange contracts | $ | 10,882 | $ | — | $ | — | $ | — | ||||||||
| 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 | $ | — |
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. Foreign exchange derivative contracts are carried at fair value, with changes in fair value recognized in the Consolidated Statements of Income. The fair value of the Company's derivatives is derived with reference to a valuation from a derivatives dealer operating in an active market, which the Company accepts as the fair value of these instruments. The fair value represents what would be received and or paid by the Company if the contracts were terminated as of the reporting date. Cash collateral received for foreign exchange derivatives is recorded within customer deposits in our Consolidated Balance Sheet at December 31, 2017. Cash collateral paid for foreign exchange derivatives is recorded within restricted cash in our Consolidated Balance Sheet at December 31, 2017.
The level within the fair value hierarchy and the measurement technique are reviewed quarterly. Transfers between levels are deemed to have occurred at the end of the quarter. There were no transfers between fair value levels during the periods presented for 2017 and 2016.
The Company’s assets that are measured at fair value on a nonrecurring basis and are evaluated with periodic testing for impairment include property, plant and equipment, investments, goodwill and other intangible assets. Estimates of the fair value of assets acquired and liabilities assumed in business combinations are generally developed using key inputs such as management’s projections of cash flows on a held-and-used basis (if applicable), discounted as appropriate, 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. See footnote 2 for discussion of Masternaut's other than temporary decline in fair value during the year.
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 February 4, 2016, the Company's Board of Directors approved a stock repurchase program (the "Program") under which the Company may purchase up to an aggregate of $500 million of its common stock over the following 18 months period. On July 27, 2017, the Company's Board of Directors authorized an increase in the size of the Program by an additional $250 million and an extension of the Program by an additional 18 months. On November 1, 2017, the Company announced that its Board of Directors had authorized an increase in the size of the Program by an additional $350 million, resulting in total aggregate repurchases authorized under the Program of $1.1 billion. With the increase and giving effect to the Company's $590.1 million of previous repurchases, the Company may repurchase up to $510 million in shares of its common stock at any time prior to February 1, 2019.
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 have been and are expected to be funded by a combination of available cash flow from the business, working capital and debt.
On August 3, 2017, as part of the Program, the Company entered an Accelerated Share Repurchase agreement ("ASR Agreement") with a third-party financial institution to repurchase $250 million of its common stock. Pursuant to the ASR Agreement, the Company delivered $250 million in cash and received 1,491,647 shares based on a stock price of $142.46 on August 7, 2017. The ASR Agreement was completed on September 7, 2017, at which time the Company received 263,012 additional shares based on a final weighted average per share purchase price during the repurchase period of $142.48.
The Company accounted for the ASR Agreement as two separate transactions: (i) as shares of reacquired common stock for the shares delivered to the Company upon effectiveness of the ASR Agreement and (ii) as a forward contract indexed to the Company's common stock for the undelivered shares. The initial delivery of shares was included in treasury stock at cost and results in an immediate reduction of the outstanding shares used to calculate the weighted average common shares outstanding for basic and diluted earnings per share. The forward contracts indexed to the Company's own common stock met the criteria for equity classification, and these amounts were initially recorded in additional paid-in capital and then reclassified to treasury stock upon completion of the ASR agreement.
Since the beginning of the Program, 4,114,104 shares for an aggregate purchase price of $590.1 million have been repurchased. There were 2,854,959 common shares totaling $402.4 million repurchased under the Program during 2017.
- 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, 2017, 2016 and 2015, 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 277,821 additional shares remaining available for grant under the Plans at December 31, 2017.
On February 7, 2018, the stockholders of the Company approved the FleetCor Technologies, Inc. Amended and Restated 2010 Equity Incentive Plan (the "Amended Plan"). The Amended Plan was authorized and approved by the Company's Board of Directors on December 20, 2017, and Company's stockholders at a special meeting held on February 7, 2018. The Amended Plan amends the Registrant’s existing 2010 Equity Incentive Plan (as amended, the "Prior Plan") to, among other things, increase the number of shares of common stock available for issuance from 13,250,000 to 16,750,000 and make certain other amendments to the Prior Plan.
The table below summarizes the expense recognized within general and administrative expenses in the Consolidated Statements of Income related to share-based payments recognized for the years ended December 31 (in thousands):
| 2017 | 2016 | 2015 | ||||||||||
| Stock options | $ | 56,400 | $ | 35,234 | $ | 44,260 | ||||||
| Restricted stock | 36,897 | 28,712 | 45,862 | |||||||||
| Stock-based compensation | $ | 93,297 | $ | 63,946 | $ | 90,122 |
The tax benefits recorded on stock based compensation were $48.6 million, $35.0 million and $35.7 million for the years ended December 31, 2017, 2016 and 2015, respectively.
The following table summarizes the Company’s total unrecognized compensation cost related to stock-based compensation as of December 31, 2017 (cost in thousands):
| Unrecognized Compensation Cost | Weighted Average Period of Expense Recognition (in Years) | |||||
| Stock options | $ | 84,452 | 1.33 | |||
| Restricted stock | 18,819 | 1.06 | ||||
| Total | $ | 103,271 |
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, 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 | |||||||||||||||||
| Granted | 2,885 | 145.35 | $ | 32.57 | ||||||||||||||||||
| Exercised | (633 | ) | 71.43 | 76,546 | ||||||||||||||||||
| Forfeited | (367 | ) | 144.51 | |||||||||||||||||||
| Outstanding at December 31, 2017 | 8,031 | $ | 109.78 | 4,029 | $ | 75.80 | $ | 663,815 | ||||||||||||||
| Expected to vest at December 31, 2017 | 8,031 | $ | 109.78 |
The following table summarizes information about stock options outstanding at December 31, 2017 (shares in thousands):
| Exercise Price | Options Outstanding | Weighted Average Remaining Vesting Life in Years | Options Exercisable | |||||
| $10.00 – 58.02 | 2,218 | 0.00 | 2,218 | |||||
| 74.99 – 111.09 | 104 | 0.03 | 90 | |||||
| 114.90 – 138.47 | 2,029 | 0.77 | 577 | |||||
| 140.23-150.74 | 2,593 | 1.60 | 906 | |||||
| 151.16-158.24 | 618 | 1.48 | 195 | |||||
| 165.96-174.35 | 469 | 3.08 | 43 | |||||
| 8,031 | 4,029 |
The aggregate intrinsic value of stock options exercisable at December 31, 2017 was $469.8 million. The weighted average remaining contractual term of options exercisable at December 31, 2017 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:
| 2017 | 2016 | 2015 | |||||||
| Risk-free interest rate | 1.65 | % | 1.08 | % | 1.47 | % | |||
| Dividend yield | — | — | — | ||||||
| Expected volatility | 28.00 | % | 27.29 | % | 27.77 | % | |||
| Expected life (in years) | 3.4 | 3.5 | 4.5 |
The weighted-average remaining contractual life for options outstanding was 6.9 years at December 31, 2017.
