filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
177K characters. Original on sec.gov · Markdown
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences include, but are not limited to, those identified below and those described in Item 1A “Risk Factors” appearing elsewhere in this report. All foreign currency amounts that have been converted into U.S. dollars in this discussion are based on the exchange rate as reported by Oanda for the applicable periods.
General Business
FLEETCOR is a leading global provider of commercial payment solutions. We help businesses of all sizes control, simplify and secure payment of various domestic and cross-border payables using specialized payment products. We serve businesses, merchants and partners in North America, Latin America, Europe, and Australasia. FLEETCOR’s predecessor company was organized in the United States in 1986, and FLEETCOR had its initial public offering in 2010 (NYSE: FLT).
FLEETCOR has two reportable segments, North America and International. We report these two segments as they align with our senior executive organizational structure, reflect how we organize and manage our employees around the world, manage operating performance, contemplate the differing regulatory environments in North America versus other geographies, and help us isolate the impact of foreign exchange fluctuations on our financial results.
Our payment solutions provide our customers with a payment method designed to be superior to 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. Our solutions are comprised of payment products, networks and associated services.
FLEETCOR is a global payments company primarily focused on business to business payments. We simplify the way businesses manage and pay for expenses and operate in five categories: Fuel, Lodging, Tolls, Corporate Payments and Gift. Our products are focused on delivering a better, more efficient way to pay, through specialized products, systems, and payment and merchant networks. While the actual payment mechanisms vary from category to category, they are structured to afford control and reporting to the end user. The methods of payment generally function like a charge card, prepaid card, one-time use virtual card, and electronic RFID, etc. Each category is unique in its focus, customer base and target markets, but they also share a number of characteristics. Customers are primarily business to business, have recurring revenue models, specialized networks which create barriers to entry, have high EBITDA margins, and have similar selling systems, which can be leveraged in each business. Additionally, we provide other payment products including fleet maintenance, employee benefits and long haul transportation-related services. Our products are used in 82 countries around the world, with our primary geographies being the U.S., Brazil and the United Kingdom, which combined accounted for approximately 88% of our revenue in 2018.
FLEETCOR uses both proprietary and third-party networks to deliver our payment solutions. FLEETCOR owns and operates proprietary networks with well-established brands throughout the world, bringing incremental sales and loyalty to affiliated merchants. Third-party networks are used to broaden payment product acceptance and use. In 2018, we processed approximately 2.9 billion transactions within these networks, of which approximately 1.4 billion were related to our Gift product line.
FLEETCOR capitalizes on its products’ specialization with sales and marketing efforts by deploying product-dedicated sales forces to target specific customer segments. We market our products directly through multiple sales channels, including field sales, telesales and digital marketing, and indirectly through our partners, which include major oil companies, leasing companies, petroleum marketers, value-added resellers (VARs) and referral partners.
We believe that our size and scale, product breadth and specialization, geographic reach, proprietary networks, robust distribution capabilities and advanced technology contribute to our industry leading position.
Executive Overview
We operate in two segments, which we refer to as our North America and International segments. Our revenue is generally reported net of the cost for underlying products and services. In this report, we refer to this net revenue as “revenue". See “Results of Operations” for additional segment information.
Results presented for 2018 reflect the impact of the Company's adoption of Accounting Standards Update 2014-09, "Revenue from Contracts with Customers" ("Topic 606") ("ASC 606") and related cost capitalization guidance, which was adopted by the Company on January 1, 2018, using the modified retrospective transition method. The adoption of Topic 606 resulted in the classification of certain amounts previously classified as merchant commissions and processing expense net with revenues. As a result of the application of the modified retrospective transition method, the Company's prior period results within its annual report on Form 10-K and quarterly reports on Form 10-Q will not be restated to reflect the impact of Topic 606.
The adoption of Topic 606 had the impact of reducing revenues by approximately $112.0 million for the year ended December 31, 2018. Such expenses were not reflected as a reduction of revenues in the 2017 and 2016 amounts presented. This lack of comparability should be considered in reviewing the transaction analysis and the various breakdowns of revenue by geography, product and source in this discussion and analysis.
Revenues, net, by Segment. For the years ended December 31, 2018, 2017 and 2016, our North America and International segments generated the following revenue (in millions):
| Year ended December 31, | |||||||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||||
| Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | ||||||||||||||||
| North America | $ | 1,571 | 64.6 | % | $ | 1,429 | 63.5 | % | $ | 1,279 | 69.8 | % | |||||||||
| International | 862 | 35.4 | % | 821 | 36.5 | % | 552 | 30.2 | % | ||||||||||||
| $ | 2,433 | 100.0 | % | $ | 2,250 | 100.0 | % | $ | 1,832 | 100.0 | % |
Revenues, net, Net Income and Net Income Per Diluted Share. Set forth below are revenues, net, net income and net income per diluted share for the years ended December 31, 2018, 2017 and 2016 (in millions, except per share amounts).
| Year ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Revenues, net | $ | 2,433 | $ | 2,250 | $ | 1,832 | ||||||
| Net income | $ | 811 | $ | 740 | $ | 452 | ||||||
| Net income per diluted share | $ | 8.81 | $ | 7.91 | $ | 4.75 |
Adjusted Net Income and Adjusted Net Income Per Diluted Share. Set forth below are adjusted revenues, adjusted net income and adjusted net income per diluted share for the years ended December 31, 2018, 2017 and 2016 (in millions, except per share amounts).
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Adjusted net income | $ | 969.8 | $ | 798.9 | $ | 659.2 | ||||||
| Adjusted net income per diluted share | $ | 10.53 | $ | 8.54 | $ | 6.92 |
Adjusted net income and adjusted net income per diluted share are supplemental non-GAAP financial measures of operating performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures” for more information and a reconciliation of the non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with GAAP. We use adjusted net income and adjusted net income per diluted share to eliminate the effect of items that we do not consider indicative of our core operating performance on a consistent basis.
Sources of Revenue
Transactions. In both of our segments, we derive revenue from transactions. A transaction is defined as a purchase by a customer utilizing one of our payment products at a participating merchant. The following diagram illustrates a typical transaction flow, which is representative of many, but not all, of our businesses.
Illustrative Transaction Flow
The revenue we derive from transactions is generated from both customers and merchants. Customers may include commercial businesses (obtained through direct and indirect channels), as well as partners for whom we manage payment programs. Merchants, who may also be customers under relevant accounting guidance, may include those merchants affiliated with our proprietary networks or those participating in the third-party networks we utilize.
From our customers and partners, we generate revenue through a variety of program fees, including transaction fees, card fees, network fees and charges. These fees may be charged as fixed amounts, costs plus a mark-up, or based on a percentage of the transaction purchase amounts, or a combination thereof. Our programs include other fees and charges associated with late payments and based on customer credit risk.
From our merchants and third-party networks, we generate revenue mostly from the difference between the amount charged to a customer and the amount paid to the merchant or network for a given transaction, as well as network fees and charges in certain businesses. The amount paid to a merchant or network may be calculated as (i) the merchant’s wholesale product cost plus a markup; (ii) the transaction purchase amount less a percentage discount; or (iii) the transaction purchase amount less a fixed fee per unit.
For a transaction involving the purchase of fuel where the amount paid to the merchant is calculated under the cost plus markup model, we refer to the difference between the amount charged to the customer and the amount paid to the merchant as revenue tied to fuel-price spreads. In all other cases, we refer to the difference between the amount charged to the customer and the amount paid to the merchant for a given transaction as interchange revenue.
Revenue per transaction. Set forth below is revenue per transaction by segment information for the years ended December 31, 2018, 2017 and 2016. Revenue per transactions by segment is affected by the mix of products and acquisitions, as well as the impact of the adoption of ASC 606, which may result in revenue per transaction by product providing more meaningful data for analysis.
| Year ended December 31, | ||||||||||||
| (Unaudited) | 2018 | 2017 | 2016 | |||||||||
| Transactions (in millions) | ||||||||||||
| North America | 1,789.1 | 1,798.2 | 1 | 1,714.6 | ||||||||
| International2 | 1,099.1 | 1,092.5 | 507.8 | |||||||||
| Total transactions | 2,888.2 | 2,890.7 | 2,222.4 | |||||||||
| Revenue per transaction | ||||||||||||
| North America | $ | 0.88 | $ | 0.79 | $ | 0.75 | ||||||
| International | $ | 0.78 | $ | 0.75 | $ | 1.09 | ||||||
| Consolidated revenue per transaction | $ | 0.84 | $ | 0.78 | $ | 0.82 | ||||||
| Consolidated adjusted revenue per transaction | $ | 0.84 | $ | 0.74 | $ | 0.78 |
| 1 For purposes of comparability, reflects adjustment for 44.3 million non-recurring transactions at SVS in the first quarter of 2017 due to system driven balance inquiries. |
| 2 Reflects adjustments from previously disclosed amounts for the prior period to conform to current presentation. |
The following table provides a breakdown of revenue per transaction by product and organic growth by product for the years ended December 31, 2018 and 2017 (in millions, except per transaction data):*
| As Reported | Pro Forma and Macro Adjusted | |||||||||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||
| 2018¹ | 2017 | Change | % Change | 2018¹ | 2017¹ | Change | % Change | |||||||||||||||||||||||
| FUEL | ||||||||||||||||||||||||||||||
| '- Transactions | 484 | 466 | 18 | 4 | % | 484 | 471 | 13 | 3 | % | ||||||||||||||||||||
| '- Revenues, net per transaction | $ | 2.27 | $ | 2.35 | $ | (0.08 | ) | (3 | )% | $ | 2.15 | $ | 2.10 | $ | 0.05 | 2 | % | |||||||||||||
| '- Revenues, net | $ | 1,097 | $ | 1,096 | $ | — | — | % | $ | 1,042 | $ | 990 | $ | 52 | 5 | % | ||||||||||||||
| CORPORATE PAYMENTS | ||||||||||||||||||||||||||||||
| '- Transactions | 49 | 42 | 8 | 19 | % | 49 | 42 | 7 | 17 | % | ||||||||||||||||||||
| '- Revenues, net per transaction | $ | 8.42 | $ | 6.30 | $ | 2.12 | 34 | % | $ | 8.40 | $ | 7.92 | $ | 0.48 | 6 | % | ||||||||||||||
| '- Revenues, net | $ | 416 | $ | 262 | $ | 154 | 59 | % | $ | 415 | $ | 334 | $ | 81 | 24 | % | ||||||||||||||
| TOLLS | ||||||||||||||||||||||||||||||
| - Transactions2 | 877 | 894 | (17 | ) | (2 | )% | 877 | 894 | (17 | ) | (2 | )% | ||||||||||||||||||
| '- Revenues, net per transaction | $ | 0.39 | $ | 0.37 | $ | 0.02 | 5 | % | $ | 0.44 | $ | 0.37 | $ | 0.07 | 19 | % | ||||||||||||||
| '- Revenues, net | $ | 339 | $ | 327 | $ | 12 | 4 | % | $ | 386 | $ | 327 | $ | 59 | 18 | % | ||||||||||||||
| LODGING | ||||||||||||||||||||||||||||||
| '- Transactions | 19 | 17 | 2 | 12 | % | 19 | 19 | 1 | 4 | % | ||||||||||||||||||||
| '- Revenues, net per transaction | $ | 9.16 | $ | 7.45 | $ | 1.71 | 23 | % | $ | 9.16 | $ | 7.82 | $ | 1.34 | 17 | % | ||||||||||||||
| '- Revenues, net | $ | 176 | $ | 127 | $ | 49 | 39 | % | $ | 176 | $ | 145 | $ | 30 | 21 | % | ||||||||||||||
| GIFT | ||||||||||||||||||||||||||||||
| '- Transactions | 1,384 | 1,394 | (10 | ) | (1 | )% | 1,384 | 1,394 | (10 | ) | (1 | )% | ||||||||||||||||||
| '- Revenues, net per transaction | $ | 0.13 | $ | 0.14 | $ | (0.01 | ) | (7 | )% | $ | 0.13 | $ | 0.14 | $ | (0.01 | ) | (7 | )% | ||||||||||||
| '- Revenues, net | $ | 187 | $ | 194 | $ | (8 | ) | (4 | )% | $ | 187 | $ | 194 | $ | (8 | ) | (4 | )% | ||||||||||||
| OTHER3 | ||||||||||||||||||||||||||||||
| '- Transactions | 74 | 78 | (3 | ) | (4 | )% | 74 | 77 | (2 | ) | (3 | )% | ||||||||||||||||||
| '- Revenues, net per transaction | $ | 2.96 | $ | 3.14 | $ | (0.18 | ) | (6 | )% | $ | 3.01 | $ | 2.81 | $ | 0.20 | 7 | % | |||||||||||||
| '- Revenues, net | $ | 220 | $ | 244 | $ | (24 | ) | (10 | )% | $ | 224 | $ | 216 | $ | 8 | 4 | % | |||||||||||||
| FLEETCOR CONSOLIDATED REVENUES | ||||||||||||||||||||||||||||||
| '- Transactions | 2,888 | 2,891 | (3 | ) | — | % | 2,888 | 2,897 | (9 | ) | — | % | ||||||||||||||||||
| '- Revenues, net per transaction | $ | 0.84 | $ | 0.78 | $ | 0.06 | 8 | % | $ | 0.84 | $ | 0.76 | $ | 0.08 | 11 | % | ||||||||||||||
| '- Revenues, net | $ | 2,434 | $ | 2,250 | $ | 184 | 8 | % | $ | 2,429 | $ | 2,206 | $ | 223 | 10 | % |
| * Columns may not calculate due to rounding. |
| 1 Reflects the impact of the Company's adoption of ASC 606 and related cost capitalization guidance, which was adopted by the Company on January 1, 2018 using the modified retrospective transition method. The adoption of ASC 606 resulted in an adjustment to retained earnings in our consolidated balance sheet for the cumulative effect of applying the standard, which included costs incurred to obtain a contract, as well as presentation changes in our statements of income, including the classification of certain amounts previously classified as merchant commissions and processing expense net with revenues. As a result of the application of the modified retrospective transition method, the Company's prior period results within its annual report on Form 10-K and quarterly reports on Form 10-Q will not be restated to reflect the impact of ASC 606. For purposes of comparability, 2017 has been recast and is reconciled to GAAP in the section entitled “Management’s Use of Non-GAAP Financial Measures”, which includes certain estimates and assumptions made by the Company for the impact of ASC 606 on 2017 revenues, as the Company did not apply a full retrospective adoption. |
| 2 Reflects adjustments from previously disclosed amounts for the prior period to conform to current presentation. |
| 3 Other includes telematics, maintenance, food, and transportation related businesses. |
The following table provides a breakdown of revenue per transaction by product and organic growth by product for the years ended December 31, 2017 and 2016 (in millions, except per transaction data):*
| As Reported | Pro Forma and Macro Adjusted | |||||||||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||
| 2017 | 2016 | Change | % Change | 2017 | 2016 | Change | % Change | |||||||||||||||||||||||
| FUEL | ||||||||||||||||||||||||||||||
| '- Transactions | 466 | 434 | 32 | 7 | % | 466 | 444 | 23 | 5 | % | ||||||||||||||||||||