Restricted Stock
There were no restricted stock shares granted with market based vesting conditions in 2017, 2016 and 2015. 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, 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 | |||||
| Granted | 238 | 141.99 | |||||
| Cancelled | (48 | ) | 152.95 | ||||
| Issued | (204 | ) | 136.85 | ||||
| Outstanding at December 31, 2017 | 365 | $ | 155.58 |
- Acquisitions
2017 Acquisitions
During 2017, the Company completed acquisitions with an aggregate purchase price of $720.8 million, net of cash acquired of $96.2 million and inclusive of notes payable of $29.3 million. During 2017, the Company made investments in other businesses of $39 million.
Cambridge Global Payments
On August 9, 2017, the Company acquired Cambridge, a leading business to business (B2B) international payments provider, for approximately $616.1 million in cash, net of cash acquired of $94.5 million and inclusive of a note payable of $23.8 million. Cambridge processes B2B cross-border payments, assisting business clients in making international payments. The purpose of this acquisition is to further expand the Company's corporate payments footprint. The Company financed the acquisition using a combination of existing cash and borrowings under its existing credit facility. The results from Cambridge are reported in its North America segment. The following table summarizes the preliminary acquisition accounting for Cambridge (in thousands):
| Restricted cash | $ | 37,666 | |
| Trade and other receivables | 61,801 | ||
| Prepaid expenses and other current assets | 15,190 | ||
| Property and equipment | 7,106 | ||
| Other long term assets | 10,025 | ||
| Goodwill | 500,391 | ||
| Customer relationships and other identifiable intangible assets | 271,793 | ||
| Liabilities assumed | (194,552 | ) | |
| Deferred tax liabilities | (93,364 | ) | |
| Aggregate purchase price | $ | 616,056 |
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 | |||
| Banking relationships | 20 | $ | 705 | |
| Trade name and trademarks | Indefinite | 35,110 | ||
| Technology | 5 | 16,039 | ||
| Customer relationships - excluding Accounts Payable Solutions | 7-18 | 178,190 | ||
| Customer relationships - Accounts Payable Solutions | 20 | 41,749 | ||
| $ | 271,793 |
Along with the Company's acquisition of Cambridge, the Company signed noncompete agreements with certain parties with an estimated fair value of $5.8 million. Acquisition accounting for Cambridge is preliminary as the Company is still completing the valuation for goodwill, intangible assets, income taxes, certain acquired contingencies, derivatives and the working capital adjustment period remains open. Goodwill recorded is comprised primarily of expected synergies from combining the operations of the Company and Cambridge, as well as assembled workforce.
Other
During 2017, the Company acquired Creative Lodging Solutions ("CLS"), a small lodging tuck-in business, and a fuel card provider in Russia for approximately $104.7 million, net of cash acquired of $1.8 million and inclusive of a note payable of $5.5 million. The Company financed the acquisitions using a combination of existing cash and borrowings under its existing credit facility. The accounting for these acquisitions is preliminary as the Company is still completing the valuation of goodwill, intangible assets, income taxes and evaluation of acquired contingencies.
The following table summarizes the preliminary acquisition accounting for the acquisitions (in thousands):
| Trade and other receivables | $ | 37,986 | |
| Prepaid expenses and other | 1,426 | ||
| Property and equipment | 5,745 | ||
| Goodwill | 55,711 | ||
| Other intangible assets | 53,259 | ||
| Liabilities assumed | (32,202 | ) | |
| Deferred tax liabilities | (17,217 | ) | |
| Aggregate purchase prices | $ | 104,708 |
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 | |||
| Trade name and trademarks | 1 | $ | 180 | |
| Technology | 4 | 1,750 | ||
| Customer relationships | 8 | 51,329 | ||
| $ | 53,259 |
Along with the Company's acquisition of CLS, the Company signed noncompete agreements with certain parties with an estimated fair value of $4.5 million.
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 the Company's 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 acquisition accounting for STP (in thousands):
| Trade and other receivables | $ | 243,157 | |
| Prepaid expenses and other | 5,757 | ||
| Deferred tax assets | 20,644 | ||
| Property and equipment | 44,226 | ||
| Other long term assets | 14,280 | ||
| Goodwill | 663,040 | ||
| Customer relationships and other identifiable intangible assets | 548,682 | ||
| Liabilities assumed | (312,297 | ) | |
| Aggregate purchase price | $ | 1,227,489 | |
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 | 8.5-20 | $ | 348,414 | |
| Trade names and trademarks | Indefinite | 154,851 | ||
| Technology | 6 | 45,417 | ||
| $ | 548,682 |
In connection with the STP acquisition, the Company recorded contingent liabilities aggregating $15.1 million, 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 $15.1 million was recorded within prepaid and other long term assets in the Consolidated Balance Sheet. Along with the Company's acquisition of STP, the Company signed noncompete agreements with certain parties with an estimated fair value of $23.2 million.