| '- Revenues, net per transaction | $ | 2.35 | $ | 2.30 | $ | 0.05 | 2 | % | $ | 2.29 | $ | 2.25 | $ | 0.04 | 2 | % | ||||||||||||||
| '- Revenues, net | $ | 1,096 | $ | 997 | $ | 99 | 10 | % | $ | 1,066 | $ | 998 | $ | 68 | 7 | % | ||||||||||||||
| CORPORATE PAYMENTS | ||||||||||||||||||||||||||||||
| '- Transactions | 42 | 39 | 3 | 8 | % | 42 | 39 | 3 | 6 | % | ||||||||||||||||||||
| '- Revenues, net per transaction | $ | 6.30 | $ | 4.64 | $ | 1.66 | 36 | % | $ | 6.26 | $ | 5.80 | $ | 0.46 | 8 | % | ||||||||||||||
| '- Revenues, net | $ | 262 | $ | 180 | $ | 82 | 46 | % | $ | 260 | $ | 226 | $ | 34 | 15 | % | ||||||||||||||
| TOLLS | ||||||||||||||||||||||||||||||
| - Transactions1 | 916 | 327 | 589 | 180 | % | 916 | 894 | 22 | 2 | % | ||||||||||||||||||||
| '- Revenues, net per transaction | $ | 0.36 | $ | 0.31 | $ | 0.04 | 13 | % | $ | 0.33 | $ | 0.29 | $ | 0.04 | 14 | % | ||||||||||||||
| '- Revenues, net | $ | 327 | $ | 103 | $ | 224 | 218 | % | $ | 302 | $ | 257 | $ | 45 | 18 | % | ||||||||||||||
| LODGING | ||||||||||||||||||||||||||||||
| '- Transactions | 17 | 13 | 4 | 30 | % | 17 | 14 | 3 | 22 | % | ||||||||||||||||||||
| '- Revenues, net per transaction | $ | 7.45 | $ | 7.58 | $ | (0.13 | ) | (2 | )% | $ | 7.45 | $ | 7.68 | $ | (0.23 | ) | (3 | )% | ||||||||||||
| '- Revenues, net | $ | 127 | $ | 101 | $ | 26 | 26 | % | $ | 127 | $ | 105 | $ | 22 | 21 | % | ||||||||||||||
| GIFT | ||||||||||||||||||||||||||||||
| '- Transactions | 1,439 | 1,327 | 111 | 8 | % | 1,439 | 1,327 | 111 | 8 | % | ||||||||||||||||||||
| '- Revenues, net per transaction | $ | 0.13 | $ | 0.14 | $ | — | (3 | )% | $ | 0.13 | $ | 0.14 | $ | (0.01 | ) | (7 | )% | |||||||||||||
| '- Revenues, net | $ | 194 | $ | 185 | $ | 9 | 5 | % | $ | 194 | $ | 185 | $ | 9 | 5 | % | ||||||||||||||
| OTHER2 | ||||||||||||||||||||||||||||||
| '- Transactions | 77 | 82 | (5 | ) | (6 | )% | 77 | 82 | (4 | ) | (5 | )% | ||||||||||||||||||
| '- Revenues, net per transaction | $ | 3.15 | $ | 3.23 | $ | (0.08 | ) | (2 | )% | $ | 2.13 | $ | 2.99 | $ | 0.15 | 5 | % | |||||||||||||
| '- Revenues, net | $ | 244 | $ | 266 | $ | (23 | ) | (8 | )% | $ | 243 | $ | 244 | $ | (1 | ) | — | % | ||||||||||||
| FLEETCOR CONSOLIDATED REVENUES | ||||||||||||||||||||||||||||||
| '- Transactions | 2,957 | 2,222 | 735 | 33 | % | 2,957 | 2,799 | 158 | 6 | % | ||||||||||||||||||||
| '- Revenues, net per transaction | $ | 0.76 | $ | 0.82 | $ | (0.06 | ) | (7 | )% | $ | 0.74 | $ | 0.73 | $ | 0.02 | 2 | % | |||||||||||||
| '- Revenues, net | $ | 2,250 | $ | 1,832 | $ | 418 | 23 | % | $ | 2,193 | $ | 2,015 | $ | 178 | 9 | % |
| * Columns may not calculate due to rounding. |
| 1 Reflects adjustments from previously disclosed amounts for the prior period to conform to current presentation. |
| 2 Other includes telematics, maintenance, food, and transportation related businesses. |
Revenue per transaction is derived from the various revenue types as discussed above and can vary based on geography, the relevant merchant relationship, the payment product utilized and the types of products or services purchased, the mix of which would be influenced by our acquisitions, organic growth in our business, and the overall macroeconomic environment, including fluctuations in foreign currency exchange rates, fuel prices and fuel spread margins. Revenue per transaction per customer changes as the level of services we provide to a customer increases or decreases, as macroeconomic factors change and as adjustments are made to merchant and customer rates. See “Results of Operations” for further discussion of transaction volumes and revenue per transaction.
Sources of Expenses
We incur expenses in the following categories:
| • | Merchant commissions—In certain of our card programs, we incur merchant commissions expense when we pay merchants with whom we have direct, contractual relationships for specific transactions where a customer purchases products or services from the merchant. In the card programs where it is paid, merchant commissions equal the difference between the price paid by us to the merchant and the merchant’s wholesale cost of the underlying products or services. The adoption of ASC 606 on January 1, 2018, resulted in a change in the presentation of amounts |
previously classified as merchant commissions, resulting in these amounts being recorded within revenues, net in periods beginning in 2018.
| • | Processing—Our processing expense consists of expenses related to processing transactions, servicing our customers and merchants, bad debt expense and cost of goods sold related to our hardware sales in certain businesses. Effective with the adoption of ASC 606 on January 1, 2018, certain third party processing expenses are netted with consolidated revenues, where the network is considered to be our customer. |
| • | Selling—Our selling expenses consist primarily of wages, benefits, sales commissions (other than merchant commissions) and related expenses for our sales, marketing and account management personnel and activities. |
| • | General and administrative—Our general and administrative expenses include compensation and related expenses (including stock-based compensation) for our executives, finance and accounting, information technology, human resources, legal and other administrative personnel. Also included are facilities expenses, third-party professional services fees, travel and entertainment expenses, and other corporate-level expenses. |
| • | Depreciation and amortization—Our depreciation expenses include depreciation of property and equipment, consisting of computer hardware and software (including proprietary software development amortization expense), card-reading equipment, furniture, fixtures, vehicles and buildings and leasehold improvements related to office space. Our amortization expenses include amortization of intangible assets related to customer and vendor relationships, trade names and trademarks, software and non-compete agreements. We are amortizing intangible assets related to business acquisitions and certain private label contracts associated with the purchase of accounts receivable. |
| • | Other operating, net—Our other operating, net includes other operating expenses and income items that do not relate to our core operations or that occur infrequently. |
| • | Investment loss—Our investment results relate to our minority interest in Masternaut, a provider of telematics solutions to commercial fleets in Europe, which we historically accounted for using the equity method and recorded our share of earnings and losses. On September 30, 2017, we entered into an amended Masternaut investment agreement that resulted in the loss of significant influence, and we began accounting for the Masternaut investment by applying the cost method. Also includes impairment charges related to other investments. |
| • | Other (income) expense, net—Our other (income) expense, net includes gains or losses from the sale of assets/businesses, foreign currency transaction gains or losses and other miscellaneous operating costs and revenue. |
| • | Interest expense, net—Our interest expense, net includes interest income on our cash balances and interest expense on our outstanding debt and on our Securitization Facility. We have historically invested our cash primarily in short-term money market funds and overnight bank deposits. |
| • | Loss on extinguishment of debt—Loss on extinguishment of debt relates to our write-off of debt issuance costs associated with the refinancing of our Credit Facility. |
| • | Provision for income taxes—Our provision for income taxes consists primarily of corporate income taxes related to profits resulting from the sale of our products and services on a global basis. |
Factors and Trends Impacting our Business
We believe that the following factors and trends are important in understanding our financial performance:
| • | Global economic conditions—Our results of operations are materially affected by conditions in the economy generally, both in North America and internationally. Factors affected by the economy include our transaction volumes, the credit risk of our customers and changes in tax laws across the globe. These factors affected our businesses in both our North America and International segments. |
| • | Foreign currency changes—Our results of operations are significantly impacted by changes in foreign currency rates; namely, by movements of the Australian dollar, Brazilian real, British pound, Canadian dollar, Czech koruna, Euro, Mexican peso, New Zealand dollar and Russian ruble, relative to the U.S. dollar. Approximately 61%, 62% and 70% of our revenue in 2018, 2017 and 2016, respectively, was derived in U.S. dollars and was not affected by foreign currency exchange rates. See “Results of Operations” for information related to foreign currency impact on our total revenue, net. |
| • | Fuel prices—Our fleet customers use our products and services primarily in connection with the purchase of fuel. Accordingly, our revenue is affected by fuel prices, which are subject to significant volatility. A change in retail fuel prices could cause a decrease or increase in our revenue from several sources, including fees paid to us based on a percentage of each customer’s total purchase. Changes in the absolute price of fuel may also impact unpaid account balances and the late fees and charges based on these amounts. See “Sources of Revenue” above for further information related to the absolute price of fuel. |
| • | Fuel-price spread volatility—A portion of our revenue involves transactions where we derive revenue from fuel-price spreads, which is the difference between the price charged to a fleet customer for a transaction and the price paid to the merchant for the same transaction. In these transactions, the price paid to the merchant is based on the wholesale cost of fuel. The merchant’s wholesale cost of fuel is dependent on several factors including, among others, the factors described above affecting fuel prices. The fuel price that we charge to our customer is dependent on several factors including, among others, the fuel price paid to the merchant, posted retail fuel prices and competitive fuel prices. We experience fuel-price spread contraction when the merchant’s wholesale cost of fuel increases at a faster rate than the fuel price we charge to our customers, or the fuel price we charge to our customers decreases at a faster rate than the merchant’s wholesale cost of fuel. The inverse of these situations produces fuel-price spread expansion. See “Sources of Revenue” above for further information related to fuel-price spreads. |
| • | Acquisitions—Since 2002, we have completed over 75 acquisitions of companies and commercial account portfolios. Acquisitions have been an important part of our growth strategy, and it is our intention to continue to seek opportunities to increase our customer base and diversify our service offering through further strategic acquisitions. The impact of acquisitions has, and may continue to have, a significant impact on our results of operations and may make it difficult to compare our results between periods. |
| • | Interest rates—Our results of operations are affected by interest rates. We are exposed to market risk to changes in interest rates on our cash investments and debt. |
| • | Expenses— Over the long term, we expect that our general and administrative expense will decrease as a percentage of revenue as our revenue increases. To support our expected revenue growth, we plan to continue to incur additional sales and marketing expense by investing in our direct marketing, third-party agents, internet marketing, telemarketing and field sales force. |
| • | Taxes— We pay taxes in many different taxing jurisdictions, including the U.S., most U.S. states and many non-U.S. jurisdictions. The tax rates in certain non-U.S. taxing jurisdictions are higher than the U.S. tax rate. Thus, our effective tax rate is impacted not only as a result of tax law changes such as the Tax Act, but also as our earnings fluctuate between taxing jurisdictions. |
Acquisitions and Investments
During 2018, we completed an acquisition with an aggregate purchase price of $21.2 million, net of cash acquired of $11.0 million and made deferred payments of $3.8 million related to acquisitions occurring in prior years. During 2018, we made investments in other businesses of $17.0 million and payments on a seller note of $1.6 million.
During 2017, we completed acquisitions with an aggregate purchase price of $725.1 million, net of cash acquired of $96.3 million. During 2017, we made investments in other businesses of $39 million.
| • | On August 9, 2017, we acquired Cambridge, a leading business to business (B2B) international payments provider, for approximately $616.0 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 our corporate payments footprint. |
| • | On September 26, 2017, we acquired a fuel card provider in Russia. |
| • | On October 13, 2017, we completed the acquisition of CLS, a small lodging tuck-in business, in the United States. |
During 2016, we 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.
| • | In August 2016, we acquired all of the outstanding stock of Serviços e Tecnologia de Pagamentos S.A. (“STP”) for $1.23 billion, net of cash acquired of $40.2 million. STP is an electronic toll payments company in Brazil and provides cardless fuel payments at a number of Shell sites throughout Brazil. The purpose of this acquisition was to expand our presence in the toll market in Brazil. |
| • | During 2016, we 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 $76.7 million, net of cash acquired of $11.1 million. |
| • | During 2016, we made additional investments of $7.9 million related to our investment at Masternaut. We also received a $9.2 million return of our investment in Masternaut in 2016. |
We report our results from our Canadian acquisition in 2018 in our North America segment from the date of acquisition. We report our results from Cambridge and CLS acquired in the third and fourth quarters of 2017, respectively, in our North America segment, from the date of acquisition. The results of operations from the fuel card business in Russia acquired in the third quarter of 2017, are included within our International segment from the date of acquisition. The results of operations from the fuel card portfolio acquired in the U.S. are included within our North America segment, from the date of acquisition in 2016. The results of operations of STP, the fuel card portfolio in the United Kingdom, the additional Shell markets, the Travelcard business in the Netherlands and the small business in Brazil are included within our International segment, from the date of acquisition in 2016.
Asset and Investment Dispositions
Chevron Portfolio
In October 2018, we completed the sale of the Chevron portfolio resulting in a pre-tax gain of $152.8 million during the fourth quarter of 2018. The gain on the disposal is included in other (income) expense in the Consolidated Statements of Income. Revenues generated from the Chevron portfolio had historically been included in our North America segment.
Telematics Businesses
As part of our plan to exit the telematics business, on July 27, 2017, we sold NexTraq, a U.S. fleet telematics business, to Michelin Group for $316.5 million. We 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. We 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 our North America segment.
On September 30, 2017, we entered into an amended Masternaut investment agreement that resulted in the loss of significant influence, and we began accounting for the Masternaut investment by applying the cost method. As a result of our loss of significant influence and the operating results of Masternaut, we determined that the carrying value of our investment exceeded its fair value, and concluded that this decline in value was other than temporary. We recorded a $44.6 million impairment loss in the Masternaut investment that included an adjustment for $31.4 million of currency translation losses previously recognized in accumulated other comprehensive income, in the accompanying Consolidated Statements of Income in 2017.