Goodwill recognized is comprised primarily of expected synergies from combining the operations of the Company and STP, as well as the assembled workforce. The goodwill and definite lived intangibles acquired with STP will 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 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 |
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 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 |
- 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, 2016 | Acquisitions | Dispositions | Acquisition Accounting Adjustments | Foreign Currency | December 31, 2017 | |||||||||||||||||||
| Segment | ||||||||||||||||||||||||
| North America | $ | 2,640,409 | $ | 534,777 | $ | (92,046 | ) | $ | — | $ | 983 | $ | 3,084,123 | |||||||||||
| International | 1,554,741 | 21,325 | — | 3,752 | 51,882 | 1,631,700 | ||||||||||||||||||
| $ | 4,195,150 | $ | 556,102 | $ | (92,046 | ) | $ | 3,752 | $ | 52,865 | $ | 4,715,823 |
| 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 |
At December 31, 2017 and 2016, approximately $988.0 million and $362.6 million of the Company’s goodwill is deductible for tax purposes, respectively. Acquisition accounting adjustments recorded in 2017 and 2016 are a result of the Company completing its acquisition accounting and working capital adjustments for certain prior year acquisitions.
Other intangible assets consisted of the following at December 31 (in thousands):
| 2017 | 2016 | |||||||||||||||||||||||||
| 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 | $ | 2,698,428 | $ | (605,347 | ) | $ | 2,093,081 | $ | 2,449,389 | $ | (458,118 | ) | $ | 1,991,271 | |||||||||||
| Trade names and trademarks—indefinite lived | N/A | 499,587 | — | 499,587 | 510,952 | — | 510,952 | |||||||||||||||||||
| Trade names and trademarks—other | 13.8 | 2,986 | (2,207 | ) | 779 | 2,746 | (2,021 | ) | 725 | |||||||||||||||||
| Software | 6.0 | 219,019 | (116,654 | ) | 102,365 | 211,331 | (85,167 | ) | 126,164 | |||||||||||||||||
| Non-compete agreements | 4.5 | 48,221 | (19,076 | ) | 29,145 | 35,191 | (11,070 | ) | 24,121 | |||||||||||||||||
| Total other intangibles | $ | 3,468,241 | $ | (743,284 | ) | $ | 2,724,957 | $ | 3,209,609 | $ | (556,376 | ) | $ | 2,653,233 |
Changes in foreign exchange rates resulted in a $24.2 million increase to the carrying values of other intangible assets in the year ended December 31, 2017. Amortization expense related to intangible assets for the years ended December 31, 2017, 2016 and 2015 was $211.8 million, $161.6 million and $159.7 million, respectively. As part of the Company's plan to exit the telematics business, on July 27, 2017, the Company sold NexTraq, a U.S. fleet telematics business, to Michelin Group, resulting in a $41.8 million reduction in the net carrying values of other intangible assets.
The future estimated amortization of intangibles at December 31, 2017 is as follows (in thousands):
| 2018 | $ | 220,506 | ||
| 2019 | 206,174 | |||
| 2020 | 186,259 | |||
| 2021 | 182,156 | |||
| 2022 | 171,177 | |||
| Thereafter | 1,259,098 |
- Property, Plant and Equipment
Property, plant and equipment, net consisted of the following at December 31 (in thousands):
| Estimated Useful Lives (in Years) | 2017 | 2016 | ||||||||
| Computer hardware and software | 3 to 5 | $ | 244,655 | $ | 197,958 | |||||
| Card-reading equipment | 4 to 6 | 25,462 | 25,553 | |||||||
| Furniture, fixtures, and vehicles | 2 to 10 | 18,846 | 15,418 | |||||||
| Buildings and improvements | 5 to 50 | 21,603 | 14,432 | |||||||
| Property, plant and equipment, gross | 310,566 | 253,361 | ||||||||
| Less: accumulated depreciation | (130,509 | ) | (110,857 | ) | ||||||
| Property, plant and equipment, net | $ | 180,057 | $ | 142,504 |
Depreciation expense related to property and equipment for the years ended December 31, 2017, 2016 and 2015 was $46.6 million, $36.5 million and $30.5 million, respectively. Depreciation expense includes $21.8 million, $17.7 million and $11.6 million, for capitalized computer software costs for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017 and 2016, the Company had unamortized computer software costs of $75.8 million and $60.2 million, respectively.
- Accrued Expenses
Accrued expenses consisted of the following at December 31 (in thousands):
| 2017 | 2016 | |||||||
| Accrued bonuses | $ | 15,119 | $ | 15,866 | ||||
| Accrued payroll and severance | 18,500 | 10,704 | ||||||
| Accrued taxes | 63,698 | 104,623 | ||||||
| Accrued commissions/rebates | 47,198 | 43,467 | ||||||
| Other | 93,957 | 64,152 | ||||||
| $ | 238,472 | $ | 238,812 |
- 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):
| 2017 | 2016 | |||||||
| Term notes payable—domestic(a), net of discounts | $ | 2,993,667 | $ | 2,639,279 | ||||
| Revolving line of credit A Facility—domestic(a) | 635,000 | 465,000 | ||||||
| Revolving line of credit B Facility—foreign(a) | 28,334 | 123,412 | ||||||
| Revolving line of credit B Facility—swing line(a) | 6,879 | 26,608 | ||||||
| Other(c) | 43,736 | 12,934 | ||||||
| Total notes payable and other obligations | 3,707,616 | 3,267,233 | ||||||
| Securitization Facility(b) | 811,000 | 591,000 | ||||||
| Total notes payable, credit agreements and Securitization Facility | $ | 4,518,616 | $ | 3,858,233 | ||||
| Current portion | $ | 1,616,512 | $ | 1,336,506 | ||||
| Long-term portion | 2,902,104 | 2,521,727 | ||||||
| Total notes payable, credit agreements and Securitization Facility | $ | 4,518,616 | $ | 3,858,233 |
| (a) | The Company has a Credit Agreement, which has been amended multiple times and provides for senior secured credit facilities consisting of a revolving A credit facility in the amount of $1.285 billion, a term loan A facility in the amount of $2.69 billion and a term loan B facility in the amount of $350 million as of December 31, 2017. The revolving credit facility consists of (a) a revolving A credit facility in the amount of $800 million, with sublimits for letters of credit and swing line loans, (b) a revolving B facility in the amount of $450 million for swing line loans and multi-currency borrowings and, (c) a revolving C facility in the amount of $35 million for multi-currency borrowings in Australian Dollars or New Zealand Dollars. The Credit Agreement also includes an accordion feature for borrowing an additional $750 million in term A, term B or revolver A debt. Proceeds from the credit facilities may be used for working capital purposes, acquisitions, and other general corporate purposes. On January 20, 2017, the Company entered into the second amendment to the Credit Agreement, which established a new term B loan. On August 2, 2017, the Company entered into the third amendment to the Credit Agreement, which increased the total facility by $708.7 million and extended the terms of the credit facilities to August 2, 2022 for the term A loan, revolving loans, and letters of credit under the Credit Agreement and August 2, 2024 for the term B loan. |
Interest on amounts outstanding under the 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 on the term B loan facility accrues based on the Eurocurrency Rate plus 2.00% for Eurocurrency Loans and at 1.00% 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, 2017, the interest rate on the term A loan and the domestic revolving A facility was 3.32%, the interest rate on the foreign revolving B facility was 2.25%, the interest rate on the revolving B facility foreign swing line of
credit was 2.22% and the interest rate on the term B loan was 3.57%. The unused credit facility was 0.35% for all revolving facilities at December 31, 2017.
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, 2017, the Company had $2.7 billion in borrowings outstanding on term A loan, excluding the related debt discount, $349.1 million in borrowings outstanding on term B loan, excluding the related debt discount, $635 million in borrowings outstanding on the domestic revolving A facility, $28.3 million in borrowings outstanding on the foreign revolving B facility and $6.9 million in borrowings outstanding on the foreign swing line revolving B facility. The Company has unamortized debt discounts of $6.0 million related to the term A facility and $0.7 million related to the term B facility and deferred financing costs of $5.1 million at December 31, 2017. In August 2017, the Company expensed $3.3 million and capitalized $10.6 million of debt issuance costs associated with the refinancing of its Credit Facility. The effective interest rate incurred on term loans was 2.69% and 2.57% during 2017 and 2016, respectively, related to the discount on debt. Principal payments of $423.2 million were made on the term loans during 2017.
| (b) | The Company is party to a $950 million receivables purchase agreement (Securitization Facility) that was amended and restated on November 14, 2017. There is a program fee equal to one month LIBOR plus 0.90% or the Commercial Paper Rate plus 0.80% as of December 31, 2017 and one month LIBOR or the Commercial Paper Rate plus 0.90% as of December 31, 2016. The program fee was 1.55% plus 0.86% as of December 31, 2017 and 0.85% plus 0.90% as of December 31, 2016. The unused facility fee is payable at a rate of 0.40% as of December 31, 2017 and 2016. 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, 2017.
The contractual maturities of the Company’s notes payable and other obligations at December 31, 2017 are as follows (in thousands):
| 2018 | $ | 805,512 | ||
| 2019 | 173,927 | |||
| 2020 | 136,197 | |||
| 2021 | 136,337 | |||
| 2022 | 2,121,177 | |||
| Thereafter | 334,466 |
- Income Taxes
On December 22, 2017, the U.S. government enacted tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time Deemed Repatriation Transition Tax (“Transition Tax”) on certain unrepatriated earnings of foreign subsidiaries that can be paid over eight years; (3) a new provision designed to tax global intangible low-taxed income (GILTI), which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (4) the repeal of the domestic production activity deduction beginning January 1, 2018; (5) limitations on the deductibility of certain executive compensation; and (6) a new limitation on deductible interest expense beginning January 1, 2018.
At December 31, 2017, the Company has not completed its accounting for the tax effects of enactment of the Tax Act. However, as described below, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time Transition Tax. In other cases, the Company has not been able to make a reasonable estimate and continue to
account for those items based on its existing accounting under ASC 740 ("Income Taxes"), and the provisions of the tax laws that were in effect immediately prior to enactment. The Company was not able to make a reasonable estimate of the impact of the new limitations on the deductibility of certain executive compensation.
For those items for which it was able to determine a reasonable estimate, the Company recognized a provisional net tax benefit of $128.2 million, which is included as a component of income tax expense from continuing operations. In all cases, the Company will continue to make and refine its calculations as additional analysis is completed. In addition, it is anticipated that the U.S. Treasury Department will publish new regulations providing some clarity to many of the provisions included in the new act. As a result, the Company's estimates may also be affected as it gains a more thorough understanding of the Tax Act via new regulations and other guidance.
The SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
In connection with its initial analysis of the impact of the Tax Act, the Company has recorded a net tax benefit of $128.2 million in the period ending December 31, 2017. This net benefit primarily consists of a net benefit for the corporate rate reduction on the deferred tax assets and liabilities of $210 million and a net expense for the Transition Tax of $81.8 million. For various reasons that are discussed more fully below, the Company has not completed its accounting for the income tax effects of certain elements of the Tax Act. However, the Company was able to make reasonable estimates of the effects of the elements for which its analysis is not yet complete and recorded provisional adjustments.
The Company's accounting for the following elements of the Tax Act are incomplete. However, the Company was able to make reasonable estimates of certain effects and, therefore, recorded provisional adjustments.