Results of Operations
Year ended December 31, 2018 compared to the year ended December 31, 2017
The following table sets forth selected consolidated statement of income and selected operational data for the years ended December 31, 2018 and 2017 (in millions, except percentages)*.
| Year ended December 31, 20181 | % of total revenue | Year ended December 31, 2017 | % of total revenue | Increase (decrease) | % Change | ||||||||||||||||
| Revenues, net: | |||||||||||||||||||||
| North America | $ | 1,571.5 | 64.6 | % | $ | 1,428.7 | 63.5 | % | $ | 142.8 | 10.0 | % | |||||||||
| International | 862.0 | 35.4 | % | 820.8 | 36.5 | % | 41.2 | 5.0 | % | ||||||||||||
| Total revenues, net | 2,433.5 | 100.0 | % | 2,249.5 | 100.0 | % | 184.0 | 8.2 | % | ||||||||||||
| Consolidated operating expenses: | |||||||||||||||||||||
| Merchant commissions | — | — | % | 113.1 | 5.0 | % | (113.1 | ) | (100.0 | )% | |||||||||||
| Processing | 487.7 | 20.0 | % | 429.6 | 19.1 | % | 58.1 | 13.5 | % | ||||||||||||
| Selling | 182.6 | 7.5 | % | 170.7 | 7.6 | % | 11.9 | 7.0 | % | ||||||||||||
| General and administrative | 389.2 | 16.0 | % | 387.7 | 17.2 | % | 1.5 | 0.4 | % | ||||||||||||
| Depreciation and amortization | 274.6 | 11.3 | % | 264.6 | 11.8 | % | 10.0 | 3.8 | % | ||||||||||||
| Other operating, net | 8.7 | 0.4 | % | 0.1 | — | % | 8.7 | NM | |||||||||||||
| Operating income | 1,090.7 | 44.8 | % | 883.8 | 39.3 | % | 206.9 | 23.4 | % | ||||||||||||
| Investment loss | 7.1 | 0.3 | % | 53.2 | 2.4 | % | (46.0 | ) | (86.6 | )% | |||||||||||
| Other (income) expense, net | (152.2 | ) | (6.3 | )% | (173.4 | ) | (7.7 | )% | (21.3 | ) | (12.3 | )% | |||||||||
| Interest expense, net | 138.5 | 5.7 | % | 107.1 | 4.8 | % | 31.3 | 29.3 | % | ||||||||||||
| Loss on extinguishment of debt | 2.1 | 0.1 | % | 3.3 | 0.1 | % | (1.2 | ) | (36.3 | )% | |||||||||||
| Provision for income taxes | 283.6 | 11.7 | % | 153.4 | 6.8 | % | 130.3 | 84.9 | % | ||||||||||||
| Net income | $ | 811.5 | 33.3 | % | $ | 740.2 | 32.9 | % | $ | 71.3 | 9.6 | % | |||||||||
| Operating income for segments: | |||||||||||||||||||||
| North America | $ | 673.9 | $ | 541.6 | $ | 132.3 | 24.4 | % | |||||||||||||
| International | 416.8 | 342.2 | 74.7 | 21.8 | % | ||||||||||||||||
| Operating income | $ | 1,090.7 | $ | 883.8 | $ | 206.9 | 23.4 | % | |||||||||||||
| Operating margin for segments: | |||||||||||||||||||||
| North America | 42.9 | % | 37.9 | % | 5.0 | % | |||||||||||||||
| International | 48.4 | % | 41.7 | % | 6.7 | % | |||||||||||||||
| Total | 44.8 | % | 39.3 | % | 5.5 | % |
NM = Not Meaningful
*The sum of the columns and rows may not calculate due to rounding.
1 Reflects the impact of the Company's adoption of ASC 606, which was adopted by the Company on January 1, 2018, using the modified retrospective transition method. The adoption of ASC 606 resulted in an adjustment to retained earnings in our consolidated balance sheet for the cumulative effect of applying the standard, which included costs incurred to obtain a contract, as well as presentation changes in our statements of income, including the classification of certain amounts previously classified as merchant commissions and processing expense net with revenues. As a result of the application of the modified retrospective transition method, the Company's prior period results within its annual report on Form 10-K and quarterly reports on Form 10-Q will not be restated to reflect the impact of ASC 606.
Revenues
Our consolidated revenue increased from $2,249.5 million in 2017 to $2,433.5 million in 2018, an increase of $184.0 million, or 8.2%. The increase in our consolidated revenue was primarily due to:
| • | Organic growth of approximately 10% on a constant fuel price, fuel spread margin, foreign currency and acquisition and disposition basis, driven by increases in both volume and revenue per transaction in certain of our payment programs. Organic revenue growth has been calculated assuming ASC 606 was implemented on January 1, 2017, in order to calculate organic growth using comparable revenue results in each period. |
| • | The impact of acquisitions completed in 2017, which contributed approximately $97 million in additional revenue. |
| • | Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a favorable impact on our consolidated revenue for 2018 over 2017 of approximately $6 million. We believe the favorable impact of higher fuel prices and fuel spread margins, primarily in the U.S., had a favorable impact on consolidated revenues in 2018 over 2017 of approximately $54 million, partially offset by the negative impact of unfavorable foreign exchange rates on consolidated revenues in 2018 over 2017 of approximately $48 million, primarily due to unfavorable changes in foreign exchange rates in Brazil and the U.K. |
These increases were partially offset by the impact of the adoption of ASC 606, which decreased consolidated revenues, net by approximately $112 million, for certain amounts previously classified as merchant commissions and processing expense, net with revenues and by approximately $26 million due to the disposition of the NexTraq business in July 2017.
North America segment revenues. North America revenues increased from $1,428.7 million in 2017 to $1,571.5 million in 2018, an increase of $142.8 million, or 10.0%. The increase in our North America segment revenue was primarily due to:
| • | Organic growth of approximately 9%, on a constant fuel price, fuel spread margin and pro forma basis, driven by increases in both volume and revenue per transaction in certain of our payment programs. Organic revenue growth has been calculated assuming ASC 606 was implemented on January 1, 2017, in order to calculate organic growth using comparable revenue results in each period. |
| • | The impact of our Cambridge and CLS acquisitions completed during the third and fourth quarters of 2017, respectively, which contributed approximately $91 million in additional revenue. |
| • | Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a positive impact on our North America segment revenue in 2018 over in 2017 of approximately $45 million, primarily due to the favorable impact of changes in fuel prices and slightly higher fuel spread margins. |
These increases were partially offset by the impact of the adoption of ASC 606, which decreased North America revenues, net by approximately $91 million and by approximately $26 million due to the disposition of the NexTraq business in July 2017.
International segment revenues. International segment revenues increased from $820.8 million in 2017 to $862.0 million in 2018, an increase of $41.2 million, or 5.0%. The increase in our International segment revenue was primarily due to:
| • | Organic growth of approximately 12% on a constant macroeconomic and pro forma basis, driven by increases in both volume and revenue per transaction in certain of our payment programs. Organic revenue growth has been calculated assuming ASC 606 was implemented on January 1, 2017, in order to calculate organic growth using comparable revenue results in each period. |
| • | Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a negative impact on our International segment revenue for 2018 over 2017 of approximately $39 million. Changes in foreign exchange rates had an unfavorable impact on consolidated revenues of approximately $46 million, partially offset by the favorable impact of changes in fuel prices of approximately $7 million. |
| • | The impact of a small fuel card acquisition during 2017, which contributed approximately $7 million in additional revenue. |
The increases in consolidated revenues were partially offset by the impact of the adoption of ASC 606, which decreased International revenues, net by approximately $21 million.
Revenues by geography, product and source. Set forth below are further breakdowns of revenue by geography, product and source for the years ended December 31, 2018 and 2017 (in millions).
| Year Ended December 31, | |||||||||||||||
| (Unaudited) | 20181 | 2017 | |||||||||||||
| Revenue, net by Geography* | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | |||||||||||
| United States | $ | 1,482 | 61 | % | $ | 1,401 | 62 | % | |||||||
| Brazil | 400 | 16 | 395 | 18 | |||||||||||
| United Kingdom | 258 | 11 | 237 | 11 | |||||||||||
| Other | 294 | 12 | 218 | 10 | |||||||||||
| Consolidated revenues, net | $ | 2,433 | 100 | % | $ | 2,250 | 100 | % |
*Columns may not calculate due to rounding.
| Year Ended December 31, | |||||||||||||||
| (Unaudited) | 20181 | 2017 | |||||||||||||
| Revenue, net by Product Category* | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | |||||||||||
| Fuel | $ | 1,097 | 45 | % | $ | 1,096 | 49 | % | |||||||
| Corporate payments | 416 | 17 | 262 | 12 | |||||||||||
| Tolls | 339 | 14 | 327 | 15 | |||||||||||
| Lodging | 176 | 7 | 127 | 6 | |||||||||||
| Gift | 187 | 8 | 194 | 9 | |||||||||||
| Other | 220 | 9 | 244 | 11 | |||||||||||
| Consolidated revenues, net | $ | 2,433 | 100 | % | $ | 2,250 | 100 | % |
*Columns may not calculate due to rounding.
| Year Ended December 31, | |||||||||||||||
| (Unaudited) | 20181 | 2017 | |||||||||||||
| Major Sources of Revenue, net* | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | |||||||||||
| Processing and Program Revenue2 | $ | 1,253 | 51 | % | $ | 1,093 | 49 | % | |||||||
| Late Fees and Finance Charges3 | 152 | 6 | 141 | 6 | |||||||||||
| Miscellaneous Fees4 | 155 | 6 | 129 | 6 | |||||||||||
| Discount Revenue (Fuel)5 | 351 | 14 | 303 | 13 | |||||||||||
| Discount Revenue (Nonfuel)6 | 194 | 8 | 175 | 8 | |||||||||||
| Tied to Fuel-Price Spreads7 | 120 | 5 | 220 | 10 | |||||||||||
| Merchant Program Revenue8 | 209 | 9 | 189 | 8 | |||||||||||
| Consolidated revenues, net | $ | 2,433 | 100 | % | $ | 2,250 | 100 | % |
| 1 Reflects the impact of the Company's adoption of ASC 606 guidance, which was adopted by the Company on January 1, 2018 using the modified retrospective transition method. The adoption of ASC 606 resulted in an adjustment to retained earnings in our consolidated balance sheet for the cumulative effect of applying the standard, which included costs incurred to obtain a contract, as well as presentation changes in our statements of income, including the classification of certain amounts previously classified as merchant commissions and processing expense net with revenues. As a result of the application of the modified retrospective transition method, the Company's prior period results within its annual report on Form 10-K and quarterly reports on Form 10-Q will not be restated to reflect the impact of ASC 606. |
| 2 Includes revenue from customers based on accounts, cards, devices, transactions, load amounts and/or purchase amounts, etc. for participation in our various fleet and workforce related programs, as well as revenue from partners (e.g., major retailers, leasing companies, oil companies, petroleum marketers, etc.) for processing and network management services. Primarily represents revenue from North American trucking, lodging, prepaid benefits, telematics, gift cards and toll related businesses. |
| 3 Fees for late payment and interest charges for carrying a balance charged to a customer. |
| 4 Non-standard fees charged to customers based on customer behavior or optional participation, primarily including high credit risk surcharges, over credit limit charges, minimum processing fees, printing and mailing fees, etc. |
| 5 Interchange revenue directly influenced by the absolute price of fuel and other interchange related to fuel products. |
| 6 Interchange revenue related to nonfuel products. |
| 7 Revenue derived from the difference between the price charged to a fleet customer for a transaction and the price paid to the merchant for the same transaction. |
| 8 Revenue derived primarily from the sale of equipment, related maintenance to merchants and software licensing. |
| * We may not be able to precisely calculate revenue by source, as certain estimates were made in these allocations. Columns may not calculate due to rounding. |
Consolidated operating expenses
Merchant commission. The adoption of ASC 606 on January 1, 2018, resulted in a change in the presentation of amounts previously classified as merchant commissions of $126.8 million in 2018. As of January 1, 2018, these amounts were recorded within revenues, net. Merchant commissions were $113.1 million in 2017.
Processing. Processing expenses increased from $429.6 million in 2017 to $487.7 million in 2018, an increase of $58.1 million or 13.5%. Increases in processing expenses were primarily due to expenses related to acquisitions completed in 2017 of approximately $35 million, which includes incremental bad debt expense of approximately $20 million, and organic growth in certain lines of business. Additionally, the adoption of ASC 606 on January 1, 2018, resulted in an increase of approximately $13 million to processing expenses in 2018. As of January 1, 2018, these amounts are recorded within revenues, net. These increases were partially offset by the favorable impact of fluctuations in foreign exchange rates of approximately $12 million and the impact of disposition of the NexTraq business of approximately $6 million.
Selling. Selling expenses increased from $170.7 million in 2017 to $182.6 million in 2018, an increase of $11.9 million or 7.0%. Increases in spending were primarily due to ongoing incremental expenses related to acquisitions completed in 2017 of approximately $14 million and additional spending in certain lines of business. These increases were partially offset by the impact of disposition of the NexTraq business of approximately $3 million and the favorable impact of fluctuations in foreign exchange rates of approximately $3 million. Additionally, the adoption of ASC 606 and related cost capitalization guidance on January 1, 2018, resulted in the capitalization of certain costs incurred to obtain a contract (sales commissions) and deferral over the period of benefit, resulting in reduced selling expenses of approximately $5 million.
General and administrative. General and administrative expense increased from $387.7 million in 2017 to $389.2 million in 2018, an increase of $1.5 million or 0.4%. The increase was primarily due to ongoing expenses related to acquisitions completed in 2017 of approximately $23 million and additional spending in certain lines of business. These increases were partially offset by a decrease in stock based compensation expense of approximately $23 million, the impact of disposition of the NexTraq business of approximately $3 million and the favorable impact of fluctuations in foreign exchange rates of approximately $6 million.
Depreciation and amortization. Depreciation and amortization increased from $264.6 million in 2017 to $274.6 million in 2018, an increase of $10.0 million or 3.8%. The increase was primarily due to amortization of intangible assets related to acquisitions completed in 2017 of approximately $20 million and increased capital spending. These increases were partially
offset by the impact of disposition of the NexTraq business of approximately $5 million and the favorable impact of fluctuations in foreign exchange rates of approximately $8 million.
Other operating, net. Other operating losses of $8.7 million in 2018 are a result of a write-off of capitalized software costs.
Investment loss. Investment loss was $7.1 million in 2018, a decrease of $46.0 million or 86.6% from $53.2 million in 2017. The decrease in investment loss was due to a non-cash impairment charge of $7.1 million recorded for a non-marketable investment in 2018 as compared to a non-cash impairment charge of $44.6 million recorded to our Masternaut investment in 2017.