Deferred tax effects
The Tax Act reduces the corporate tax rate to 21 percent, effective January 1, 2018. For its deferred tax assets and deferred tax liabilities, the Company has recorded a provisional decrease of $210 million with a corresponding net adjustment to deferred tax benefit of $210 million for the year ended December 31, 2017. While the Company was able to make a reasonable estimate of the impact of the reduction in corporate rate, the impact may be affected by other analysis related to the Tax Act, including, but not limited to, FLEETCOR's calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.
One time transition tax
The Transition Tax is a tax on previously untaxed accumulated and current earnings and profits ("E&P") of certain of the Company's foreign subsidiaries. To determine the amount of the Transition Tax, the Company must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. The Company was able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $81.8 million. However, the Company is continuing to gather additional information to more precisely compute the amount of the Transition Tax. Further, the Transition Tax is based in part on the amount of accumulated and current E&P held in cash and other specified assets. This amount may change when the Company finalizes the calculation of post-1986 foreign E&P previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets. Double tax relief is available for the pool of foreign tax credits attributed to the accumulated and current E&P. The amount of foreign tax credits claimed when the Company finalizes the calculation of the pool of foreign tax credits.
No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the Transition Tax, or any additional outside basis differences inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. The Company has not been able to make a reasonable estimate of the impact of the unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the Transition Tax or additional outside basis differences in these entities.
The Company has also not been able to make a reasonable estimate of the impact of the new limitations on the deductibility of certain executive compensation and continues to account for that item based on its existing accounting under ASC 740 and the provisions of the tax laws that were in effect immediately prior to enactment.
Global Intangible Low-Taxed Income
The Tax Act subjects a U.S. shareholder to current tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries. The FASB Staff Q&A, Topic 740 No. 5, "Accounting for Global Intangible Low-Taxed Income", states that an entity can make an accounting policy election to either recognize deferred taxes for temporary differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred. Based on the Company's preliminary assessment of the GILTI tax, the Company believes it will recognize tax on GILTI as a period expense.
Income before the provision for income taxes is attributable to the following jurisdictions for years ended December 31 (in thousands) :
| 2017 | 2016 | 2015 | ||||||||||
| United States | $ | 524,669 | $ | 383,427 | $ | 304,743 | ||||||
| Foreign | 368,921 | 259,492 | 231,261 | |||||||||
| Total | $ | 893,590 | $ | 642,919 | $ | 536,004 |
The provision for income taxes for the years ended December 31 consists of the following (in thousands):
| 2017 | 2016 | 2015 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 303,514 | $ | 147,406 | $ | 82,926 | ||||||
| State | 19,234 | 10,725 | 8,051 | |||||||||
| Foreign | 78,354 | 61,084 | 51,970 | |||||||||
| Total current | 401,102 | 219,215 | 142,947 | |||||||||
| Deferred: | ||||||||||||
| Federal | (255,188 | ) | (18,723 | ) | 36,723 | |||||||
| State | 276 | 1,608 | 1,525 | |||||||||
| Foreign | 7,200 | (11,566 | ) | (7,622 | ) | |||||||
| Total deferred | (247,712 | ) | (28,681 | ) | 30,626 | |||||||
| Total provision | $ | 153,390 | $ | 190,534 | $ | 173,573 |
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):
| 2017 | 2016 | 2015 | |||||||||||||||||||
| Computed “expected” tax expense | $ | 312,756 | 35.0 | % | $ | 225,022 | 35.0 | % | $ | 187,601 | 35.0 | % | |||||||||
| Changes resulting from: | |||||||||||||||||||||
| Change in valuation allowance | 18,289 | 2.0 | 11,952 | 1.9 | 20,243 | 3.8 | |||||||||||||||
| Foreign income tax differential | (38,695 | ) | (4.3 | ) | (25,533 | ) | (4.0 | ) | (23,718 | ) | (4.4 | ) | |||||||||
| State taxes net of federal benefits | 12,884 | 1.4 | 9,439 | 1.5 | 6,711 | 1.2 | |||||||||||||||
| Foreign-sourced nontaxable income | (8,836 | ) | (1.0 | ) | (13,659 | ) | (1.2 | ) | (10,573 | ) | (2.0 | ) | |||||||||
| IRC Section 199 deduction | (8,844 | ) | (1.0 | ) | (7,731 | ) | (1.2 | ) | (10,221 | ) | (1.9 | ) | |||||||||
| Excess tax benefits related to stock-based compensation | (18,058 | ) | (2.0 | ) | (11,974 | ) | (1.9 | ) | — | — | |||||||||||
| Subpart F income/transition tax - federal only | 195,779 | 21.9 | — | — | — | — | |||||||||||||||
| Foreign tax credit/transition tax - federal only | (113,955 | ) | (12.8 | ) | — | — | — | — | |||||||||||||
| Tax reform - federal rate reduction | (209,966 | ) | (23.5 | ) | — | — | — | — | |||||||||||||
| Other | 12,036 | 1.3 | 3,018 | (0.4 | ) | 3,530 | 0.7 | ||||||||||||||
| Provision for income taxes | $ | 153,390 | 17.2 | % | $ | 190,534 | 29.7 | % | $ | 173,573 | 32.4 | % |
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):
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Accounts receivable, principally due to the allowance for doubtful accounts | $ | 6,752 | $ | 7,148 | ||||
| Accrued expenses not currently deductible for tax | 442 | 2,647 | ||||||
| Stock based compensation | 37,274 | 41,415 | ||||||
| Income tax credits | 376 | 376 | ||||||
| Net operating loss carry forwards | 41,168 | 45,969 | ||||||
| Investments | 37,804 | 53,379 | ||||||
| Accrued escheat | 4,768 | 7,290 | ||||||
| Fixed assets, intangibles and other | 12,604 | 15,622 | ||||||
| Deferred tax assets before valuation allowance | 141,188 | 173,846 | ||||||
| Valuation allowance | (59,349 | ) | (76,395 | ) | ||||
| Deferred tax assets, net | 81,839 | 97,451 | ||||||