Other (income) expense, net. Other income, net was $152.2 million in 2018, a decrease of $21.3 million or 12.3% from $173.4 million in 2017. The decrease was due primarily to the pre-tax gain on the sale of our NexTraq business of $175.0 million in 2017 as compared to the pre-tax gain on the sale of the Chevron customer portfolio of approximately $152.8 million in 2018.
Interest expense, net. Interest expense increased from $107.1 million in 2017 to $138.5 million in 2018, an increase of $31.3 million or 29.3%. The increase in interest expense is primarily due to the impact of additional borrowings to repurchase our common stock, to finance the acquisition of Cambridge completed in 2017 and increases in LIBOR. The following table sets forth the average interest rates paid on borrowings under our Credit Facility, excluding the related unused credit facility fees.
| (Unaudited) | 2018 | 2017 | ||||
| Term loan A | 3.52 | % | 2.79 | % | ||
| Term loan B | 3.98 | % | 3.28 | % | ||
| Revolving credit A facility | 3.51 | % | 2.88 | % | ||
| Revolving credit B facility | 2.61 | % | 2.05 | % | ||
| Revolving credit C facility | 4.00 | % | — | % | ||
| Revolving credit B facility—foreign swing line | 2.11 | % | 2.01 | % |
The average unused credit facility fee for the revolving credit facilities was 0.31% and 0.35% in 2018 and 2017, respectively.
Loss on extinguishment of debt. Losses on extinguishment of debt of $2.1 million in 2018 and $3.3 million in 2017 relates to the write-off of debt issuance costs associated with the refinancing of our credit facility during the fourth quarter of 2018 and the third quarter of 2017, respectively.
Provision for income taxes. The provision for income taxes increased from $153.4 million in 2017 to $283.6 million in 2018, an increase of $130.3 million or 84.9%. Our effective tax rate increased to 25.9% for 2018 from 17.2% for 2017.
The 2017 rate included a net tax benefit of $128.2 million due to recording the provisional impact of the Tax Act in the fourth quarter of 2017. During 2018, we finalized our accounting for the income tax effects of the Tax Act, which resulted in adjustments to current tax expense and deferred taxes of $17.4 million and $7.1 million, respectively. We pay taxes in many different taxing jurisdictions, including the U.S., most U.S. states and many non-U.S. jurisdictions. The tax rates in certain non-U.S. taxing jurisdictions are different than the U.S. tax rate. Consequently, as our earnings fluctuate between taxing jurisdictions, our effective tax rate fluctuates.
Net income. For the reasons discussed above, our net income increased from $740.2 million in 2017 to $811.5 million in 2018, an increase of $71.3 million or 9.6%.
Operating income and operating margin
Consolidated operating income. Operating income increased from $883.8 million in 2017 to $1,090.7 million in 2018, an increase of $206.9 million or 23.4%. Consolidated operating margin was 39.3% in 2017 and 44.8% in 2018. These increases were driven by organic growth, acquisitions completed in 2017 and 2018 and the positive impact of the macroeconomic environment of approximately $34 million driven by higher fuel prices and fuel price spreads, partially offset by the unfavorable impact of foreign exchange rates of approximately $20 million. The increases were also driven by lower stock
based compensation of approximately $23 million. These increases were partially offset by the negative impact of the disposition of NexTraq of approximately $9 million and the write-off of fixed assets of approximately $9 million.
For the purpose of segment operating results, we calculate segment operating income by subtracting segment operating expenses from segment revenue. Segment operating margin is calculated by dividing segment operating income by segment revenue.
North America segment operating income. North America operating income increased from $541.6 million in 2017 to $673.9 million in 2018, an increase of $132.3 million, or 24.4%. North America operating margin was 37.9% in 2017 and 42.9% in 2018. The increases were due primarily to organic growth, acquisitions completed in 2017 and 2018 and the positive impact of the macroeconomic environment of approximately $46 million, driven by higher fuel prices. The increase was also driven by lower stock based compensation of approximately $25 million. The increase was partially offset by the negative impact of the disposition of NexTraq and the write-off of fixed assets.
International segment operating income. International operating income increased from $342.2 million in 2017 to $416.8 million in 2018, an increase of $74.7 million, or 21.8%. International operating margin was 41.7% in 2017 and 48.4% in 2018. The increases were due primarily to organic growth and acquisitions completed in 2017, partially offset by the negative impact of the macroeconomic environment of approximately $12 million, driven by unfavorable movements in the foreign exchange rates. Unfavorable movements in foreign exchange rates were partially offset by higher fuel prices.
Year ended December 31, 2017 compared to the year ended December 31, 2016
The following table sets forth selected consolidated statement of income and selected operational data for the years ended December 31, 2017 and 2016 (in millions, except percentages).
| Year ended December 31, 2017 | % of total revenue | Year ended December 31, 2016 | % of total revenue | Increase (decrease) | % Change | ||||||||||||||||
| North America | $ | 1,428.7 | 63.5 | % | $ | 1,279.1 | 69.8 | % | $ | 149.6 | 11.7 | % | |||||||||
| International | 820.8 | 36.5 | % | 552.4 | 30.2 | % | 268.4 | 48.6 | % | ||||||||||||
| Total revenues, net | 2,249.5 | 100.0 | % | 1,831.5 | 100.0 | % | 418.0 | 22.8 | % | ||||||||||||
| Consolidated operating expenses: | |||||||||||||||||||||
| Merchant commissions | 113.1 | 5.0 | % | 104.3 | 5.7 | % | 8.8 | 8.4 | % | ||||||||||||
| Processing | 429.6 | 19.1 | % | 355.4 | 19.4 | % | 74.2 | 20.9 | % | ||||||||||||
| Selling | 170.7 | 7.6 | % | 131.4 | 7.2 | % | 39.3 | 29.9 | % | ||||||||||||
| General and administrative | 387.7 | 17.2 | % | 283.6 | 15.5 | % | 104.1 | 36.7 | % | ||||||||||||
| Depreciation and amortization | 264.6 | 11.8 | % | 203.3 | 11.1 | % | 61.3 | 30.2 | % | ||||||||||||
| Other operating, net | 0.1 | — | % | (0.7 | ) | — | % | (0.8 | ) | (108.8 | )% | ||||||||||
| Operating income | 883.8 | 39.3 | % | 754.2 | 41.2 | % | 129.6 | 17.2 | % | ||||||||||||
| Investment loss | 53.2 | 2.4 | % | 36.4 | 2.0 | % | 16.8 | 46.2 | % | ||||||||||||
| Other expense, net | (173.4 | ) | (7.7 | )% | 3.0 | 0.2 | % | (176.4 | ) | NM | |||||||||||
| Interest expense, net | 107.1 | 4.8 | % | 71.9 | 3.9 | % | 35.3 | 49.0 | % | ||||||||||||
| Loss on extinguishment of debt | 3.3 | 0.1 | % | — | — | % | 3.3 | NM | |||||||||||||
| Provision for income taxes | 153.4 | 6.8 | % | 190.5 | 10.4 | % | (37.1 | ) | (19.5 | )% | |||||||||||
| Net income | $ | 740.2 | 32.9 | % | $ | 452.4 | 24.7 | % | $ | 287.8 | 63.6 | % | |||||||||
| Operating income for segments: | |||||||||||||||||||||
| North America | $ | 541.6 | $ | 506.4 | $ | 35.2 | 6.9 | % | |||||||||||||
| International | 342.2 | 247.7 | 94.4 | 38.1 | % | ||||||||||||||||
| Operating income | $ | 883.8 | $ | 754.2 | $ | 129.6 | 17.2 | % | |||||||||||||
| Operating margin for segments: | |||||||||||||||||||||
| North America | 37.9 | % | 39.6 | % | (1.7 | )% | |||||||||||||||
| International | 41.7 | % | 44.8 | % | (3.2 | )% | |||||||||||||||
| Total | 39.3 | % | 41.2 | % | (1.9 | )% |
NM = Not Meaningful
Revenues
Our consolidated revenue increased from $1,831.5 million in 2016 to $2,249.5 million in 2017, an increase of $418.0 million, or 22.8%. The increase in our consolidated revenue was primarily due to the following:
| • | The impact of acquisitions completed in 2016 and 2017, which contributed approximately $212 million in additional revenue. |
| • | Organic growth of approximately 9% on a constant fuel price, fuel spread margin, foreign currency and pro forma basis, driven by increases in both volume and revenue per transaction in certain of our payment programs. |
| • | Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a favorable impact on our consolidated revenue for 2017 over 2016 of approximately $33 million. We believe the favorable impact of higher fuel prices and fuel spread margins, primarily in the U.S., had a favorable impact on consolidated revenues in 2017 over in 2016 of approximately $30 million. Additionally, changes in foreign exchange |
rates had a favorable impact on consolidated revenues in 2017 over in 2016 of approximately $3 million, primarily due to favorable changes in foreign exchange rates in Brazil.
These increases were partially offset by the impact of the disposition of the NexTraq telematics business in July 2017 of $23 million.
North America segment revenues. North America revenue increased from $1,279.1 million in 2016 to $1,428.7 million in 2017, an increase of $149.6 million, or 11.7%. The increase in our North America revenue was primarily due to:
| • | The impact of our Cambridge and CLS acquisitions during the third and fourth quarters of 2017, respectively, which contributed approximately $51 million in additional revenue. |
| • | Organic growth of approximately 8%, on a constant fuel price, fuel spread margin and pro forma basis, driven by increases in both volume and revenue per transaction in certain of our payment programs. |
| • | Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a positive impact on our North America segment revenue in 2017 over in 2016 of approximately $26 million, primarily due to the favorable impact of changes in fuel prices and slightly higher fuel spread margins. |
These increases were partially offset by the impact of the disposition of the NexTraq business in July 2017 of $23 million.
International segment revenues. International segment revenues increased from $552.4 million in 2016 to $820.8 million in 2017, an increase of $268.4 million, or 48.6%. The increase in our International segment revenue was primarily due to:
| • | The impact of acquisitions during 2016 and 2017, which contributed approximately $161 million in additional revenue. |
| • | Organic growth of approximately 11% on a constant macroeconomic and pro forma basis, driven by increases in both volume and revenue per transaction in certain of our payment programs. |
| • | Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a positive impact on our International segment revenue for 2017 over 2016 of approximately $7 million, primarily due to favorable changes in foreign exchange rates in Brazil, as well as favorable impact of changes in fuel prices. |
Revenues by geography, product and source. Set forth below are further breakdowns of revenue by geography, product and source for the years ended December 31, 2017 and 2016 (in millions), which we believe is useful in understanding the results of our business.
| Year Ended December 31, | |||||||||||||||
| (Unaudited) | 2017 | 2016 | |||||||||||||
| Revenue, net by Geography* | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | |||||||||||
| United States | $ | 1,401 | 62 | % | $ | 1,279 | 70 | % | |||||||
| Brazil | 395 | 18 | 168 | 9 | |||||||||||
| United Kingdom | 237 | 11 | 229 | 13 | |||||||||||
| Other | 218 | 10 | 156 | 8 | |||||||||||
| Consolidated revenues, net | $ | 2,250 | 100 | % | $ | 1,832 | 100 | % |
*Columns may not calculate due to rounding.
| Year Ended December 31, | ||||||||||||||
| (Unaudited) | 2017 | 2016 | ||||||||||||
| Revenue, net by Product Category* | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | ||||||||||
| Fuel | $ | 1,096 | 49 | % | $ | 997 | 54 | % | ||||||
| Corporate payments | 262 | 12 | 180 | 10 | % | |||||||||
| Tolls | 327 | 15 | 103 | 6 | % | |||||||||
| Lodging | 127 | 6 | 101 | 5 | % | |||||||||
| Gift | 194 | 9 | 185 | 10 | % | |||||||||
| Other | 244 | 11 | 266 | 15 | % | |||||||||
| Consolidated revenues, net | $ | 2,250 | 100 | % | $ | 1,832 | 100 | % |
*Columns may not calculate due to rounding.
| Year Ended December 31, | |||||||||||||||
| (Unaudited) | 2017 | 2016 | |||||||||||||
| Major Sources of Revenue, net* | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | |||||||||||
| Processing and Program Revenue1 | $ | 1,093 | 49 | % | $ | 809 | 44 | % | |||||||
| Late Fees and Finance Charges2 | 141 | 6 | 118 | 6 | |||||||||||
| Miscellaneous Fees3 | 129 | 6 | 129 | 7 | |||||||||||
| Discount Revenue (Fuel)4 | 303 | 13 | 260 | 14 | |||||||||||
| Discount Revenue (Nonfuel)5 | 175 | 8 | 157 | 9 | |||||||||||
| Tied to Fuel-Price Spreads6 | 220 | 10 | 194 | 11 | |||||||||||
| Merchant Program Revenue7 | 189 | 8 | 164 | 9 | |||||||||||
| Consolidated revenues, net | $ | 2,250 | 100 | % | $ | 1,832 | 100 | % |
| 1 Includes revenue from customers based on accounts, cards, devices, transactions, load amounts and/or purchase amounts, etc. for participation in our various fleet and workforce related programs, as well as revenue from partners (e.g., major retailers, leasing companies, oil companies, petroleum marketers, etc.) for processing and network management services. Primarily represents revenue from North American trucking, lodging, prepaid benefits, telematics, gift cards and toll related businesses. |
| 2Fees for late payment and interest charges for carrying a balance charged to a customer. |
| 3 Non-standard fees charged to customers based on customer behavior or optional participation, primarily including high credit risk surcharges, over credit limit charges, minimum processing fees, printing and mailing fees, etc. |
| 4 Interchange revenue directly influenced by the absolute price of fuel and other interchange related to fuel products. |
| 5 Interchange revenue related to nonfuel products. |
| 6 Revenue derived from the difference between the price charged to a fleet customer for a transaction and the price paid to the merchant for the same transaction. |
| 7 Revenue derived primarily from the sale of equipment, software licensing and related maintenance to merchants. |
| * We may not be able to precisely calculate revenue by source, as certain estimates were made in these allocations. Columns may not calculate due to rounding. |
Consolidated operating expenses
Merchant commission. Merchant commissions increased from $104.3 million in 2016 to $113.1 million in 2017, an increase of $8.8 million or 8.4%. This increase was primarily due to the fluctuation of the margin between the wholesale cost and retail price of fuel and the impact of higher volume in certain revenue streams where merchant commissions are paid.