| Deferred tax liabilities: | ||||||||
| Intangibles—including goodwill | (508,958 | ) | (687,443 | ) | ||||
| Basis difference in investment in foreign subsidiaries | (39,287 | ) | (48,354 | ) | ||||
| Prepaid expenses | (1,605 | ) | (3,644 | ) | ||||
| Property and equipment, principally due to differences between book and tax depreciation, and other | (49,100 | ) | (24,157 | ) | ||||
| Deferred tax liabilities | (598,950 | ) | (763,598 | ) | ||||
| Net deferred tax liabilities | $ | (517,111 | ) | $ | (666,147 | ) |
The Company’s deferred tax balances are classified in its balance sheets as of December 31 as follows (in thousands):
| 2017 | 2016 | |||||||
| Long term deferred tax assets and liabilities: | ||||||||
| Long term deferred tax assets | 1,801 | 2,433 | ||||||
| Long term deferred tax liabilities | (518,912 | ) | (668,580 | ) | ||||
| Net long term deferred taxes | (517,111 | ) | (666,147 | ) | ||||
| Net deferred tax liabilities | $ | (517,111 | ) | $ | (666,147 | ) |
The valuation allowance for deferred tax assets at December 31, 2017 and 2016 was $59.3 million and $76.4 million, respectively. These valuation allowances related to basis differences in equity method investments, capital loss carryforwards, income tax credits, foreign net operating loss carryforwards and state net operating loss carryforwards. The net change in the total valuation allowance for the years ended December 31, 2017 and 2016 was a decrease of $17.0 million and an increase of $13.8 million, respectively. The valuation decrease from the prior year was due to the U.S. tax rate reduction that resulted from the Tax Act, which was offset by an increase in basis differences related to equity method investments completed in 2014. The increase in 2016 was primarily due to changes in the Company's deferred tax asset related to basis differences in an equity method investment.
The valuation allowance for deferred tax assets changed during 2017 as follows (in thousands):
| Balances at December 31, 2014 | $ | 27,082 | ||
| Additions | 35,523 | |||
| Balance at December 31, 2015 | 62,605 | |||
| Additions | 13,790 | |||
| Balance at December 31, 2016 | 76,395 | |||
| Additions | 5,332 | |||
| Reduction in valuation allowance due to rate change from Tax Act | (22,378 | ) | ||
| Balance at December 31, 2017 | $ | 59,349 |
The valuation allowances relate to basis differences in cost method investments, capital loss carryforwards, income tax credits, foreign net operating loss carryforwards and state net operating loss carryforwards. The net change in the total valuation allowance for the year ended December 31, 2017 was a decrease of $17.0 million. The valuation decrease from the prior year was due to the U.S. tax rate reduction that resulted from the Tax Act, which was partially offset by an increase in the basis differences related to cost method investments. The increase in 2015 and 2016 were primarily due to changes in the Company's deferred tax asset related to basis differences in a cost method investment.
As of December 31, 2017, the Company had a net operating loss carryforward for state income tax purposes of approximately $590.0 million that is available to offset future state taxable income through 2029. Additionally, the Company had $44.0 million net operating loss carryforwards for foreign income tax purposes that are available to offset future foreign taxable income. The foreign net operating loss carryforwards will not expire in future years.
The Company recognizes interest and penalties on unrecognized tax benefits (including interest and penalties calculated on uncertain tax positions on which the Company believes it will ultimately prevail) within the provision for income taxes on continuing operations in the consolidated financial statements. This policy is a continuation of the Company's policy prior to the adoption of the guidance regarding uncertain tax positions. During 2017 and 2016, the Company had recorded accrued interest and penalties related to the unrecognized tax benefits of $1.3 million and $5.9 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, 2017, 2016 and 2015 is as follows (in thousands):
| 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 | |||
| Additions based on tax provisions related to the current year | 4,143 | |||
| Additions for tax positions due to acquisitions | 9,208 | |||
| Additions based on tax provisions related to the prior year | 1,171 | |||
| Deductions based on settlement/expiration of prior year tax positions | (9,119 | ) | ||
| Unrecognized tax benefits at December 31, 2017 | $ | 31,558 |
As of December 31, 2017, the Company had total unrecognized tax benefits of $31.6 million of which $31.6 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 2014. The statute of limitations for the Company’s U.K. income tax returns has expired for years prior to 2015. The statute of limitations has expired for years prior to 2014 for the Company’s Czech Republic income tax returns, 2014 for the Company’s Russian income tax returns, 2012 for the Company’s Mexican income tax returns, 2012 for the Company’s Brazilian income tax returns, 2012 for the Company’s Luxembourg income tax returns, 2013 for the Company’s New Zealand income tax returns, and 2015 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):
| 2018 | $ | 19,343 | ||
| 2019 | 14,362 | |||
| 2020 | 12,132 | |||
| 2021 | 10,661 | |||
| 2022 | 10,195 | |||
| Thereafter | 25,335 |
Rent expense for noncancelable operating leases approximated $18.4 million, $15.1 million and $14.1 million for the years ended December 31, 2017, 2016 and 2015, 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, arbitration proceedings, claims, subpoenas, and matters relating to compliance with laws and regulations (collectively, legal proceedings). Based on our current knowledge, management presently does not believe that the liabilities arising from these legal
proceedings will have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, it is possible that the ultimate resolution of these legal proceedings could have a material adverse effect on our results of operations and financial condition for any particular period.
Shareholder Class Action and Derivative Lawsuits
On June 14, 2017, a shareholder filed a class action complaint in the United States District Court for the Northern District of Georgia against the Company and certain of its officers and directors on behalf of all persons who purchased or otherwise acquired the Company’s stock between February 5, 2016 and May 2, 2017. On October 13, 2017, the shareholder filed an amended complaint asserting claims on behalf of a putative class of all persons who purchased or otherwise acquired the Company's common stock between February 4, 2016 and May 3, 2017. The complaint alleges that the defendants made false or misleading statements regarding fee charges and the reasons for its earnings and growth in certain press releases and other public statements in violation of the federal securities laws. Plaintiff seeks class certification, unspecified monetary damages, costs, and attorneys’ fees. The Company disputes the allegations in the complaint and intends to vigorously defend against the claims.
On July 10, 2017, a shareholder derivative complaint was filed against the Company and certain of the Company’s directors and officers in the United States District Court for the Northern District of Georgia seeking recovery on behalf of the Company. The derivative complaint alleges that the defendants issued a false and misleading proxy statement in violation of the federal securities laws; that defendants breached their fiduciary duties by causing or permitting the Company to make allegedly false and misleading public statements concerning the Company’s fee charges, and financial and business prospects; and that certain defendants breached their fiduciary duties through allegedly improper sales of stock. The complaint seeks unspecified monetary damages on behalf of the Company, corporate governance reforms, disgorgement of profits, benefits and compensation by the defendants, restitution, costs, and attorneys’ and experts’ fees. On August 18, 2017, the court entered an order deferring the case pending a ruling on the defendants' motion to dismiss the putative shareholder class action, or until otherwise agreed to by the parties. The defendants dispute the allegations in the complaint and intend to vigorously defend against the claims.
Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, the Company is currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from the matters described above.
- Asset Dispositions
Telematics Businesses
As part of the Company's plan to exit the telematics business, on July 27, 2017, the Company sold NexTraq, a U.S. fleet telematics business, to Michelin Group for $316.5 million. The Company recorded a pre-tax gain on the disposal of NexTraq of $175.0 million during the third quarter of 2017, which is net of transaction closing costs. The Company recorded tax on the gain of disposal of $65.8 million. The gain on the disposal is included in other (income) expense, net in the accompanying Consolidated Statements of Income. NexTraq had historically been included in the Company's North America segment.
- Derivative Financial Instruments
As a result of the Cambridge acquisition during 2017, the Company writes derivatives, primarily foreign currency forward contracts, option contracts, and swaps, mostly with small and medium size enterprises that are customers and derives a currency spread from this activity. Derivative transactions include:
| • | Forward contracts, which are commitments to buy or sell at a future date a currency at a contract price and will be settled in cash. |
| • | Option contracts, which gives the purchaser, the right, but not the obligation to buy or sell within a specified time a currency at a contracted price that may be settled in cash. |
| • | Swap contracts, which are commitments to settlement in cash at a future date or dates, usually on an overnight basis. |
The credit risk inherent in derivative agreements represents the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. The Company performs a review of the credit risk of these counterparties at the inception of
the contract and on an ongoing basis. The Company also monitors the concentration of its contracts with any individual counterparty against limits at the individual counterparty level. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements, but takes action when doubt arises about the counterparties' ability to perform. These actions may include requiring customers to post or increase collateral, and for all counterparties, the possible termination of the related contracts. The Company does not designate any of its foreign exchange derivatives as hedging instruments in accordance with ASC 815.
The aggregate equivalent U.S. dollar notional amount of foreign exchange derivative customer contracts held by the Company as of December 31, 2017 (in millions) is presented in the table below. Notional amounts do not reflect the netting of offsetting trades, although these offsetting positions may result in minimal overall market risk. Aggregate derivative notional amounts can fluctuate from period to period in the normal course of business based on market conditions, levels of customer activity and other factors.
| Net Notional | |||
| Foreign exchange contracts: | |||
| Swaps | $ | 515.4 | |
| Futures, forwards and spot | 3,274.5 | ||
| Written options | 2,934.2 | ||
| Purchased options | 2,314.1 | ||
| Total | $ | 9,038.1 |
The majority of customer foreign exchange contracts are written in major currencies such as the U.S. Dollar, Canadian Dollar, British Pound, Euro and Australian Dollar.
The following table summarizes the fair value of derivatives reported in the Consolidated Balance Sheet as of December 31, 2017 (in millions):
| Fair Value, Gross | Fair Value, Net | ||||||||||||||
| Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | ||||||||||||
| Derivatives - undesignated: | |||||||||||||||
| Over the counter | $ | 80.4 | $ | 68.2 | $ | 39.0 | $ | 26.8 | |||||||
| Exchange traded | — | 0.1 | — | 0.1 | |||||||||||
| Foreign exchange contracts | 80.4 | 68.3 | 39.0 | 26.9 | |||||||||||
| Cash collateral | 12.5 | 10.9 | 12.5 | 10.9 | |||||||||||
| Total net derivative assets and liabilities | $ | 67.9 | $ | 57.4 | $ | 26.5 | $ | 16.0 |
The fair values of derivative assets and liabilities associated with contracts that include netting language that the Company believes to be enforceable have been netted to present the Company's net exposure with these counterparties. The Company recognizes all derivative assets, net in prepaid expense and other current assets and all derivative liabilities, net in other current liabilities, both net at the customer level as right of offset exists, in its Consolidated Balance Sheets at their fair value. The gain or loss on the fair value is recognized immediately within revenues, net in the Consolidated Statements of Income. The Company does not offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral. At December 31, 2017, $39.0 million derivative assets and $26.9 million derivative liabilities were recorded in other current assets and other current liabilities, respectively, in the Consolidated Balance Sheet. The Company receives cash from customers as collateral for trade exposures, which is recorded within cash and cash equivalents and customer deposits in the Consolidated Balance Sheet. The customer has the right to recall their collateral in the event exposures move in their favor, they unwind all outstanding trades or they cease to do business with the Company.
- 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:
| 2017 | 2016 | 2015 | ||||||||||
| Net income | $ | 740,200 | $ | 452,385 | $ | 362,431 | ||||||
| Denominator for basic earnings per share | 91,129 | 92,597 | 92,023 | |||||||||
| Dilutive securities | 2,465 | 2,616 | 2,116 | |||||||||
| Denominator for diluted earnings per share | 93,594 | 95,213 | 94,139 | |||||||||
| Basic earnings per share | $ | 8.12 | $ | 4.89 | $ | 3.94 | ||||||
| Diluted earnings per share | 7.91 | 4.75 | 3.85 |
There were 0.1 million antidilutive shares for the year ended December 31, 2017. Diluted earnings per share for the years ended December 31, 2017, 2016 and 2015 excludes the effect of 0.1 million , 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 0.1 million antidilutive shares for 2016. Diluted earnings per share also excludes the effect of 0.3 million, 0.2 million and 0.2 million shares of performance based restricted stock for which the performance criteria have not yet been achieved for the years ended December 31, 2017, 2016 and 2015, 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. The results from the Cambridge business acquired in the third quarter of 2017 and CLS business acquired in the fourth quarter of 2017 are reported in the Company's North America segment. The results from the Company's Russian business acquired in the fourth quarter of 2017 are reported in its International segment. There were no inter-segment sales.
The Company’s segment results are as follows as of and for the years ended December 31 (in thousands):
| 2017 | 2016 | 2015 | ||||||||||
| Revenues, net: | ||||||||||||
| North America | $ | 1,428,711 | $ | 1,279,102 | $ | 1,231,957 | ||||||
| International | 820,827 | 552,444 | 470,908 | |||||||||
| $ | 2,249,538 | $ | 1,831,546 | $ | 1,702,865 | |||||||
| Operating income: | ||||||||||||
| North America | $ | 541,598 | $ | 506,414 | $ | 442,052 | ||||||
| International | 342,162 | 247,739 | 225,482 | |||||||||
| $ | 883,760 | $ | 754,153 | $ | 667,534 | |||||||
| Depreciation and amortization: | ||||||||||||
| North America | $ | 139,418 | $ | 129,653 | $ | 127,863 | ||||||
| International | 125,142 | 73,603 | 65,590 | |||||||||
| $ | 264,560 | $ | 203,256 | $ | 193,453 | |||||||
| Capital expenditures: | ||||||||||||
| North America | $ | 40,747 | $ | 39,000 | $ | 19,883 | ||||||
| International | 29,346 | 20,011 | 21,992 | |||||||||
| $ | 70,093 | $ | 59,011 | $ | 41,875 | |||||||
| Long-lived assets (excluding goodwill): | ||||||||||||
| North America | $ | 1,888,599 | $ | 1,664,224 | $ | 1,719,639 | ||||||
| International | 1,131,610 | 1,203,465 | 602,941 | |||||||||
| $ | 3,020,209 | $ | 2,867,689 | $ | 2,322,580 |
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):
| 2017 | 2016 | 2015 | ||||||||||
| Revenues, net by location: | ||||||||||||
| United States (country of domicile) | $ | 1,400,801 | $ | 1,278,828 | $ | 1,231,641 | ||||||
| Brazil | 394,550 | 167,769 | 85,124 | |||||||||
| United Kingdom | 236,550 | 229,125 | 248,598 |
The table below presents the Company's revenues, net from its primary product categories as of and for the years ended December 31 (in thousands).
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Revenue by Product Category | Revenues, net | Revenues, net | Revenues, net | |||||||||
| Fuel1 | $ | 1,096,153 | $ | 997,398 | $ | 1,115,570 | ||||||
| Corporate payments | 261,822 | 179,557 | 162,283 | |||||||||
| Tolls | 326,977 | 102,740 | 9,337 | |||||||||
| Lodging | 126,657 | 100,664 | 91,751 | |||||||||
| Gift | 194,099 | 184,743 | 170,095 | |||||||||
| Other | 243,830 | 266,444 | 153,829 | |||||||||
| Consolidated revenues, net | $ | 2,249,538 | $ | 1,831,546 | $ | 1,702,865 |
| 1Amounts shown for 2016 and 2015 from previously disclosed amounts conform to the current year's presentation. |
The table below presents the Company's long-lived assets (excluding goodwill) at December 31 (in thousands).
| 2017 | 2016 | |||||||
| Long-lived assets (excluding goodwill): | ||||||||
| United States (country of domicile) | $ | 1,808,043 | $ | 1,664,224 | ||||
| Brazil | 688,809 | 784,816 | ||||||
| United Kingdom | 294,039 | 286,928 |
No single customer represented more than 10% of the Company’s consolidated revenue in 2017, 2016 and 2015.
- Selected Quarterly Financial Data (Unaudited)
| Fiscal Quarters Year Ended December 31, 2017 | First | Second | Third | Fourth | ||||||||||||
| Revenues, net | $ | 520,433 | $ | 541,237 | $ | 577,877 | $ | 609,991 | ||||||||
| Operating income | 195,068 | 216,043 | 232,637 | 240,012 | ||||||||||||
| Net income | 123,693 | 130,987 | 202,823 | 282,697 | ||||||||||||
| Basic earnings per share | $ | 1.34 | $ | 1.42 | $ | 2.23 | $ | 3.15 | ||||||||
| Diluted earnings per share | 1.31 | 1.39 | 2.18 | 3.05 | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic shares | 92,108 | 92,013 | 90,751 | 89,676 | ||||||||||||
| Diluted shares | 94,560 | 94,223 | 93,001 | 92,623 |
| 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 shares | 92,516 | 92,665 | 92,631 | 92,574 | ||||||||||||
| Diluted shares | 95,030 | 95,279 | 95,307 | 95,235 |
*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 2017 and 2016 may not equal the earnings per common share for the 2017 and 2016 due to rounding.
The fourth quarter of 2017 includes the provisional net tax benefit of $128.2 million as a result of the Tax Act and $11 million of incremental legal fees.
The fourth quarter of 2016 includes 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.
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