Processing. Processing expenses increased from $355.4 million in 2016 to $429.6 million in 2017, an increase of $74.2 million or 20.9%. Increases in processing expenses were primarily due to expenses related to acquisitions completed in 2016 and 2017 of approximately $62 million, as well as the impact of changes in foreign exchange rates, partially offset by the impact of negotiated lower vendor processing costs. The increase in bad debt was primarily due to bad debt inherent in the acquired STP
business. These increases were partially offset by the impact of disposition of the NexTraq business of approximately $6 million.
Selling. Selling expenses increased from $131.4 million in 2016 to $170.7 million in 2017, an increase of $39.3 million or 29.9%. Increases in spending were primarily due to ongoing expenses related to acquisitions completed in 2016 and 2017 of approximately $26 million and additional spending in certain lines of business. These increases were partially offset by the impact of disposition of the NexTraq business of approximately $2 million.
General and administrative. General and administrative expense increased from $283.6 million in 2016 to $387.7 million in 2017, an increase of $104.1 million or 36.7%. The increase was primarily due to ongoing expenses related to acquisitions completed in 2016 and 2017 of approximately $42 million, increased stock based compensation expense of approximately $30 million and increases in other professional and legal fees totaling approximately $22 million. These increases were partially offset by the impact of disposition of the NexTraq business of approximately $2 million.
Depreciation and amortization. Depreciation and amortization increased from $203.3 million in 2016 to $264.6 million in 2017, an increase of $61.3 million or 30.2%. The increase was primarily due to amortization of intangible assets related to acquisitions completed in 2016 and 2017 of approximately $47 million and increased capital spending. These increases were partially offset by the impact of disposition of the NexTraq business of approximately $4 million.
Investment loss. Investment losses increased from $36.4 million in 2016 to $53.2 million in 2017. We determined that the carrying value of our investment exceeded its fair value, and concluded that this decline in value was other than temporary. We recorded a $44.6 million impairment loss in the Masternaut investment that includes adjustment for $31.4 million of currency translation losses previously recognized in accumulated other comprehensive income.
Other (income) expense, net. Other income, net was $173.4 million in 2017, compared to other expense, net of $3.0 million in 2016. The increase was due primarily to the pre-tax gain on the sale of our NexTraq business of $175 million in 2017.
Interest expense, net. Interest expense increased from $71.9 million in 2016 to $107.1 million in 2017, an increase of $35.3 million or 49.0%. The increase in interest expense is primarily due to the impact of additional borrowings to finance the acquisitions in 2016 and 2017, share buybacks and increases in LIBOR. The following table sets forth the average interest rates paid on borrowings under our Credit Facility, excluding the related unused credit facility fees.
| (Unaudited) | 2017 | 2016 | ||||
| Term loan A | 2.79 | % | 2.05 | % | ||
| Term loan B | 3.28 | % | 3.75 | % | ||
| Revolving credit A facility | 2.88 | % | 2.07 | % | ||
| Revolving credit B facility | 2.05 | % | 1.84 | % | ||
| Revolving credit C facility | — | % | — | % | ||
| Revolving credit B facility—foreign swing line | 2.01 | % | 1.84 | % |
The average unused credit facility fee for the revolving credit facilities was 0.35% and 0.31% in 2017 and 2016, respectively.
Loss on extinguishment of debt. Loss on extinguishment of debt of $3.3 million relates to our write-off of debt issuance costs associated with the refinancing of our existing credit facility during the third quarter of 2017.
Provision for income taxes. The provision for income taxes decreased from $190.5 million in 2016 to $153.4 million in 2017, a decrease of $37.1 million or 19.5%, primarily driven by the impact of the enactment of the Tax Act, partially offset by the increase in pretax book income for 2017 as compared to 2016. On December 22, 2017, the U.S. government enacted tax legislation referred to as the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to reducing the U.S. federal corporate tax rate from 35% to 21% and requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. The transition tax can be paid over eight years.
Also, the SEC staff issued Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Act. In accordance with SAB 118, we had a one-year measurement period in which to complete our accounting for the Tax Act.
We made an estimate of the effects on our existing deferred tax balances and the one-time transition tax, which resulted in a provisional net tax benefit of $128.2 million, which is included as a component of income tax expense from continuing operations. We remeasured certain deferred tax assets and liabilities after considering the U.S. federal income tax rate reduction to 21%. The one-time transition tax is based on our total post-1986 earnings and profits that we previously deferred from U.S. income taxes. In 2017, we recorded a provisional amount for the one-time transition tax liability of $81.8 million, net of foreign tax credits.
Net income. For the reasons discussed above, our net income increased from $452.4 million in 2016 to $740.2 million in 2017, an increase of $287.8 million or 63.6%, primarily due to the impact of the enactment of the Tax Act on earnings of approximately $127.5 million and the gain on the disposition of NexTraq of $109.2 million, partially offset by incremental amortization expense, stock based compensation expense, impairment of our investment in Masternaut and legal fees during 2017.
Operating income and operating margin
Consolidated operating income. Operating income increased from $754.2 million in 2016 to $883.8 million in 2017, an increase of $129.6 million or 17.2%. Consolidated operating margin was 41.2% in 2016 and 39.3% in 2017. The increase in operating income was primarily due to acquisitions completed in 2016 and 2017, organic growth, as well as the positive impact of the macroeconomic environment of approximately $25 million, as previously discussed. These increases were partially offset by higher operating expenses related to acquisitions completed in 2016 and 2017 of approximately $178 million, additional stock based compensation of approximately $30 million, higher professional and legal fees totaling approximately $22 million and the disposition of the NexTraq business in July 2017 of approximately $8 million. The decrease in operating margin is driven by the items discussed above.
For the purpose of segment operating results, we calculate segment operating income by subtracting segment operating expenses from segment revenue. Segment operating margin is calculated by dividing segment operating income by segment revenue.
North America segment operating income. North America operating income increased from $506.4 million in 2016 to $541.6 million in 2017, an increase of 35.2 million, or 6.9%. North America operating margin was 39.6% in 2016 and 37.9% in 2017. The increase in operating income was due primarily to organic growth and the positive impact of the macroeconomic environment of approximately $24 million, driven primarily by higher fuel prices. These increases were partially offset by additional stock based compensation of approximately $21 million, higher operating expenses related to acquisitions completed in 2017 of approximately $50 million, higher professional and legal fees totaling approximately $22 million and the disposition of the NexTraq business in July 2017 of approximately $8 million. The decrease in operating margin is driven by the items discussed above.
International segment operating income. International operating income increased from $247.7 million in 2016 to $342.2 million in 2017, an increase of $94.4 million, or 38.1%. International operating margin was 44.8% in 2016 and 41.7% in 2017. The increase in operating income was due primarily to the impact of acquisitions completed in 2016 and 2017 and organic growth and the slightly positive impact of the macroeconomic environment. These increases were partially offset by higher operating expenses related to acquisitions completed in 2016 and 2017 of approximately $128 million and additional stock based compensation of approximately $9 million. The decrease in operating margin is driven by the items discussed above.
Liquidity and Capital Resources
Our principal liquidity requirements are to service and repay our indebtedness, make acquisitions of businesses and commercial account portfolios, repurchase shares of our common stock and meet working capital, tax and capital expenditure needs.
Sources of liquidity. At December 31, 2018, our cash balances totaled $1,364.9 million, with approximately $333.7 million restricted. Restricted cash represents customer deposits in the Czech Republic and in our Comdata business in the U.S., as well
as collateral received from customers for cross-currency transactions in our Cambridge business, which are restricted from use other than to repay customer deposits, as well as secure and settle cross-currency transactions.
At December 31, 2018, cash and cash equivalents held in foreign subsidiaries where we have determined we are permanently reinvested was $702.4 million. All of the cash and cash equivalents held by our foreign subsidiaries, excluding restricted cash, are available for general corporate purposes. Our current intent is to permanently reinvest these funds outside of the U.S. Our current expectation for funds held in our foreign subsidiaries is to use the funds to finance foreign organic growth, to pay for potential future foreign acquisitions and to repay any foreign borrowings that may arise from time to time. We currently believe that funds generated from our U.S. operations, along with available borrowing capacity in the U.S. will be sufficient to fund our U.S. operations for the foreseeable future, and therefore do not foresee a need to repatriate cash held by our foreign subsidiaries to fund our U.S. operations.
In the fourth quarter of 2017, the U.S. government enacted the Tax Act, which includes provisions for a tax on all previously undistributed earnings in foreign jurisdictions. Our final calculation of the one-time transition tax liability as a result of the Tax Act was $99.2 million. As permitted by the Tax Act, we began to pay the one-time transition tax in eight annual interest-free installments beginning in 2018. At December 31, 2018, we have remaining payments outstanding of $83.4 million.
We utilize an accounts receivable Securitization Facility to finance a majority of our domestic receivables, to lower our cost of borrowing and more efficiently use capital. We generate and record accounts receivable when a customer makes a purchase from a merchant using one of our card products and generally pay merchants before collecting the receivable. As a result, we utilize the Securitization Facility as a source of liquidity to provide the cash flow required to fund merchant payments while we collect customer balances. These balances are primarily composed of charge balances, which are typically billed to the customer on a weekly, semimonthly or monthly basis, and are generally required to be paid within 14 days of billing. We also consider the undrawn amounts under our Securitization Facility and Credit Facility as funds available for working capital purposes and acquisitions. At December 31, 2018, we had no additional liquidity under our Securitization Facility. At December 31, 2018, we had approximately $249.6 million available under our Credit Facility.
Based on our current forecasts and anticipated market conditions, we believe that our current cash balances, our available borrowing capacity and our ability to generate cash from operations, will be sufficient to fund our liquidity needs for at least the next twelve months. However, we regularly evaluate our cash requirements for current operations, commitments, capital requirements and acquisitions, and we may elect to raise additional funds for these purposes in the future, either through the issuance of debt or equity securities. We may not be able to obtain additional financing on terms favorable to us, if at all.
Cash flows
The following table summarizes our cash flows for the years ended December 31, 2018, 2017 and 2016.
| Year ended December 31, | ||||||||||||
| (in millions) | 2018 | 2017 | 2016 | |||||||||
| Net cash provided by operating activities | $ | 903.4 | $ | 680.1 | $ | 708.2 | ||||||
| Net cash used in investing activities | (26.3 | ) | (497.8 | ) | (1,389.6 | ) | ||||||
| Net cash (used in) provided by financing activities | (577.8 | ) | 251.9 | 754.0 |
Operating activities. Net cash provided by operating activities increased from $680.1 million in 2017 to $903.4 million in 2018. The increase in operating cash flows was primarily due to higher net income and the change in deferred income taxes due to the impact of the Tax Act in 2017, partially offset by unfavorable working capital adjustments primarily due to the timing of cash receipts and payments in 2018.
Net cash provided by operating activities decreased from $708.2 million in 2016 to $680.1 million in 2017. Operating cash flows were primarily affected by higher net income and deferred income taxes resulting from enactment of the Tax Act. Also included in cash flows from operating activities were unfavorable working capital adjustments primarily due to the timing of cash receipts and payments in 2017 over the comparable period in 2016.
Investing activities. Net cash used in investing activities decreased from $497.8 million in 2017 to $26.3 million in 2018. This decrease was primarily due to a reduction in cash outlay for acquisitions. Also, the proceeds received from the sale of our NexTraq business in 2017 was much higher than those from the sale of Chevron in 2018.
Net cash used in investing activities decreased from $1.4 billion in 2016 to $497.8 million in 2017. This decrease was primarily due to reduction in cash outlay for acquisitions and the proceeds received from the sale of our NexTraq business during the third quarter of 2017.
Financing activities. Net cash used in financing activities was $577.8 million in 2018, compared to net cash provided of $251.9 million in 2017. The increased use of cash is primarily due to increased spending to repurchase our common stock of $556.3 million in 2018 over 2017, a reduction in net borrowings of $147.9 million on our Credit Facility and a reduction in net borrowings of $145.0 million on our Securitization Facility.
Net cash provided by financing activities decreased from $754.0 million in 2016 to $251.9 million in 2017. The decrease is primarily due to additional repayments on our Credit Facility of $599.8 million in 2017 over 2016, and increased spending to repurchase our common stock of $214.7 million, partially offset by an increase in borrowings of $243 million on our Securitization Facility and an increase in borrowings of $55.5 million on our Credit Facility.
Capital spending summary
Our capital expenditures increased from $70.1 million in 2017 to $81.4 million in 2018, an increase of $11 million or 16.1%. This increase is primarily due to increased spending on strategic projects, including continued investment in our operating systems, as well as incremental spending related to acquisitions in 2016 and 2017.
Our capital expenditures increased from $59.0 million in 2016 to $70.1 million in 2017, an increase of $11 million or 18.8%. This increase is primarily due to increased spending on strategic projects, including continued investment in our operating systems, as well as incremental spending related to acquisitions in 2016 and 2017.
Credit Facility
FLEETCOR Technologies Operating Company, LLC, and certain of our domestic and foreign owned subsidiaries, as designated co-borrowers (the “Borrowers”), are parties to a $4.16 billion Credit Agreement (the "Credit Agreement"), with Bank of America, N.A., as administrative agent, swing line lender and local currency issuer, and a syndicate of financial institutions (the “Lenders”), which has been amended multiple times. The Credit Agreement provides for senior secured credit facilities consisting of a revolving credit facility in the amount of $1.285 billion, a term loan A facility in the amount of $2.53 billion and a term loan B facility in the amount of $350.0 million as of December 31, 2018. The revolving credit facility consists of (a) a revolving A 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 with multi-currency borrowings and a sublimit for swing line loans and, (c) a revolving C facility in the amount of $35 million with borrowings in U.S. Dollars, Australian Dollars or New Zealand Dollars. The Credit Agreement also contains an accordion feature for borrowing an additional $750 million in term A, term B, revolver A or revolver B debt. Proceeds from the credit facilities may be used for working capital purposes, acquisitions, and other general corporate purposes.
On August 30, 2018, the Credit Agreement was amended to change the consolidated leverage ratio definition and the negative covenant related to indebtedness. On December 19, 2018, we entered into the fifth amendment to the Credit Agreement, which modified the term A loan and revolver pricing grid and extended the maturity date of the term A loan and revolving credit facilities to December 19, 2023. The maturity date for the term B loan is August 2, 2024.
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 at 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 the Base Rate plus 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, 2018, the interest rate on the term A loan and the revolving A facility was 4.02%, the interest rate on the revolving B facility U.S. Dollar borrowings ($220 million) was 3.97%, the interest rate on the revolving B facility GBP borrowings ($125 million) was 2.23%, the interest rate on the term B loan was 4.52% and the interest rate on the revolving C facility was 4.00%. The unused credit facility fee was 0.30% for all revolving facilities at December 31, 2018.
The term loans are payable in quarterly installments 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 six 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.
The Credit Agreement contains representations, warranties and events of default, as well as certain affirmative and negative covenants, customary for financings of this nature. These covenants include limitations on the ability to pay dividends and make other restricted payments under certain circumstances and compliance with certain financial ratios. As of December 31, 2018, we were in compliance with each of the covenants under the Credit Agreement.
Our Credit Agreement contains a number of negative covenants restricting, among other things, limitations on liens (with exceptions for our Securitization Facility) and investments, incurrence or guarantees of indebtedness, mergers, acquisitions, dissolutions, liquidations and consolidations, dispositions, dividends and other restricted payments and prepayments of other indebtedness. In particular, we are not permitted to make any restricted payments (which includes any dividend or other distribution) except that the we may declare and make dividend payments or other distributions to our stockholders so long as (i) on a pro forma basis both before and after the distribution the consolidated leverage ratio is not greater than 3.25:1.00 and we are in compliance with the financial covenants and (ii) no default or event of default shall exist or result therefrom. The Credit Agreement also contains customary events of default. The Credit Agreement includes financial covenants where the Company is required to maintain a consolidated leverage ratio to consolidated EBITDA of less than (i) 4.00 to 1.00 as of the end of any fiscal quarter provided that in connection with any Material Acquisition the leverage ratio may be increased to 4.25 to 1.00 for the quarter in which the Material Acquisition is consummated and the next three fiscal quarters; and a consolidated interest coverage ratio of no higher than 4.00 to 1.0.
The obligations of the Borrowers under the Credit Agreement are secured by substantially all of the assets of FLEETCOR and its domestic subsidiaries, pursuant to a security agreement and includes a pledge of (i) 100% of the issued and outstanding equity interests owned by us of each Domestic Subsidiary and (2) 66% of the voting shares of the first-tier foreign subsidiaries, but excluding real property, personal property located outside of the U.S., accounts receivables and related assets subject to the Securitization Facility and certain investments required under money transmitter laws to be held free and clear of liens.
At December 31, 2018, we had $2.5 billion in borrowings outstanding on term A loan, excluding the related debt discount, $345.6 million in borrowings outstanding on term B loan, excluding the related debt discount, $655 million in borrowings outstanding on the revolving A facility, $345.4 million in borrowings outstanding on the revolving B facility and $35.0 million in borrowings outstanding on the revolving C facility. The Company has unamortized debt issuance costs of $8.3 million related to the revolving credit facility as of December 31, 2018. The Company has unamortized debt discounts of $9.5 million related to the term A facility and $0.6 million related to the term B facility and deferred financing costs of $0.9 million related to the term B facility at December 31, 2018. The effective interest rate incurred on term loans was 2.15% and 2.69% during 2018 and 2017, respectively, related to the discount on debt.
During 2018, we made principal payments of $498.3 million on the term loans, $1,099.0 million on the revolving facilities, and $4.9 million net borrowings on the swing line revolving facilities.
Cash Flow Hedges
On January 22, 2019, we entered into three interest rate swap cash flow contracts with U.S. dollar notional amounts of $1 billion with a fixed rate of 2.56%, $500 million with a fixed rate of 2.56%, and $500 million with a fixed rate of 2.55%. The purpose of these contracts is to eliminate the variability of cash flows in interest payments associated with $2 billion of our variable rate debt outstanding under our Credit Agreement, the sole source of which is due to changes in the 1-month LIBOR benchmark interest rate. We anticipate that these derivative instruments will be designated and qualify as cash flow hedging instruments to reduce the exposure to changes in interest rates. The effective date of the hedges is January 31, 2019 and the maturity dates are January 31, 2022, January 31, 2023 and December 19, 2023, respectively.
Securitization Facility
We are a party to a receivables purchase agreement among FleetCor Funding LLC, as seller, PNC Bank, National Association as administrator, and various purchaser agents, conduit purchasers and related committed purchasers parties thereto, which was amended and restated for the fifth time as of November 14, 2014. We refer to this arrangement as the Securitization Facility. There have been several amendments to the Securitization Facility the latest on August 30, 2018, which increased the current purchase limit under the Securitization Facility from $950 million to $1.2 billion. The Securitization Facility expires on November 14, 2020 and contains customary financial covenants.
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, 2018 and 2017. The program fee was 2.52% plus 0.89% as of December 31, 2018 and 1.55% plus 0.86% as of December 31, 2017. The unused facility fee is payable at a rate of 0.40% as of December 31, 2018 and 2017.
Under a related purchase and sale agreement, dated as of December 20, 2004, and last amended on November 14, 2014 to include Comdata as an originator, between FLEETCOR Funding LLC, as purchaser, and certain of our subsidiaries, as originators, the receivables generated by the originators are deemed to be sold to FLEETCOR Funding LLC immediately and without further action upon creation of such receivables. At the request of FLEETCOR Funding LLC, as seller, undivided percentage ownership interests in the receivables are ratably purchased by the purchasers in amounts not to exceed their respective commitments under the facility. Collections on receivables are required to be made pursuant to a written credit and collection policy and may be reinvested in other receivables, may be held in trust for the purchasers, or may be distributed. Fees are paid to each purchaser agent for the benefit of the purchasers and liquidity providers in the related purchaser group in accordance with the Securitization Facility and certain fee letter agreements.
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.
We were in compliance with all financial and non-financial covenant requirements related to our Securitization Facility as of December 31, 2018.
Other Liabilities
In connection with our acquisition of certain businesses, we owe final payments of $24.8 million, which are all payable in the next twelve months.
Stock Repurchase Program
On February 4, 2016, our Board of Directors approved a stock repurchase program (the "Program") under which we may purchase up to an aggregate of $500 million of our common stock over the following 18 months period. On July 27, 2017, our 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, we announced that our Board of Directors had authorized an additional increase in the size of the Program by an another $350 million and on July 17, 2018, our Board of Directors authorized an additional increase of $500 million in the size of the Program. With the increase and giving effect to $1.5 billion of previous repurchases, we may repurchase up to $551 million in shares of our common stock at any time prior to February 1, 2020.
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 we 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, we entered an Accelerated Share Repurchase agreement ("2017 ASR Agreement") with a third-party financial institution to repurchase $250 million of our common stock. Pursuant to the 2017 ASR Agreement, we delivered $250 million in cash and received 1,491,647 shares based on a stock price of $142.46 on August 7, 2017. The 2017 ASR Agreement was completed on September 7, 2017, at which time we received 263,012 additional shares based on a final weighted average per share purchase price during the repurchase period of $142.48.
On December 14, 2018, as part of the Program, we entered an Accelerated Share Repurchase ("ASR") agreement ("2018 ASR Agreement") with a third-party financial institution to repurchase $220 million of our common stock. Pursuant to the 2018 ASR Agreement, we delivered $220 million in cash and received 1,057,035 shares based on a stock price of $176.91 on December 14, 2018. The 2018 ASR Agreement was completed on January 29, 2019, at which time we received 117,751 additional shares based on a final weighted average per share purchase price during the repurchase period of $187.27.
We accounted for the 2017 and 2018 ASR Agreements as two separate transactions: (i) as shares of reacquired common stock for the shares delivered to us upon effectiveness of each ASR agreement and (ii) as a forward contract indexed to the our 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.
Since the beginning of the Program, 9,025,542 shares for an aggregate purchase price of $1.5 billion have been repurchased. There were 4,911,438 common shares totaling $958.7 million, 2,854,959 common shares totaling $402.4 million and 1,259,145 common shares totaling $187.7 million repurchased under the Program during 2018, 2017 and 2016, respectively.
Critical Accounting Policies and Estimates
In applying the accounting policies that we use to prepare our consolidated financial statements, we necessarily make accounting estimates that affect our reported amounts of assets, liabilities, revenue and expenses. Some of these estimates require us to make assumptions about matters that are highly uncertain at the time we make the accounting estimates. We base these assumptions and the resulting estimates on historical information and other factors that we believe to be reasonable under the circumstances, and we evaluate these assumptions and estimates on an ongoing basis. In many instances, however, we reasonably could have used different accounting estimates and, in other instances, changes in our accounting estimates could occur from period to period, with the result in each case being a material change in the financial statement presentation of our financial condition or results of operations. We refer to estimates of this type as critical accounting estimates. Our significant accounting policies are summarized in the consolidated financial statements contained elsewhere in this report. The critical accounting estimates that we discuss below are those that we believe are most important to an understanding of our consolidated financial statements.
See Footnote 2 to the Consolidated Financial Statements, Summary of Significant Accounting Policies.
Revenue recognition and presentation. We provide payment solutions to our business, merchant, consumer and payment network customers. Our payment solutions are primarily focused on specific commercial spend categories, including fuel, lodging, tolls, and general corporate payments, as well as gift card solutions (stored value cards). We provide products that help businesses of all sizes control, simplify and secure payment of various domestic and cross-border payables using specialized payment products. We also provide other payment solutions for fleet maintenance, employee benefits and long haul transportation-related services.
Payment Services
Our primary performance obligation for the majority of our payment solution products (fuel, lodging, corporate payments, among others) is to stand-ready to provide authorization and processing services ("payment services") for an unknown or unspecified quantity of transactions and the consideration received is contingent upon the customer’s use (e.g., number of transactions submitted and processed) of the related payment services. Accordingly, the total transaction price is variable. Payment services involve a series of distinct daily services that are substantially the same, with the same pattern of transfer to the customer. For the tolls payment solution, the Company's primary performance obligation is to stand-ready each month to provide access to the toll network and process toll transactions. Each period of access is determined to be distinct and substantially the same as the customer benefits over the period of access.
We record revenue for our payment services net of (i) the cost of the underlying products and services; (ii) assessments and other fees charged by the credit and debit payment networks (along with any rebates provided by them); (iii) customer rebates and other discounts; and (iv) taxes assessed (e.g. VAT and VAT-like taxes) by a government, imposed concurrent with, a revenue producing transaction.
The majority of the transaction price we receive for fulfilling the Payment Services performance obligation are comprised of one or a combination of the following: 1) interchange fees earned from the payment networks; 2) discount fees earned from merchants; 3) fees calculated based on a number of transactions processed; 4) fees calculated based upon a percentage of the transaction value for the underlying goods or services (i.e. fuel, food, toll and transportation cards and vouchers); and 5) monthly access fees.
We recognize revenue when the underlying transactions are complete and our performance obligations are satisfied. Transactions are considered complete depending upon the related payment solution but generally when we have authorized the transaction, validated that the transaction has no errors and accepted and posted the data to our records.
Our performance obligation for our foreign exchange payment services is providing a foreign currency payment to a customer’s designated recipient and therefore, we recognize revenue on foreign exchange payment services when the underlying payment is made. Revenues from foreign exchange payment services are primarily comprised of the difference between the exchange rate set by us to the customer and the rate available in the wholesale foreign exchange market.
Gift Card Products and Services
Our Gift product line delivers both stored value cards and card-based services primarily in the form of gift cards to retailers. These activities each represent performance obligations that are separate and distinct. Revenue for stored valued cards are recognized (gross of the underlying cost of the related card, recorded within processing expense within the Consolidated Statements of Income) at the point in time when control passes to our customer, which is generally upon shipment.
Card-based services consist of transaction processing and reporting of gift card transactions where we recognize revenue based on an output measure of elapsed time for an unknown or unspecified quantity of transactions. As a result, we allocate and recognize variable consideration over the estimated period of time over which the performance obligation is satisfied.
Other
We account for revenue from late fees and finance charges, in jurisdictions where permitted under local regulations, primarily in the U.S. and Canada in accordance with ASC 310, "Receivables". 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. We cease billing and accruing for late fees and finance charges approximately 30 - 40 days after the customer’s balance becomes delinquent.
We also write foreign currency forward and option contracts for our customers to facilitate future payments in foreign currencies, and recognize revenue in accordance with authoritative fair value and derivative accounting (ASC 815, "Derivatives").
Revenue is also derived from the sale of equipment in certain of our businesses, which is recognized at the time the device is sold and control has passed to the customer. 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.
Revenues from contracts with customers, within the scope of Topic 606, represents approximately 80% of total consolidated revenues, net, the year ended December 31, 2018.
Contract Liabilities
Deferred revenue contract liabilities for customers subject to ASC 606 were $30.6 million and $30.2 million as of December 31, 2018 and January 1, 2018, respectively. We expect to recognize substantially all of these amounts in revenues within approximately 12 months. Revenue recognized for the year ended December 31, 2018, that was included in the deferred revenue contract liability as of January 1, 2018 was approximately $26.6 million.
Costs to Obtain or Fulfill a Contract
With the adoption of ASC 606, we began capitalizing the incremental costs of obtaining a contract with a customer if we expect to recover those costs. The incremental costs of obtaining a contract are those that we incur to obtain a contract with a customer that we would not have incurred if the contract had not been obtained (for example, a sales commission).
Costs incurred to fulfill a contract are capitalized if those costs meet all of the following criteria:
| a. | The costs relate directly to a contract or to an anticipated contract that we can specifically identify. |
| b. | The costs generate or enhance resources of ours that will be used in satisfying (or in continuing to satisfy) performance obligations in the future. |
| c. | The costs are expected to be recovered. |
In order to determine the appropriate amortization period for contract costs, we considered a combination of factors, including customer attrition rates, estimated terms of customer relationships, the useful lives of technology used by us to provide products and services to our customers, whether further contract renewals are expected and if there is any incremental commission to be paid on a contract renewal. Contract acquisition and fulfillment costs are amortized using the straight-line method over the expected period of benefit (ranging from five to ten years). Costs to obtain a contract with an expected period of benefit of one
year or less are recognized as an expense when incurred. The amortization of contract acquisition costs associated with sales commissions that qualify for capitalization will be recorded as selling expense in our Consolidated Statements of Income. The amortization of contract acquisition costs associated with cash payments for client incentives is included as a reduction of revenues in our Consolidated Statements of Income. For the year ended December 31, 2018, amortization of capitalized contract costs recorded in selling expense was $12 million.
Costs to obtain or fulfill a contract are classified as contract cost assets within "prepaid expenses and other current assets" and "other assets" in our Consolidated Balance Sheets. As of December 31, 2018, we had capitalized costs to obtain a contract of $12.7 million within prepaid expenses and $34.5 million within "other assets" in our Consolidated Balance Sheets, respectively.
We have recorded $83.9 million, $96.9 million and $91.6 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, 2018, 2017 and 2016, respectively.
Practical Expedients
ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to unsatisfied performance obligations; however, as allowed by ASC 606, we elected to exclude this disclosure for any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. As described above, our most significant performance obligations consist of variable consideration under a stand-ready series of distinct days of service. Such variable consideration meets the specified criteria for the disclosure exclusion; therefore, the majority of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied is variable consideration that is not required for this disclosure. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.
We elected to exclude all sales taxes and other similar taxes from the transaction price. Accordingly, we present all collections from customers for these taxes on a net basis, rather than having to assess whether we are acting as an agent or a principal in each taxing jurisdiction.
In certain arrangements with customers, we determined that certain promised services and products are immaterial in the context of the contract, both quantitatively and qualitatively.
As a practical expedient, we are not required to adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised service or product to a customer and when the customer pays for the service or product will be one year or less. As of December 31, 2018, our contracts with customers did not contain a significant financing component.
We adopted Topic 606 as of January 1, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, we utilized a practical expedient to consider the aggregate effect of all modifications when identifying performance obligations and allocating transaction price.
Accounts receivable. As described above under the heading “Securitization facility,” we maintain a revolving trade accounts receivable Securitization Facility. The current purchase limit under the Securitization Facility is $1.2 billion. 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, we transfer certain of our domestic receivables, on a revolving basis, to FLEETCOR Funding LLC (Funding), a wholly-owned bankruptcy remote subsidiary. In turn, Funding transfers, without recourse, on a revolving basis, an undivided ownership interest 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.
We utilize proceeds from the transfer of our accounts receivable as an alternative to other forms of financing, to reduce our overall borrowing costs. We have agreed to continue servicing the sold receivables for the financial institution at market rates, which approximates our cost of servicing. We retain 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.
Our 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.
Foreign receivables are not included in our receivable securitization program. At December 31, 2018 and 2017, there was $886 million and $811 million, respectively, of short-term debt outstanding under our accounts receivable Securitization Facility.
Credit risk and reserve for losses on receivables. We control credit risk by performing periodic credit evaluations of our customers. Payments from customers are generally due within 14 days or less of billing. We routinely review our accounts receivable balances and make provisions for probable doubtful accounts based primarily on the aging of those balances. Accounts receivable are deemed uncollectible from the customer once they age past 90 days. We also provide an allowance for receivables aged less than 90 days that we expect will be uncollectible based on historical collections experience including accounts that have filed for bankruptcy. At December 31, 2018, approximately 99% 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.
Impairment of long-lived assets, intangibles and investments. We regularly evaluate whether events and circumstances have occurred that indicate the carrying amount of property and equipment and finite-life intangible assets may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, we assess the potential impairment by determining whether the carrying amount of such long-lived assets will be recovered through the future undiscounted cash flows expected from use of the asset and its eventual disposition. If the carrying amount of the asset is determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market prices or discounted cash flow analysis as applicable. We regularly evaluate whether events and circumstances have occurred that indicate the useful lives of property and equipment and finite-life intangible assets may warrant revision.
We complete 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. We first perform a qualitative assessment of certain of its reporting units. Factors considered in the qualitative assessment include general macroeconomic conditions, industry and market conditions, cost factors, overall financial performance of our reporting units, events or changes affecting the composition or carrying amount of the net assets of our reporting units, sustained decrease in our share price, and other relevant entity-specific events. If we elect to bypass the qualitative assessment or if we determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, a quantitative test would be required. We then perform the goodwill impairment test for each reporting unit by comparing 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.
Based on the goodwill asset impairment analysis performed quantitatively on October 1, 2018, we determined that the fair value of each of our reporting units was in excess of the carrying value. No events or changes in circumstances have occurred since the date of this most recent annual impairment test that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
We also evaluate indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually. We also test 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 our evaluation of indefinite-lived intangible assets for impairment include the discount rate, royalty rates used in our 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.
We regularly evaluate the carrying value of our investments, which are not carried at fair value, for impairment. We have elected to measure certain equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes for similar investments of the issuer.
Income taxes. We account 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. We evaluate on a quarterly basis whether it is more likely than not that our deferred tax assets will be realized in the future and conclude 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. We include 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 Act. As a result of the 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. We recognized a deferred tax benefit of $210 million to reflect the reduced U.S. tax rate and other effects of the Tax Act as of December 31, 2017. The final deferred tax benefit was adjusted to $202.9 million during the one-year measurement period. The reduced benefit on deferred taxes was driven by the reduced federal benefit received on state income taxes as a result of the lower federal tax rate enacted by the Tax Act. We recognized a provisional net tax benefit of $128.2 million as of December 31, 2017. During the tax year ended December 31, 2018, the Company finalized its accounting for the income tax effects of the Tax Act in accordance with its understanding of the Tax Act and the guidance available as of the date of this filing. After the adjustments recognized during 2018, the overall net tax benefit of the Tax Act was adjusted to $103.7 million. The accounting for the tax effects of the Tax Act has been completed as of December 31, 2018. See Note 12 for further information regarding income taxes.
Business combinations. Business combinations completed by us 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. For significant acquisitions, we obtain independent third-party valuation studies for certain of the assets acquired and liabilities assumed to assist us 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 our 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. We estimate the fair value of the acquisition-related contingent consideration using various valuation approaches, as well as significant unobservable inputs, reflecting our assessment of the assumptions market participants would use to value these liabilities.
Stock-based compensation. We account for employee stock options and restricted stock in accordance with relevant authoritative literature. Stock options are granted with an exercise price equal to the fair market value on the date of grant as authorized by our 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. We have selected the Black-Scholes option pricing model for estimating the grant date fair value of stock option awards. We have considered the retirement and forfeiture provisions of the options and utilized our historical experience to estimate the expected life of the options. Option forfeitures are accounted for upon occurrence. We base 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 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 or performance, 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 our stock.
For performance-based restricted stock awards and performance based stock option awards, we must also make assumptions regarding the likelihood of achieving performance goals. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.
Derivatives. We use derivatives to facilitate cross-currency corporate payments by writing derivatives to customers. With our Cambridge business, we use 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. We aggregate our 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.
We recognize 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.
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.
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 leases. This ASU also requires disclosures to provide additional information about the amounts recorded in the financial statements. This ASU is effective for us for annual periods beginning after December 15, 2018 and interim periods therein. On July 31, 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements”, which provides (1) an optional transition method that entities can use when adopting ASC 842 and (2) a practical expedient that permits lessors to not separate nonlease components from the associated lease component if certain conditions are met. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We will elect this transition method at the adoption date of January 1, 2019 and will not restate comparative periods. Prior comparative periods will be reported under ASC 840. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification. We also expect to make an accounting policy election to use the short term lease exception and will not record a right-of-use-asset and lease liability on the balance sheet for leases with an initial term of 12 months or less. We will recognize those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term. We have analyzed our lease portfolio, as well as our accounting policies and internal controls that will be impacted by the new guidance. We have also implemented lease accounting software to support the new reporting requirements. While certain adoption procedures are ongoing, including the discount rate determination and validating our completeness of the lease population, we do not believe the new standard will have a material impact on our consolidated statements of income or liquidity. The standard will have no impact on our debt-covenant compliance under our current agreements. We are still in the process of finalizing the impact on the Consolidated Financial Statements.
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 us for reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. Our adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows. The ASU should, however, simplify our accounting for interest rate swap hedges.
In October 2018, the FASB issued ASU 2018-16, which amends ASC 2018-16, "Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate, Overnight Index Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes," which amends the hedge accounting to add overnight index swap rates based on the secured overnight financing rate as a fifth U.S. benchmark interest rate. The guidance is effective for us for reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. Our adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
Comprehensive Income Classification. In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income", that gives entities the option to reclassify to retained earnings tax effects related to items that have been stranded in accumulated other comprehensive income as a result of the Tax Act. An entity that elects to reclassify these amounts must reclassify stranded tax effects related to the Tax Act’s change in U.S. federal tax rate for all items accounted for in other comprehensive income. These entities can also elect to reclassify other stranded effects that relate to the Tax Act but do not directly relate to the change in the federal rate. For all entities, the guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance. Entities can choose whether to apply the amendments retrospectively to each period in which the effect of the Tax Act is recognized or to apply the amendments in the period of adoption. Our adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
Non-Employee Share-Based Payments. In June 2018, the FASB issued ASU 2018-07, "Compensation—Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting", that supersedes ASC 505-50 and expands the scope of ASC 718 to include all share-based payment arrangements related to the acquisition of goods and services from both non-employees and employees. Under the new guidance, the existing employee guidance will apply to non-employee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of non-employee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for non-employee awards. The guidance is effective for us for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, including in interim periods, but no earlier than an entity’s adoption of ASC 606. Our adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
Cloud Computing Arrangements. On August 29, 2018, the FASB issued ASU 2018-15, "Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", that provides guidance on implementation costs incurred in a cloud computing arrangement (CCA) that is a service contract. The ASU, which was released in response to a consensus reached by the EITF at its June 2018 meeting, aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of a CCA that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in such a CCA. The guidance is effective for us for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods. The guidance should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Our adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
Fair Value Measurement. On August 28, 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement", which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. The guidance is effective for us for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The guidance on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other guidance should be applied retrospectively to all periods presented upon their effective date. We are permitted to early adopt any removed or modified disclosures upon issuance of this guidance and delay adoption of the additional disclosures until their effective date. Our adoption of this ASU is not expected to have a material impact on our disclosures.
Credit Losses on Financial Instruments. In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which changes how companies measure and recognize credit impairment for many financial assets. The new expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets (including trade receivables) that are in the scope of the update. The update also made amendments to the current impairment model for held-to-maturity and available-for-sale debt securities and certain guarantees. The ASU is effective for us on January 1, 2020. Early adoption is permitted for periods beginning on or after January 1, 2019. We are evaluating the effect of ASU 2016-13 on our consolidated financial statements.
Recently Adopted Accounting Standards
Impact of Adoption of ASC 606
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (ASC 606)", which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue from contracts with customers. 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. The two permitted transition methods under the standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. 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 standard updates ans ASC Subtopic 340-40: Other Assets and Deferred Costs - Contracts with Customers, which clarifies certain points of the standard and modifies certain requirements.
Effective January 1, 2018, we adopted ASC 606 using the modified retrospective method, for contracts that were not completed as of the date of initial application, resulting in a cumulative effect adjustment to retained earnings on January 1, 2018. For contracts that were modified before January 1, 2018, we have not retrospectively restated contracts for those modifications but instead reflected the aggregate effect of these modifications when identifying the satisfied and unsatisfied performance obligations, as allowed within the transition practical expedients. The cumulative impact to retained earnings at January 1, 2018 was $30.2 million, due to the capitalization of costs to acquire contracts under the new standard, with a corresponding increase to prepaid expense and other current assets of $10.2 million, other assets of $30.3 million and deferred income taxes (liabilities) of $10.3 million over the respective implied period of benefit. Additionally, under the new standard certain costs (e.g., merchant commissions and fees paid to credit card associations) will be presented net in revenues as the amounts represent payments to our customers that are not considered in exchange for a distinct good or service that the customer transfers to us.
The impact to the our revenue, operating expenses, income from continuing operations after taxes, net income and basic and diluted earnings per share (EPS) for the year ended December 31, 2018 was as follows:
| For the Year Ended December 31 | ||||||||||||
| 2018 As Reported | Impact of ASC 606 | 2018 Prior to Adoption | ||||||||||
| Revenues, net | $ | 2,433,492 | $ | 111,957 | $ | 2,545,449 | ||||||
| Expenses: | ||||||||||||
| Merchant commissions | — | 126,849 | 126,849 | |||||||||
| Processing | 487,695 | (12,963 | ) | 474,732 | ||||||||
| Selling | 182,593 | 5,319 | 187,912 | |||||||||
| General and administrative | 389,172 | — | 389,172 | |||||||||
| Depreciation and amortization | 274,609 | — | 274,609 | |||||||||
| Other operating, net | 8,725 | — | 8,725 | |||||||||
| Operating income | 1,090,698 | (7,248 | ) | 1,083,450 | ||||||||
| Total other income | (4,427 | ) | — | (4,427 | ) | |||||||
| Income before income taxes | 1,095,125 | (7,248 | ) | 1,087,877 | ||||||||
| Provision for income taxes | 283,642 | (2,043 | ) | 281,599 | ||||||||
| Net income | $ | 811,483 | $ | (5,205 | ) | $ | 806,278 | |||||
| Basic earnings per share | $ | 9.14 | $ | 9.08 | ||||||||
| Diluted earnings per share | $ | 8.81 | $ | 8.75 |
The adoption of ASC 606 did not impact our accounting for revenues derived from late fees, finance charges, and certain other charge card fees or certain of our foreign currency contracts, which continue to be accounted for under existing authoritative guidance, as discussed further footnote 3 to the Consolidated Financial Statements, Summary of Significant Accounting Policies.
Intra-Entity Transfers
In October 2016, the FASB issued ASU 2016-16 “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” The new guidance requires the recognition of the income tax consequences of an intercompany asset transfer, other
than transfers of inventory, when the transfer occurs. For intercompany transfers of inventory, the income tax effects will continue to be deferred until the inventory has been sold to a third party. The Company adopted this ASU on January 1, 2018, which resulted in an increase of approximately $17.1 million to retained earnings and an increase of $25.9 million to deferred tax assets and reduced prepaid tax by $8.8 million.
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. 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 adopted this guidance on January 1, 2018, which did not have a material impact on the Company's 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. 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 adopted this new guidance on January 1, 2018. The adoption of this new guidance did not have a material impact on the results of operations, financial condition, or cash flows.
In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash", which amends the guidance in ASC 230, Statement of Cash Flows, on the classification and presentation of restricted cash in the statement of cash flows. This ASU is effective for the Company for reporting periods beginning after December 15, 2017 and changes due to adoption are applied using a retrospective transition method to each period presented. The Company adopted this new guidance on January 1, 2018, and applied retrospectively to results for 2017. The adoption of Topic 230 resulted in the statement of cash flows presenting the changes in the total of cash, cash equivalents and restricted cash.
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 adoption of this ASU on January 1, 2018 did not have a material impact on the results of operations, financial condition, or cash flows.
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. The Company adopted this new guidance on January 1, 2018. The adoption of this new guidance did not have a material impact on the results of operations, financial condition, or cash flows.
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. The Company adopted this new guidance on January 1, 2018. The adoption of this new guidance did not have a material impact on the results of operations, financial condition, or cash flows.
Contractual Obligations
The table below summarizes the estimated dollar amounts of payments under contractual obligations identified below as of December 31, 2018 for the periods specified:
| Payments due by period(a) | ||||||||||||||||||||
| (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| Credit Facility | $ | 3,895.1 | $ | 1,162.8 | $ | 255.1 | $ | 2,149.3 | $ | 328.0 | ||||||||||
| Securitization Facility | 886.0 | 886.0 | — | — | — | |||||||||||||||
| Estimated interest payments- Credit Facility(b) | 723.3 | 153.9 | 292.1 | 268.7 | 8.7 | |||||||||||||||
| Estimated interest payments- Securitization Facility(b) | 41.9 | 22.3 | 19.5 | — | — | |||||||||||||||
| Operating leases | 98.3 | 19.7 | 31.5 | 22.8 | 24.4 | |||||||||||||||
| Deferred purchase price | 3.0 | 3.0 | — | — | — | |||||||||||||||
| Other(c) | 37.9 | 21.8 | 11.9 | 1.4 | 2.8 | |||||||||||||||
| Total | $ | 5,685.5 | $ | 2,269.5 | $ | 610.1 | $ | 2,442.0 | $ | 363.8 |
| (a) | Deferred income tax liabilities as of December 31, 2018 were approximately $488.8 million. Refer to Note 12 to our audited consolidated financial statements. This amount is not included in the total contractual obligations table because we believe this presentation would not be meaningful. Deferred income tax liabilities are calculated based on temporary differences between the tax bases of assets and liabilities and their respective book bases, which will result in taxable amounts in future years when the liabilities are settled at their reported financial statement amounts. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods. As a result, scheduling deferred income tax liabilities as payments due by period could be misleading, as this scheduling would not relate to liquidity needs. At December 31, 2018, we had approximately $34.2 million of unrecognized income tax benefits related to uncertain tax positions. We cannot reasonably estimate when all of these unrecognized income tax benefits may be settled. We do not expect reductions to unrecognized income tax benefits within the next 12 months as a result of projected resolutions of income tax uncertainties. |
| (b) | We draw upon and pay down on the revolver within our Credit Agreement and our Securitization Facility borrowings outside of a normal schedule, as excess cash is available. For our variable rate debt, we have assumed the December 31, 2018 interest rates to calculate the estimated interest payments, for all years presented. This analysis also assumes that outstanding principal is held constant at the December 31, 2018 balances for our Credit Agreement and Securitization Facility, except for mandatory pay downs on the term loans in accordance with the loan documents. We typically expect to settle such interest payments with cash flows from operating activities and/or other short-term borrowings. |
| (c) | The long-term portion of contingent consideration agreements and Cambridge seller note due within the next 12 months is included with ‘other debt’ in the detail of our debt instruments disclosed in Note 11 to our audited consolidated financial statements. |
Management’s Use of Non-GAAP Financial Measures
We have included in the discussion above certain financial measures that were not prepared in accordance with GAAP. Any analysis of non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP. Below, we define the non-GAAP financial measures, provide a reconciliation of the non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with GAAP, and discuss the reasons that we believe this information is useful to management and may be useful to investors.
Pro forma and macro adjusted revenue and transactions by product. We define the pro forma and macro adjusted revenue as revenue, net as reflected in our statement of income, adjusted to eliminate the impact of the macroeconomic environment and the impact of acquisitions, dispositions and the impact of adoption of ASC 606. The macroeconomic environment includes the impact that market fuel spread margins, fuel prices and foreign exchange rates have on our business. We use pro forma and macro adjusted revenue and transactions to evaluate the organic growth in our revenue and the associated transactions. Set forth
below is a reconciliation of pro forma and macro adjusted revenue and transactions to the most directly comparable GAAP measure, revenue, net and transactions (in millions):
| Revenue | Transactions | |||||||||||||
| Year Ended December 31,* | Year Ended December 31,* | |||||||||||||
| (Unaudited) | 2018 | 2017 | 2018 | 2017 | ||||||||||
| FUEL | ||||||||||||||
| Pro forma and macro adjusted | $ | 1,042 | $ | 990 | 484 | 471 | ||||||||
| Impact of acquisitions/dispositions | — | (6 | ) | — | (5 | ) | ||||||||
| Impact of fuel prices/spread | 54 | — | — | — | ||||||||||
| Impact of foreign exchange rates | 1 | — | — | — | ||||||||||
| Impact of adoption of ASC 606 | — | 113 | — | — | ||||||||||
| As reported | $ | 1,097 | $ | 1,096 | 484 | 466 | ||||||||
| CORPORATE PAYMENTS | ||||||||||||||
| Pro forma and macro adjusted | $ | 415 | $ | 334 | 49 | 42 | ||||||||
| Impact of acquisitions/dispositions | — | (72 | ) | — | (1 | ) | ||||||||
| Impact of fuel prices/spread | 1 | — | — | — | ||||||||||
| Impact of foreign exchange rates | — | — | — | — | ||||||||||
| Impact of adoption of ASC 606 | — | — | — | — | ||||||||||
| As reported | $ | 416 | $ | 262 | 49 | 42 | ||||||||
| TOLLS | ||||||||||||||
| Pro forma and macro adjusted | $ | 386 | $ | 327 | 877 | 894 | ||||||||
| Impact of acquisitions/dispositions | — | — | — | — | ||||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | (47 | ) | — | — | — | |||||||||
| Impact of adoption of ASC 606 | — | — | — | — | ||||||||||
| As reported | $ | 339 | $ | 327 | 877 | 894 | ||||||||
| LODGING | ||||||||||||||
| Pro forma and macro adjusted | $ | 176 | $ | 145 | 19 | 19 | ||||||||
| Impact of acquisitions/dispositions | — | (19 | ) | — | (2 | ) | ||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | — | — | — | — | ||||||||||
| Impact of adoption of ASC 606 | — | — | — | — | ||||||||||
| As reported | $ | 176 | $ | 127 | 19 | 17 | ||||||||
| GIFT | ||||||||||||||
| Pro forma and macro adjusted | $ | 187 | $ | 194 | 1,384 | 1,394 | ||||||||
| Impact of acquisitions/dispositions | — | — | — | — | ||||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | — | — | — | — | ||||||||||
| Impact of adoption of ASC 606 | — | — | — | — | ||||||||||
| As reported | $ | 187 | $ | 194 | 1,384 | 1,394 | ||||||||
| OTHER1 | ||||||||||||||
| Pro forma and macro adjusted | $ | 224 | $ | 216 | 74 | 77 | ||||||||
| Impact of acquisitions/dispositions | — | 26 | — | 1 | ||||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | (4 | ) | — | — | — | |||||||||
| Impact of adoption of ASC 606 | — | 2 | — | — | ||||||||||
| As reported | $ | 220 | $ | 244 | 74 | 78 | ||||||||
| FLEETCOR CONSOLIDATED REVENUES | ||||||||||||||
| Pro forma and macro adjusted | $ | 2,429 | $ | 2,206 | 2,888 | 2,897 | ||||||||
| Impact of acquisitions/dispositions | — | (71 | ) | — | (6 | ) | ||||||||
| Impact of fuel prices/spread | 54 | — | — | — | ||||||||||
| Impact of foreign exchange rates | (49 | ) | — | — | — | |||||||||
| Impact of adoption of ASC 606 | — | 115 | — | — | ||||||||||
| As reported | $ | 2,434 | $ | 2,250 | 2,888 | 2,891 |
- Columns may not calculate due to rounding.
1 Other includes telematics, maintenance, food and transportation related businesses.
| Revenue | Transactions | |||||||||||||
| Year Ended December 31,* | Year Ended December 31,* | |||||||||||||
| (Unaudited) | 2017 | 2016 | 2017 | 2016 | ||||||||||
| FUEL | ||||||||||||||
| Pro forma and macro adjusted | $ | 1,066 | $ | 998 | 466 | 444 | ||||||||
| Impact of acquisitions/dispositions | — | (7 | ) | — | (10 | ) | ||||||||
| Impact of fuel prices/spread | 32 | — | — | — | ||||||||||
| Impact of foreign exchange rates | — | — | — | — | ||||||||||
| One-time items2 | (2 | ) | 7 | — | — | |||||||||
| As reported | $ | 1,096 | $ | 998 | 466 | 434 | ||||||||
| CORPORATE PAYMENTS | ||||||||||||||
| Pro forma and macro adjusted | $ | 260 | $ | 226 | 42 | 38 | ||||||||
| Impact of acquisitions/dispositions | — | (47 | ) | — | — | |||||||||
| Impact of fuel prices/spread | 1 | — | — | — | ||||||||||
| Impact of foreign exchange rates | 1 | — | — | — | ||||||||||
| One-time items2 | — | — | — | — | ||||||||||
| As reported | $ | 262 | $ | 180 | 42 | 38 | ||||||||
| TOLLS | ||||||||||||||
| Pro forma and macro adjusted | $ | 302 | $ | 257 | 916 | 894 | ||||||||
| Impact of acquisitions/dispositions | — | (154 | ) | — | (567 | ) | ||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | 25 | — | — | — | ||||||||||
| One-time items2 | — | — | — | — | ||||||||||
| As reported | $ | 327 | $ | 103 | 916 | 327 | ||||||||
| LODGING | ||||||||||||||
| Pro forma and macro adjusted | $ | 127 | $ | 105 | 17 | 14 | ||||||||
| Impact of acquisitions/dispositions | — | (4 | ) | — | (1 | ) | ||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | — | — | — | — | ||||||||||
| One-time items2 | — | — | — | — | ||||||||||
| As reported | $ | 127 | $ | 101 | 17 | 13 | ||||||||
| GIFT | ||||||||||||||
| Pro forma and macro adjusted | $ | 194 | $ | 185 | 1,439 | 1,327 | ||||||||
| Impact of acquisitions/dispositions | — | — | — | — | ||||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | — | — | — | — | ||||||||||
| One-time items2 | — | — | — | — | ||||||||||
| As reported | $ | 194 | $ | 185 | 1,439 | 1,327 | ||||||||
| OTHER1 | ||||||||||||||
| Pro forma and macro adjusted | $ | 243 | $ | 244 | 77 | 82 | ||||||||
| Impact of acquisitions/dispositions | — | 23 | — | — | ||||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | 1 | — | — | — | ||||||||||
| One-time items2 | — | — | — | — | ||||||||||
| As reported | $ | 244 | $ | 266 | 77 | 82 | ||||||||
| FLEETCOR CONSOLIDATED REVENUES | ||||||||||||||
| Pro forma and macro adjusted | $ | 2,193 | $ | 2,013 | 2,957 | 2,799 | ||||||||
| Impact of acquisitions/dispositions | — | (189 | ) | — | (578 | ) | ||||||||
| Impact of fuel prices/spread | 33 | — | — | — | ||||||||||
| Impact of foreign exchange rates | 27 | — | — | — | ||||||||||
| One-time items2 | (2 | ) | 7 | — | — | |||||||||
| As reported | $ | 2,250 | $ | 1,830 | 2,957 | 2,222 |
- Columns may not calculate due to rounding.
1 Other includes telematics, maintenance, food and transportation related businesses.
2 Adjustments related to one-time items not representative of normal business operations.
Adjusted net income and adjusted net income per diluted share. We have defined the non-GAAP measure adjusted net income as net income as reflected in our statement of income, adjusted to eliminate (a) non-cash stock based compensation expense related to share based compensation awards, (b) amortization of deferred financing costs, discounts and intangible assets, amortization of the premium recognized on the purchase of receivables, and our proportionate share of amortization of intangible assets at our equity method investment, and (c) other non-recurring items, including the impact of the 2017 Tax Act, impairment charges, asset write-offs, restructuring costs, gains due to disposition of assets and a business, loss on extinguishment of debt, legal settlements, and the unauthorized access costs.
We have defined the non-GAAP measure adjusted net income per diluted share as the calculation previously noted divided by the weighted average diluted shares outstanding as reflected in our statement of income.
We use adjusted net income to eliminate the effect of items that we do not consider indicative of our core operating performance. We believe it is useful to exclude non-cash stock based compensation expense from adjusted net income because non-cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time and stock based compensation expense is not a key measure of our core operating performance. We also believe that amortization expense can vary substantially from company to company and from period to period depending upon their financing and accounting methods, the fair value and average expected life of their acquired intangible assets, their capital structures and the method by which their assets were acquired. Therefore, we have excluded amortization expense from adjusted net income. We also believe one-time non-recurring gains, losses, and impairment charges do not necessarily reflect how our investments and business are performing. We believe that adjusted net income and adjusted net income per diluted share are appropriate supplemental measures of financial performance and may be useful to investors to understanding our operating performance on a consistent basis. Adjusted net income and adjusted net income per diluted share are not intended to be a substitute for GAAP financial measures and should not be used as such.
Set forth below is a reconciliation of adjusted net income and adjusted net income per diluted share to the most directly comparable GAAP measure, net income and net income per diluted share (in thousands, except per share amounts)*:
| Year Ended December 31,* | ||||||||||||
| (Unaudited) | 2018 | 2017 | 2016 | |||||||||
| Net income | $ | 811,483 | $ | 740,200 | $ | 452,385 | ||||||
| Net income per diluted share | $ | 8.81 | $ | 7.91 | $ | 4.75 | ||||||
| Stock based compensation | 69,939 | 93,297 | 63,946 | |||||||||
| Amortization of intangible assets, premium on receivables, deferred financing costs and discounts | 227,015 | 233,280 | 184,475 | |||||||||
| Impairment of investment | 7,147 | 44,600 | 36,065 | |||||||||
| Net gain on disposition of assets/business | (152,750 | ) | (109,205 | ) | — | |||||||
| Write-off of fixed assets | 8,793 | — | — | |||||||||
| Loss on extinguishment of debt | 2,098 | 3,296 | — | |||||||||
| Non-recurring loss due to merger of entities | — | 2,028 | — | |||||||||
| Non-recurring net gain at equity method investment | — | — | (10,845 | ) | ||||||||
| Legal settlements | 5,500 | 11,000 | — | |||||||||
| Restructuring costs | 4,969 | 1,043 | — | |||||||||
| Unauthorized access costs | 2,065 | — | — | |||||||||
| Total adjustments | 174,777 | 279,339 | 273,641 | |||||||||
| Income tax impact of pre-tax adjustments at the effective tax rate1 | (39,151 | ) | (93,164 | ) | (66,850 | ) | ||||||
| Impact of tax reform | 22,731 | (127,466 | ) | — | ||||||||
| Adjusted net income | $ | 969,840 | $ | 798,909 | $ | 659,176 | ||||||
| Adjusted net income per diluted share | $ | 10.53 | $ | 8.54 | $ | 6.92 | ||||||
| Diluted shares | 92,151 | 93,594 | 95,213 |
| *Columns may not calculate due to rounding. |
| 1 Excludes the results of the Company's investments on our effective tax rate, as results from our investments are reported within the consolidated statements of income on a post-tax basis and no tax-over-book outside basis differences related to our investments reversed during 2017. Excludes impact of tax reform adjustments during the period included in our effective tax rate. Also excludes the net gain realized upon our disposition of Nextraq, representing a pretax gain of $175.0 million and tax on gain of $65.8 million. The tax on the gain is included in "Net gain on disposition of assets/business". |
Previous: Item 6. SELECTED FINANCIAL DATA · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK