filings.toolsItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
164K characters. Original on sec.gov · Markdown
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of FleetCor Technologies, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of FleetCor Technologies, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company‘s auditor since 2002.
Atlanta, Georgia
March 1, 2019
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
| December 31, | ||||||||
| 2018¹ | 2017 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,031,145 | $ | 913,595 | ||||
| Restricted cash | 333,748 | 217,275 | ||||||
| Accounts and other receivables (less allowance for doubtful accounts of $59,963 at December 31, 2018 and $46,031 at December 31, 2017) | 1,425,815 | 1,420,011 | ||||||
| Securitized accounts receivable—restricted for securitization investors | 886,000 | 811,000 | ||||||
| Prepaid expenses and other current assets | 199,278 | 187,820 | ||||||
| Total current assets | 3,875,986 | 3,549,701 | ||||||
| Property and equipment, net | 186,201 | 180,057 | ||||||
| Goodwill | 4,542,074 | 4,715,823 | ||||||
| Other intangibles, net | 2,407,910 | 2,724,957 | ||||||
| Investments | 42,674 | 32,859 | ||||||
| Other assets | 147,632 | 114,962 | ||||||
| Total assets | $ | 11,202,477 | $ | 11,318,359 | ||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,117,649 | $ | 1,437,314 | ||||
| Accrued expenses | 261,594 | 238,472 | ||||||
| Customer deposits | 926,685 | 732,171 | ||||||
| Securitization facility | 886,000 | 811,000 | ||||||
| Current portion of notes payable and lines of credit | 1,184,616 | 805,512 | ||||||
| Other current liabilities | 118,669 | 71,033 | ||||||
| Total current liabilities | 4,495,213 | 4,095,502 | ||||||
| Notes payable and other obligations, less current portion | 2,748,431 | 2,902,104 | ||||||
| Deferred income taxes | 491,946 | 518,912 | ||||||
| Other noncurrent liabilities | 126,707 | 125,319 | ||||||
| Total noncurrent liabilities | 3,367,084 | 3,546,335 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $0.001 par value; 475,000,000 shares authorized; 123,035,859 shares issued and 85,845,344 shares outstanding at December 31, 2018; and 122,083,059 shares issued and 89,803,982 shares outstanding at December 31, 2017 | 123 | 122 | ||||||
| Additional paid-in capital | 2,306,843 | 2,214,224 | ||||||
| Retained earnings | 3,817,656 | 2,958,921 | ||||||
| Accumulated other comprehensive loss | (913,858 | ) | (551,857 | ) | ||||
| Less treasury stock (37,190,515 shares at December 31, 2018; and 32,279,077 shares at December 31, 2017) | (1,870,584 | ) | (944,888 | ) | ||||
| Total stockholders’ equity | 3,340,180 | 3,676,522 | ||||||
| Total liabilities and stockholders’ equity | $ | 11,202,477 | $ | 11,318,359 |
| 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 Form 10-K and quarterly reports on Form 10-Q will not be restated to reflect ASC 606. |
| See accompanying notes. |
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
| Year Ended December 31, | ||||||||||||
| 2018¹ | 2017 | 2016 | ||||||||||
| Revenues, net | $ | 2,433,492 | $ | 2,249,538 | $ | 1,831,546 | ||||||
| Expenses: | ||||||||||||
| Merchant commissions | — | 113,133 | 104,345 | |||||||||
| Processing | 487,695 | 429,613 | 355,414 | |||||||||
| Selling | 182,593 | 170,717 | 131,443 | |||||||||
| General and administrative | 389,172 | 387,694 | 283,625 | |||||||||
| Depreciation and amortization | 274,609 | 264,560 | 203,256 | |||||||||
| Other operating expense (income), net | 8,725 | 61 | (690 | ) | ||||||||
| Operating income | 1,090,698 | 883,760 | 754,153 | |||||||||
| Investment loss | 7,147 | 53,164 | 36,356 | |||||||||
| Other (income) expense, net | (152,166 | ) | (173,436 | ) | 2,982 | |||||||
| Interest expense, net | 138,494 | 107,146 | 71,896 | |||||||||
| Loss on extinguishment of debt | 2,098 | 3,296 | — | |||||||||
| Total other (income) expense | (4,427 | ) | (9,830 | ) | 111,234 | |||||||
| Income before income taxes | 1,095,125 | 893,590 | 642,919 | |||||||||
| Provision for income taxes | 283,642 | 153,390 | 190,534 | |||||||||
| Net income | $ | 811,483 | $ | 740,200 | $ | 452,385 | ||||||
| Basic earnings per share | $ | 9.14 | $ | 8.12 | $ | 4.89 | ||||||
| Diluted earnings per share | $ | 8.81 | $ | 7.91 | $ | 4.75 | ||||||
| Weighted average shares outstanding: | ||||||||||||
| Basic shares | 88,750 | 91,129 | 92,597 | |||||||||
| Diluted shares | 92,151 | 93,594 | 95,213 |
| 1Reflects 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 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 Form 10-K and quarterly reports on Form 10-Q will not be restated to reflect ASC 606. |
| See accompanying notes. |
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands)
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Net income | $ | 811,483 | $ | 740,200 | $ | 452,385 | ||||||
| Other comprehensive (loss) income: | ||||||||||||
| Foreign currency translation (losses) gains, net of tax | (362,001 | ) | 83,165 | (95,592 | ) | |||||||
| Reclassification of foreign currency translation loss to investment, net of tax | — | 31,381 | — | |||||||||
| Total other comprehensive (loss) income | (362,001 | ) | 114,546 | (95,592 | ) | |||||||
| Total comprehensive income | $ | 449,482 | $ | 854,746 | $ | 356,793 |
See accompanying notes.
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In Thousands)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | |||||||||||||||||||
| Balance at December 31, 2015 | $ | 121 | $ | 1,988,917 | $ | 1,766,336 | $ | (570,811 | ) | $ | (354,516 | ) | $ | 2,830,047 | ||||||||||
| Net income | — | — | 452,385 | — | — | 452,385 | ||||||||||||||||||
| Other comprehensive loss, net of tax of $0 | — | — | — | (95,592 | ) | — | (95,592 | ) | ||||||||||||||||
| Acquisition of common stock | — | — | — | — | (187,979 | ) | (187,979 | ) | ||||||||||||||||
| Issuance of common stock | — | 85,177 | — | — | — | 85,177 | ||||||||||||||||||
| Balance at December 31, 2016 | 121 | 2,074,094 | 2,218,721 | (666,403 | ) | (542,495 | ) | 3,084,038 | ||||||||||||||||
| Net income | — | — | 740,200 | — | — | 740,200 | ||||||||||||||||||
| Other comprehensive income from currency exchange, net of tax of $0 | — | — | — | 114,546 | — | 114,546 | ||||||||||||||||||
| Acquisition/return of common stock | — | — | — | — | (402,393 | ) | (402,393 | ) | ||||||||||||||||
| Issuance of common stock | 1 | 140,130 | — | — | — | 140,131 | ||||||||||||||||||
| Balance at December 31, 2017 | 122 | 2,214,224 | 2,958,921 | (551,857 | ) | (944,888 | ) | 3,676,522 | ||||||||||||||||
| Net income | — | 811,483 | — | — | 811,483 | |||||||||||||||||||
| Cumulative effect of change in accounting principles | — | — | 47,252 | — | — | 47,252 | ||||||||||||||||||
| Other comprehensive income from currency, net of tax of $0 | — | — | — | (362,001 | ) | — | (362,001 | ) | ||||||||||||||||
| Acquisition of common stock | — | (33,000 | ) | — | — | (925,696 | ) | (958,696 | ) | |||||||||||||||
| Issuance of common stock | 1 | 125,619 | — | — | — | 125,620 | ||||||||||||||||||
| Balance at December 31, 2018 | $ | 123 | $ | 2,306,843 | $ | 3,817,656 | $ | (913,858 | ) | $ | (1,870,584 | ) | $ | 3,340,180 |
See accompanying notes.
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
| Year Ended Year Ended December 31, | ||||||||||||
| 2018¹ | 2017¹ | 2016¹ | ||||||||||
| Operating activities | ||||||||||||
| Net income | $ | 811,483 | $ | 740,200 | $ | 452,385 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation | 52,936 | 46,599 | 36,456 | |||||||||
| Stock-based compensation | 69,939 | 93,297 | 63,946 | |||||||||
| Provision for losses on accounts receivable | 64,377 | 44,857 | 35,885 | |||||||||
| Amortization of deferred financing costs and discounts | 5,342 | 6,952 | 7,582 | |||||||||
| Amortization of intangible assets | 216,330 | 211,849 | 161,635 | |||||||||
| Amortization of premium on receivables | 5,343 | 6,112 | 5,165 | |||||||||
| Loss on extinguishment of debt | 2,098 | 3,296 | — | |||||||||
| Write-off of fixed assets | 8,793 | — | — | |||||||||
| Deferred income taxes | (2,750 | ) | (247,712 | ) | (28,681 | ) | ||||||
| Investment loss | 7,147 | 53,164 | 36,356 | |||||||||
| Gain on sale of assets/business | (152,750 | ) | (174,983 | ) | — | |||||||
| Other non-cash operating income | (186 | ) | (61 | ) | (690 | ) | ||||||
| Changes in operating assets and liabilities (net of acquisitions/disposition): | ||||||||||||
| Accounts receivable and other receivables | (159,024 | ) | (431,003 | ) | (338,796 | ) | ||||||
| Prepaid expenses and other current assets | (27,650 | ) | 26,102 | 5,301 | ||||||||
| Other assets | (25,432 | ) | (20,957 | ) | (20,345 | ) | ||||||
| Accounts payable, accrued expenses and customer deposits | 27,386 | 322,346 | 292,019 | |||||||||
| Net cash provided by operating activities | 903,382 | 680,058 | 708,218 | |||||||||
| Investing activities | ||||||||||||
| Acquisitions, net of cash acquired | (20,843 | ) | (705,257 | ) | (1,331,985 | ) | ||||||
| Purchases of property and equipment | (81,387 | ) | (70,093 | ) | (59,011 | ) | ||||||
| Proceeds from disposal of an asset/business | 98,735 | 316,501 | — | |||||||||
| Other | (22,775 | ) | (38,953 | ) | 1,411 | |||||||
| Net cash used in investing activities | (26,270 | ) | (497,802 | ) | (1,389,585 | ) | ||||||
| Financing activities | ||||||||||||
| Proceeds from issuance of common stock | 55,680 | 44,690 | 21,231 | |||||||||
| Repurchase of common stock | (958,696 | ) | (402,393 | ) | (187,678 | ) | ||||||
| Borrowings (payments) on securitization facility, net | 75,000 | 220,000 | (23,000 | ) | ||||||||
| Deferred financing costs paid and debt discount | (4,927 | ) | (12,908 | ) | (2,272 | ) | ||||||
| Proceeds from issuance of notes payable | 363,430 | 780,656 | 600,000 | |||||||||
| Principal payments on notes payable | (498,305 | ) | (423,156 | ) | (118,500 | ) | ||||||
| Borrowings from revolver | 1,493,091 | 1,100,000 | 1,225,107 | |||||||||
| Payments on revolver | (1,099,040 | ) | (1,031,722 | ) | (786,849 | ) | ||||||
| (Payments) borrowings on swing line of credit, net | (4,935 | ) | (23,686 | ) | 26,606 | |||||||
| Other | 887 | 457 | (676 | ) | ||||||||
| Net cash (used in) provided by financing activities | (577,815 | ) | 251,938 | 753,969 | ||||||||
| Effect of foreign currency exchange rates on cash | (65,274 | ) | 52,906 | (43,476 | ) | |||||||
| Net increase in cash and cash equivalents and restricted cash | 234,023 | 487,100 | 29,126 | |||||||||
| Cash and cash equivalents and restricted cash, beginning of year | 1,130,870 | 643,770 | 614,644 | |||||||||
| Cash and cash equivalents and restricted cash, end of year | $ | 1,364,893 | $ | 1,130,870 | $ | 643,770 | ||||||
| Supplemental cash flow information | ||||||||||||
| Cash paid for interest | $ | 156,749 | $ | 113,416 | $ | 70,339 | ||||||
| Cash paid for income taxes | $ | 207,504 | $ | 392,192 | $ | 101,951 | ||||||
| Non cash investing activity, notes assumed in acquisitions | $ | — | $ | 29,341 | $ | — |
| 1 Reflects the impact of the Company's adoption of Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230), which was adopted by the Company 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. As a result, the Company will no longer present transfers between cash and cash equivalents and restricted cash in the statement of cash flows. |
| See accompanying notes. |
FLEETCOR Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2018
- Description of Business
FLEETCOR Technologies, Inc. and its subsidiaries (the Company) is a leading global provider of commercial payment solutions. The Company helps businesses of all sizes control, simplify and secure payment of various domestic and cross-border payables using specialized payment products. The Company serves businesses, merchants, consumers and payment networks in North America, Latin America, Europe, and Australasia.
The Company has two reportable segments, North America and International. The Company reports these two segments as they align with its senior executive organizational structure, reflect how the Company organizes and manages its employees around the world, manages operating performance, contemplates the differing regulatory environments in North America versus other geographies, and helps the Company isolate the impact of foreign exchange fluctuations on its financial results.
The Company's solutions are comprised of payment products, networks and associated services. The Company's payment products function like a charge card, prepaid card, one-time use virtual card, electronic RFID, etc. and tend to be specialized for specific spend categories, such as fuel and lodging and/or specific customer groups, such as long haul transportation. The Company's five primary product lines are Fuel, Lodging, Tolls, Corporate Payments and Gift. Additionally, the Company provides other payment products including fleet maintenance, employee benefits and long haul transportation-related services. The Company's products are used in 82 countries around the world, with its primary geographies being the U.S., Brazil and the United Kingdom, which combined accounted for approximately 88% of the Company's revenue in 2018.
The Company uses both proprietary and third-party networks to deliver its payment solutions. FLEETCOR owns and operates proprietary networks with brands throughout the world, bringing incremental sales and loyalty to affiliated merchants. Third-party networks are used to broaden payment product acceptance and use.
The Company markets its products directly through multiple sales channels, including field sales, telesales and digital marketing, and indirectly through its partners, which include major oil companies, leasing companies, petroleum marketers, value-added resellers (VARs) and referral partners.
- Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of FLEETCOR Technologies, Inc. and all of its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The Company’s fiscal year ends on December 31. In certain of the Company’s U.K. businesses, the Company records the operating results using a 4-4-5 week accounting cycle with the fiscal year ending on the Friday on or immediately preceding December 31. Fiscal years 2018, 2017 and 2016 include 52 weeks for the businesses reporting using a 4-4-5 accounting cycle.
Credit Risk and Reserve for Losses on Receivables
The Company controls credit risk by performing periodic credit evaluations of its customers. Payments from customers are generally due within 14 days or less of billing. The Company routinely reviews its accounts receivable balances and makes provisions from the customer 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. The Company also provides an allowance for receivables aged less than 90 days that it expects will be uncollectible based on historical collections experience including accounts that have filed for bankruptcy. At December 31, 2018 and 2017, approximately 99% and 96%, respectively, of
outstanding accounts receivable were current. Accounts receivable deemed uncollectible are removed from accounts receivable and the allowance for doubtful accounts when internal collection efforts have been exhausted and accounts have been turned over to a third-party collection agency. Recoveries from the third-party collection agency are not significant.
Business Combinations
Business combinations completed by the Company have been accounted for under the acquisition method of accounting. The acquisition method requires that the acquired assets and liabilities, including contingencies, be recorded at fair value determined as of the acquisition date. For significant acquisitions, the Company obtains independent third-party valuation studies for certain of the assets acquired and liabilities assumed to assist the Company in determining fair value. Goodwill represents the excess of the purchase price over the fair values of the tangible and intangible assets acquired and liabilities assumed. The results of the acquired businesses are included in the Company’s results of operations beginning from the completion date of the applicable transaction.
Estimates of fair value are revised during an allocation period as necessary when, and if, information becomes available to further define and quantify the fair value of the assets acquired and liabilities assumed. Provisional estimates of the fair values of the assets acquired and liabilities assumed involves a number of estimates and assumptions that could differ materially from the final amounts recorded. The allocation period does not exceed one year from the date of the acquisition. To the extent additional information to refine the original allocation becomes available during the allocation period, the allocation of the purchase price is adjusted. Should information become available after the allocation period, those items are adjusted through operating results. The direct costs of the acquisition are recorded as operating expenses. Certain acquisitions include contingent consideration related to the performance of the acquired operations following the acquisition. Contingent consideration is recorded at estimated fair value at the date of the acquisition, and is remeasured each reporting period, with any changes in fair value recorded in the Consolidated Statements of Income. The Company estimates the fair value of the acquisition-related contingent consideration using various valuation approaches, as well as significant unobservable inputs, reflecting the Company’s assessment of the assumptions market participants would use to value these liabilities.
Impairment of Long-Lived Assets, Goodwill, Intangibles and Investments
The Company regularly evaluates 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, the Company assesses 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. The Company regularly evaluates whether events and circumstances have occurred that indicate the useful lives of property and equipment and finite-life intangible assets may warrant revision.
The Company completes an impairment test of goodwill at least annually or more frequently if facts or circumstances indicate that goodwill might be impaired. Goodwill is tested for impairment at the reporting unit level. The Company first performs 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 the Company elects to bypass the qualitative assessment or if it determines, 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. The Company then performs 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, the Company determined that the fair value of each of its reporting units was in excess of the carrying value. No events or changes in circumstances have occurred since the date of this most recent annual impairment test that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
The Company also evaluates indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually. The Company also tests for impairment if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived intangible asset is below its carrying amount. Estimates critical to the Company’s evaluation of indefinite-lived intangible assets for impairment include the discount rate, royalty rates used in its evaluation of trade names, projected average revenue growth and projected long-term growth rates in the determination of terminal values. An impairment charge is
recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date.
The Company regularly evaluates the carrying value of its investments, which are not carried at fair value, for impairment. The company has 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.
Property, Plant and Equipment and Definite-Lived Intangible Assets
Property, plant and equipment are stated at cost and depreciated on the straight-line basis. Definite-lived intangible assets, consisting primarily of customer relationships, are stated at fair value upon acquisition and are amortized over their estimated useful lives. Customer and merchant relationship useful lives are estimated using historical attrition rates.
The Company develops software that is used in providing processing and information management services to customers. A significant portion of the Company’s capital expenditures are devoted to the development of such internal-use computer software. Software development costs are capitalized once technological feasibility of the software has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when the Company has completed all planning, designing, coding and testing activities that are necessary to determine that the software can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the software is ready for its intended use. Software development costs are amortized using the straight-line method over the estimated useful life of the software. The Company capitalized software costs of $37.3 million, $37.4 million and $33.1 million in 2018, 2017 and 2016, respectively. Amortization expense for software totaled $24.2 million, $21.8 million and $17.7 million in 2018, 2017 and 2016, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. The Company evaluates on a quarterly basis whether it is more likely than not that its deferred tax assets will be realized in the future and concludes whether a valuation allowance must be established.
Current accounting guidance clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under the relevant authoritative literature, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50 percent likelihood of being sustained. The Company includes any estimated interest and penalties on tax related matters in income tax expense.
In the fourth quarter of 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). As a result of 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. The Company 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 third quarter of 2018. The change made to deferred taxes was due solely to the state tax impact from the Tax Act. The Company recognized a provisional net tax benefit of $128.2 million as of December 31, 2017. After the adjustments recognized during 2018, the net tax benefit was adjusted to $103.7 million. The Company finalized the accounting for the limitations on the deductibility of executive compensation under the provisions of the Tax Act. See Note 12 for further information regarding income taxes.
Cash, Cash Equivalents, and Restricted Cash
Cash equivalents consist of cash on hand and highly liquid investments with original maturities of three months or less. Restricted cash represents customer deposits repayable on demand.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the rates of exchange in effect at period-end. The related translation adjustments are recorded to accumulated other comprehensive income. Income and expenses are translated at the average monthly rates of exchange in effect during the year. Gains and losses from foreign currency transactions of these subsidiaries are included in net income. The Company recognized a foreign exchange loss of $0.1 million, $0.2 million and $2.8 million for the years ended December 31, 2018, 2017 and 2016 respectively, which are recorded within other expense, net in the Consolidated Statements of Income. The Company recorded foreign currency losses on long-term intra-entity transactions of $79.6 million for the year ended December 31, 2018, included as a component of foreign currency translation (losses) gains, net of tax, on the Consolidated Statements of Comprehensives Income.
Derivatives
The Company uses derivatives to facilitate cross-currency corporate payments by writing derivatives to customers.
At Cambridge Global Payments ("Cambridge"), the Company uses derivatives to facilitate cross-currency corporate payments by writing derivatives to customers, which are not designated as hedging instruments. The majority of Cambridge's revenue is from exchanges of currency at spot rates, which enable customers to make cross-currency payments. In addition, Cambridge also writes foreign currency forward and option contracts for its customers to facilitate future payments. The duration of these derivative contracts at inception is generally less than one year. The Company aggregates its foreign exchange exposures arising from customer contracts, including forwards, options and spot exchanges of currency, and hedges (economic hedge) the resulting net currency risks by entering into offsetting contracts with established financial institution counterparties. The changes in fair value related to these contracts are recorded in revenues, net in the Consolidated Statements of Income.
The Company recognizes all derivatives in "prepaid expenses and other current assets" and "other current liabilities" in the accompanying Consolidated Balance Sheets at their fair value. All cash flows associated with derivatives are included in cash flows from operating activities in the Consolidated Statements of Cash Flows.
Stock-Based Compensation
The Company accounts for employee stock options and restricted stock in accordance with relevant authoritative literature. Stock options are granted with an exercise price equal to the fair market value on the date of grant as authorized by the Company’s board of directors. Options granted have vesting provisions ranging from one to five years and vesting of the options is generally based on the passage of time or performance. Stock option grants are subject to forfeiture if employment terminates prior to vesting. The Company has selected the Black-Scholes option pricing model for estimating the grant date fair value of stock option awards. The Company has considered the retirement and forfeiture provisions of the options and utilized its historical experience to estimate the expected life of the options. Option forfeitures are accounted for upon occurrence. The Company bases the risk-free interest rate on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. Stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period based on the number of years over which the requisite service is expected to be rendered.
Awards of restricted stock and restricted stock units are independent of stock option grants and are subject to forfeiture if employment terminates prior to vesting. The vesting of shares granted is generally based on the passage of time, performance conditions, or a combination of these. Shares vesting based on the passage of time have vesting provisions of one to three years. The fair value of restricted stock where the shares vest based on the passage of time or performance is based on the grant date fair value of the Company’s stock.
For performance-based restricted stock awards and performance based stock option awards, the Company must also make assumptions regarding the likelihood of achieving performance goals. If actual results differ significantly from these estimates, stock-based compensation expense and the Company’s results of operations could be materially affected.
Deferred Financing Costs/Debt Discounts
Costs incurred to obtain financing are amortized over the term of the related debt, using the effective interest method and are included within interest expense. The Company capitalized additional debt issuance costs of $4.9 million associated with refinancing its Credit Facility and Securitization Facilities in 2018 and $12.9 million with refinancing its Credit Facility in 2017. At December 31, 2018 and 2017, the Company had net deferred financing costs of $10.4 million and $16.3 million, respectively, related to the revolver under the Credit Facility and the Securitization Facility, each recorded within prepaid and other assets, respectively, on the Consolidated Balance Sheets. At December 31, 2018 and 2017, the Company had deferred financing costs of $10.9 million and 11.8 million, respectively, related to the term notes under the Credit Facility, recorded as a discount to the term debt outstanding within the current portion of notes payable and lines of credit and notes payable and other obligations, less current portion, respectively, in the Consolidated Balance Sheets.
Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the total of net income and all other changes in equity that result from transactions and other economic events of a reporting period other than transactions with owners.
Accounts Receivable
The Company maintains a $1.2 billion revolving trade accounts receivable Securitization Facility. Accounts receivable collateralized within our Securitization Facility relate to trade receivables resulting from charge card activity in the U.S. Pursuant to the terms of the Securitization Facility, the Company transfers certain of its domestic receivables, on a revolving basis, to FLEETCOR Funding LLC (Funding), a wholly-owned bankruptcy remote subsidiary. In turn, Funding 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.
The Company utilizes proceeds from the transferred assets as an alternative to other forms of financing to reduce its overall borrowing costs. The Company has agreed to continue servicing the sold receivables for the financial institution at market rates, which approximates the Company’s cost of servicing. The Company retains a residual interest in the transferred asset as a form of credit enhancement. The residual interest’s fair value approximates carrying value due to its short-term nature. Funding determines the level of funding achieved by the sale of trade accounts receivable, subject to a maximum amount.
The Company’s Consolidated Balance Sheets and Statements of Income reflect the activity related to securitized accounts receivable and the corresponding securitized debt, including interest income, fees generated from late payments, provision for losses on accounts receivable and interest expense. The cash flows from borrowings and repayments, associated with the securitized debt, are presented as cash flows from financing activities.
On August 30, 2018, the Company increased the amount of the Securitization facility to $1.2 billion. The maturity date for the Company's Securitization Facility is November 14, 2020.
The Company’s accounts receivable and securitized accounts receivable include the following at December 31 (in thousands):
| 2018 | 2017 | |||||||
| Gross domestic unsecuritized accounts receivables | $ | 668,154 | $ | 661,677 | ||||
| Gross domestic securitized accounts receivable | 886,000 | 811,000 | ||||||
| Gross foreign receivables | 817,624 | 804,365 | ||||||
| Total gross receivables | 2,371,778 | 2,277,042 | ||||||
| Less allowance for doubtful accounts | (59,963 | ) | (46,031 | ) | ||||
| Net accounts and securitized accounts receivable | $ | 2,311,815 | $ | 2,231,011 |
A rollforward of the Company’s allowance for doubtful accounts related to accounts receivable for the years ended December 31 is as follows (in thousands):
| 2018 | 2017 | 2016 | ||||||||||
| Allowance for doubtful accounts beginning of year | $ | 46,031 | $ | 32,506 | $ | 21,903 | ||||||
| Provision for bad debts | 64,377 | 44,857 | 35,885 | |||||||||
| Write-offs | (50,445 | ) | (31,332 | ) | (25,282 | ) | ||||||
| Allowance for doubtful accounts end of year | $ | 59,963 | $ | 46,031 | $ | 32,506 |
Advertising
The Company expenses advertising costs as incurred. Advertising expense was $26.3 million, $26.1 million and $22.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Earnings Per Share
The Company reports basic and diluted earnings per share. Basic earnings per share is calculated using the weighted average of common stock and non-vested, non-forfeitable restricted shares outstanding, unadjusted for dilution, and net income attributable to common shareholders.
Diluted earnings per share is calculated using the weighted average shares outstanding and contingently issuable shares less weighted average shares recognized during the period. The net outstanding shares have been adjusted for the dilutive effect of common stock equivalents, which consist of outstanding stock options and unvested forfeitable restricted stock units.
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, the Company 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, the Company has 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 the Company.
The impact to the Company's 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 the Company's accounting for revenues derived from late fees, finance charges, and certain other charge card fees or certain of its foreign currency contracts, which continue to be accounted for under existing authoritative guidance, as discussed further in footnote 3.
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.
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 the Company 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. The Company 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. The Company has elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows it to carryforward the historical lease classification. The Company expects to elect an accounting policy 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. The Company will recognize those lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term. The Company has analyzed its lease portfolio, as well as its accounting policies and internal controls that will be impacted by the new guidance. The Company has 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, the Company does not believe the new standard will have a material impact on its consolidated statements of income or liquidity. The standard will have no impact on the Company's debt-covenant compliance under its current agreements. The Company is 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 the Company for reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company's adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows. The ASU should, however, simplify the Company's 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 the Company for reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company's adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
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. The Company's adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
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 the Company 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. The Company's adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
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 the Company 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. The Company's adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
Fair Value 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 the Company 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. The Company is 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. The Company's adoption of this ASU is not expected to have a material impact on its 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 the Company on January 1, 2020. Early adoption is permitted for periods beginning on or after January 1, 2019. The Company is evaluating the effect of ASU 2016-13 on its consolidated financial statements.
Recently Adopted Accounting Standards
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.
- Revenue
The Company provides 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). The Company provides products that help businesses of all sizes control, simplify and secure payment of various domestic and cross-border payables using specialized payment products. The Company also provides other payment solutions for fleet maintenance, employee benefits and long haul transportation-related services.
Payment Services
The Company’s primary performance obligation for the majority of its 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. As a result, the Company allocates and recognizes variable consideration in the period it has the contractual right to invoice 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.
The Company records revenue for its 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 the Company receives 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.
The Company recognizes revenue when the underlying transactions are complete and its performance obligations are satisfied. Transactions are considered complete depending upon the related payment solution but generally when the Company has authorized the transaction, validated that the transaction has no errors and accepted and posted the data to the Company’s records.
The Company's performance obligation for its foreign exchange payment services is providing a foreign currency payment to a customer’s designated recipient and therefore, the Company recognizes 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 the Company to the customer and the rate available in the wholesale foreign exchange market.
Gift Card Products and Services
The Company’s 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 the Company's customer, which is generally upon shipment.
Card-based services consist of transaction processing and reporting of gift card transactions where the Company recognizes revenue based on an output measure of elapsed time for an unknown or unspecified quantity of transactions. As a result, the Company allocates and recognizes variable consideration over the estimated period of time over which the performance obligation is satisfied.
Other
The Company accounts 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. The Company ceases billing and accruing for late fees and finance charges approximately 30 - 40 days after the customer’s balance becomes delinquent.
The Company also writes foreign currency forward and option contracts for its customers to facilitate future payments in foreign currencies, and recognizes 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 the Company’s 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, for the year ended December 31, 2018.
Disaggregation of Revenues
The Company provides its services to customers across different payment solutions and geographies. Revenue by product (in millions) as of and for the years ended December 31 (in thousands):
| Year Ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Revenue by Product Category | Revenues, net | Revenues, net | Revenues, net | |||||||||
| Fuel | $ | 1,096,611 | $ | 1,096,153 | $ | 997,398 | ||||||
| Corporate payments | 415,856 | 261,822 | 179,557 | |||||||||
| Tolls | 338,644 | 326,977 | 102,740 | |||||||||
| Lodging | 175,505 | 126,657 | 100,664 | |||||||||
| Gift | 186,645 | 194,099 | 184,743 | |||||||||
| Other | 220,231 | 243,830 | 266,444 | |||||||||
| Consolidated revenues, net | $ | 2,433,492 | $ | 2,249,538 | $ | 1,831,546 |
The table below presents the Company's revenues, net from its primary product categories as of and for the years ended December 31 (in thousands).
| 2018 | 2017 | 2016 | ||||||||||
| Revenues, net by location: | ||||||||||||
| United States (country of domicile) | $ | 1,481,785 | $ | 1,400,801 | $ | 1,278,828 | ||||||
| Brazil | 400,111 | 394,550 | 167,769 | |||||||||
| United Kingdom | 257,651 | 236,550 | 229,125 | |||||||||
| Other | 293,945 | 217,637 | 155,824 | |||||||||
| Consolidated Revenues, net | $ | 2,433,492 | $ | 2,249,538 | $ | 1,831,546 |
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. The Company expects 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, the Company began capitalizing the incremental costs of obtaining a contract with a customer if the Company expects to recover those costs. The incremental costs of obtaining a contract are those that the Company incurs to obtain a contract with a customer that it 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 the Company can specifically identify. |
| b. | The costs generate or enhance resources of the Company 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, the Company considered a combination of factors, including customer attrition rates, estimated terms of customer relationships, the useful lives of technology used by the Company to provide products and services to its 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 the Company’s 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 the Company’s 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 the Company’s Consolidated Balance Sheets. As of December 31, 2018, the Company had capitalized costs to obtain a contract of $12.7 million within prepaid expenses and $34.5 million within "other assets" in the Company’s Consolidated Balance Sheets, respectively.
The Company has 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, the Company has 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, the Company's 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.
The Company has elected to exclude all sales taxes and other similar taxes from the transaction price. Accordingly, the Company presents all collections from customers for these taxes on a net basis, rather than having to assess whether the Company is acting as an agent or a principal in each taxing jurisdiction.
In certain arrangements with customers, the Company has determined that certain promised services and products are immaterial in the context of the contract, both quantitatively and qualitatively.
As a practical expedient, the Company is not required to adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers 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, the Company’s contracts with customers did not contain a significant financing component.
The Company 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, the Company utilized a practical expedient to consider the aggregate effect of all modifications when identifying performance obligations and allocating transaction price.
- Fair Value Measurements
Fair value is a market-based measurement that reflects assumptions that market participants would use in pricing an asset or liability. GAAP discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions.
As the basis for evaluating such inputs, a three-tier value hierarchy prioritizes the inputs used in measuring fair value as follows:
| • | Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets. |
| • | Level 2: Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
| • | Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. |
The following table presents the Company’s financial assets and liabilities which are measured at fair values on a recurring basis as of December 31, 2018 and 2017, (in thousands):
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| December 31, 2018 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Repurchase agreements | $ | 581,293 | $ | — | $ | 581,293 | $ | — | ||||||||
| Money market | 50,644 | — | 50,644 | — | ||||||||||||
| Certificates of deposit | 22,412 | — | 22,412 | — | ||||||||||||
| Foreign exchange contracts | 68,814 | 21 | 68,793 | — | ||||||||||||
| Total assets | $ | 723,163 | $ | 21 | $ | 723,141 | $ | — | ||||||||
| Cash collateral for foreign exchange contracts | $ | 9,644 | $ | — | $ | — | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange contracts | $ | 72,125 | $ | — | $ | 72,125 | ||||||||||
| Total liabilities | $ | 72,125 | $ | — | $ | 72,125 | ||||||||||
| Cash collateral obligation for foreign exchange contracts | $ | 73,140 | $ | — | $ | — | $ | — | ||||||||
| December 31, 2017 | ||||||||||||||||
| Assets: | ||||||||||||||||
| Repurchase agreements | $ | 420,838 | $ | — | $ | 420,838 | $ | — | ||||||||
| Money market | 50,423 | — | 50,423 | — | ||||||||||||
| Certificates of deposit | 7,417 | — | 7,417 | — | ||||||||||||
| Foreign exchange contracts | 39,045 | 10 | 39,035 | — | ||||||||||||
| Total assets | $ | 517,723 | $ | 10 | $ | 517,713 | $ | — | ||||||||
| Cash collateral for foreign exchange contracts | $ | 12,540 | $ | — | $ | — | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Foreign exchange contracts | $ | 26,888 | $ | 67 | $ | 26,821 | $ | — | ||||||||
| Total liabilities | $ | 26,888 | $ | 67 | $ | 26,821 | $ | — | ||||||||
| Cash collateral obligation for foreign exchange contracts | $ | 10,882 | $ | — | $ | — | $ | — |
The Company has highly-liquid investments classified as cash equivalents, with original maturities of 90 days or less, included in our Consolidated Balance Sheets. The Company utilizes Level 2 fair value determinations derived from directly or indirectly observable (market based) information to determine the fair value of these highly liquid investments. The Company has certain cash and cash equivalents that are invested on an overnight basis in repurchase agreements, money markets and certificates of deposit. The value of overnight repurchase agreements is determined based upon the quoted market prices for the treasury securities associated with the repurchase agreements. The value of money market instruments is the net asset value, as these instruments are not tradeable and must be settled directly by us with the respective financial institution. Certificates of deposit are valued at cost, plus interest accrued. Given the short-term nature of these instruments, the carrying value approximates fair value. Foreign exchange derivative contracts are carried at fair value, with changes in fair value recognized in the Consolidated Statements of Income. The fair value of the Company's derivatives are derived with reference to a valuation from a derivatives dealer operating in an active market. The fair value represents the net settlement if the contracts were terminated as of the reporting date. Cash collateral received for foreign exchange derivatives is recorded within customer deposits in our Consolidated Balance Sheet at December 31, 2018. Cash collateral paid for foreign exchange derivatives is recorded within restricted cash in our Consolidated Balance Sheet at December 31, 2018.
The level within the fair value hierarchy and the measurement technique are reviewed quarterly. Transfers between levels are deemed to have occurred at the end of the quarter. There were no transfers between fair value levels during the periods presented for 2018 and 2017.
The Company’s assets that are measured at fair value on a nonrecurring basis and are evaluated with periodic testing for impairment include property, plant and equipment, investments, goodwill and other intangible assets. Estimates of the fair value of assets acquired and liabilities assumed in business combinations are generally developed using key inputs such as management’s projections of cash flows on a held-and-used basis (if applicable), discounted as appropriate, management’s
projections of cash flows upon disposition and discount rates. Accordingly, these fair value measurements are in Level 3 of the fair value hierarchy.
The Company regularly reviews its investments for declines in fair value below cost basis and during the third quarter of 2018, determined that the fair value of its investment in Qui was impaired as a result of a decline in operating results and difficulty in obtaining financing. The Company concluded that this decline in fair value was below cost and recorded a $7.1 million impairment loss in investment loss.
On September 30, 2017, the Company entered into an amended Masternaut Group Holdings Limited ("Masternaut") investment agreement that resulted in the loss of significant influence, and the Company began accounting for the Masternaut investment by applying the cost method. The Company determined that the carrying value of its investment exceeded its fair value, and concluded that this decline in value was other than temporary during the third quarter of 2017. The Company recorded a $44.6 million impairment loss in the Masternaut investment that includes adjustment for $31.4 million of currency losses previously recognized in accumulated other comprehensive income, in the year ended December 31, 2017, in the accompanying Consolidated Statements of Income. During the fourth quarter of 2016, the Company determined that the performance improvement initiatives in its investment in Masternaut were taking longer to and were more challenging to implement than originally projected, based on revised cash flow projections provided by the business. As a result, the Company recorded a $36.1 million non-cash impairment charge in its Masternaut investment for 2016.
The fair value of the Company’s cash, accounts receivable, securitized accounts receivable and related facility, prepaid expenses and other current assets, accounts payable, accrued expenses, customer deposits and short-term borrowings approximate their respective carrying values due to the short-term maturities of the instruments. The carrying value of the Company’s debt obligations approximates fair value as the interest rates on the debt are variable market based interest rates that reset on a quarterly basis. These are each Level 2 fair value measurements, except for cash, which is a Level 1 fair value measurement.
- Stockholders' Equity
On February 4, 2016, the Company's Board of Directors approved a stock repurchase program (the "Program") under which the Company may purchase up to an aggregate of $500 million of its common stock over the following 18 months period. On July 27, 2017, the Company's Board of Directors authorized an increase in the size of the Program by an additional $250 million and an extension of the Program by an additional 18 months. On November 1, 2017, the Company announced that its Board of Directors had authorized an increase in the size of the Program by an additional $350 million and on July 17, 2018, its Board of Directors authorized an additional increase of $500 million in the size of the Program. On January 23, 2019, the Company's Board of Directors authorized an increase in the size of the program by an additional $500 million, resulting in total aggregate repurchases authorized under the Program of $2.1 billion. With the increase and giving effect to the Company's $1.5 billion of previous repurchases, the Company may repurchase up to $551 million in shares of its 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 the Company may possess. Any repurchases have been and are expected to be funded by a combination of available cash flow from the business, working capital and debt.
On August 3, 2017, as part of the Program, the Company entered an Accelerated Share Repurchase ("ASR") agreement ("2017 ASR Agreement") with a third-party financial institution to repurchase $250 million of its common stock. Pursuant to the 2017 ASR Agreement, the Company delivered $250 million in cash and received 1,491,647 shares based on a stock price of $142.46 on August 7, 2017. The 2017 ASR Agreement was completed on September 7, 2017, at which time the Company received 263,012 additional shares based on a final weighted average per share purchase price during the repurchase period of $142.48.
On December 14, 2018, as part of the Program, the Company entered an ASR agreement ("2018 ASR Agreement") with a third-party financial institution to repurchase $220 million of its common stock. Pursuant to the 2018 ASR Agreement, the Company 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 the Company received 117,751 additional shares based on a final weighted average per share purchase price during the repurchase period of $187.27.
The Company accounted for the 2017 and 2018 ASR Agreements as two separate transactions: (i) as shares of reacquired common stock for the shares delivered to the Company upon effectiveness of each ASR agreement and (ii) as a forward contract indexed to the Company's common stock for the undelivered shares. The initial delivery of shares was included in treasury stock at cost and results in an immediate reduction of the outstanding shares used to calculate the weighted average common shares outstanding for basic and diluted earnings per share. The forward contracts indexed to the Company's own common stock met the criteria for equity classification, and these amounts were initially recorded in additional paid-in capital.
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.
- Stock Based Compensation
The Company accounts for stock-based compensation pursuant to relevant authoritative guidance, which requires measurement of compensation cost for all stock awards at fair value on the date of grant and recognition of compensation, net of estimated forfeitures, over the requisite service period for awards expected to vest. The Company has Stock Incentive Plans (the Plans) pursuant to which the Company’s board of directors may grant stock options or restricted stock to employees. The Company is authorized to issue grants of restricted stock and stock options to purchase up to 30,463,150 shares for the year ended December 31, 2018 and 26,963,150 shares for the years ended December 31, 2017 and 2016, respectively.
On February 7, 2018, the stockholders of the Company approved the FleetCor Technologies, Inc. Amended and Restated 2010 Equity Incentive Plan (the "Amended Plan"). The Amended Plan was authorized and approved by the Company's Board of Directors on December 20, 2017, and Company's stockholders at a special meeting held on February 7, 2018. The Amended Plan amends the Registrant’s existing 2010 Equity Incentive Plan (as amended, the "Prior Plan") to, among other things, increase the number of shares of common stock available for issuance from 13,250,000 to 16,750,000 and make certain other amendments to the Prior Plan. Giving effect to this increase, there were 3,422,052 additional shares remaining available for grant under the Plans at December 31, 2018.
The table below summarizes the expense recognized within general and administrative expenses in the Consolidated Statements of Income related to share-based payments recognized for the years ended December 31 (in thousands):
| 2018 | 2017 | 2016 | ||||||||||
| Stock options | $ | 43,443 | $ | 56,400 | $ | 35,234 | ||||||
| Restricted stock | 26,496 | 36,897 | 28,712 | |||||||||
| Stock-based compensation | $ | 69,939 | $ | 93,297 | $ | 63,946 |
The tax benefits recorded on stock based compensation were $37.3 million, $48.6 million and $35.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The following table summarizes the Company’s total unrecognized compensation cost related to stock-based compensation as of December 31, 2018 (cost in thousands):
| Unrecognized Compensation Cost | Weighted Average Period of Expense Recognition (in Years) | |||||
| Stock options | $ | 56,281 | 1.28 | |||
| Restricted stock | 4,400 | 0.45 | ||||
| Total | $ | 60,681 |
Stock Options
The following summarizes the changes in the number of shares of common stock under option for the following periods (shares and aggregate intrinsic value in thousands):
| Shares | Weighted Average Exercise Price | Options Exercisable at End of Year | Weighted Average Exercise Price of Exercisable Options | Weighted Average Fair Value of Options Granted During the Year | Aggregate Intrinsic Value | |||||||||||||||||
| Outstanding at December 31, 2015 | 5,003 | $ | 72.72 | 2,545 | $ | 26.82 | $ | 351,277 | ||||||||||||||
| Granted | 1,780 | 133.33 | $ | 28.61 | ||||||||||||||||||
| Exercised | (500 | ) | 42.36 | 49,592 | ||||||||||||||||||
| Forfeited | (137 | ) | 140.67 | |||||||||||||||||||
| Outstanding at December 31, 2016 | 6,146 | 91.20 | 3,429 | 55.00 | 309,238 | |||||||||||||||||
| Granted | 2,885 | 145.35 | $ | 32.57 | ||||||||||||||||||
| Exercised | (633 | ) | 71.43 | 76,546 | ||||||||||||||||||
| Forfeited | (367 | ) | 144.51 | |||||||||||||||||||
| Outstanding at December 31, 2017 | 8,031 | 109.78 | 4,029 | 75.80 | 663,815 | |||||||||||||||||
| Granted | 412 | 204.59 | $ | 50.07 | ||||||||||||||||||
| Exercised | (708 | ) | 73.26 | 79,588 | ||||||||||||||||||
| Forfeited | (119 | ) | 155.41 | |||||||||||||||||||
| Outstanding at December 31, 2018 | 7,616 | $ | 117.58 | 5,174 | $ | 98.39 | $ | 518,954 | ||||||||||||||
| Expected to vest at December 31, 2018 | 7,616 | $ | 117.58 |
The following table summarizes information about stock options outstanding at December 31, 2018 (shares in thousands):
| Exercise Price | Options Outstanding | Weighted Average Remaining Vesting Life in Years | Options Exercisable | |||||
| $10.00 – $40.65 | 1,874 | 0.00 | 1,874 | |||||
| 87.61 – 138.47 | 1,868 | 0.18 | 1,428 | |||||
| 140.23 – 150.74 | 2,534 | 0.92 | 1,430 | |||||
| 151.16 – 156.04 | 519 | 0.71 | 326 | |||||
| 165.96 – 174.35 | 424 | 2.11 | 108 | |||||
| 199.75 – 206.73 | 289 | 3.01 | — | |||||
| 209.05 – 216.18 | 108 | 2.97 | 8 | |||||
| 7,616 | 5,174 |
The aggregate intrinsic value of stock options exercisable at December 31, 2018 was $451.9 million. The weighted average remaining contractual term of options exercisable at December 31, 2018 was 5.3 years.
The fair value of stock option awards granted was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions for grants or modifications during the years ended December 31 as follows:
| 2018 | 2017 | 2016 | |||||||
| Risk-free interest rate | 2.57 | % | 1.65 | % | 1.08 | % | |||
| Dividend yield | — | — | — | ||||||
| Expected volatility | 26.92 | % | 28.00 | % | 27.29 | % | |||
| Expected life (in years) | 3.8 | 3.4 | 3.5 |
The weighted-average remaining contractual life for options outstanding was 6.3 years at December 31, 2018.
Restricted Stock
There were no restricted stock shares granted with market based vesting conditions in 2018, 2017, and 2016. The following table summarizes the changes in the number of shares of restricted stock and restricted stock units for the following periods (shares in thousands):
| Shares | Weighted Average Grant Date Fair Value | ||||||
| Outstanding at December 31, 2015 | 497 | $ | 149.40 | ||||
| Granted | 152 | 128.90 | |||||
| Cancelled | (41 | ) | 145.25 | ||||
| Issued | (229 | ) | 151.72 | ||||
| Outstanding at December 31, 2016 | 379 | 140.39 | |||||
| Granted | 238 | 141.99 | |||||
| Cancelled | (48 | ) | 152.95 | ||||
| Issued | (204 | ) | 136.85 | ||||
| Outstanding at December 31, 2017 | 365 | 155.58 | |||||
| Granted | 107 | 200.71 | |||||
| Cancelled | (47 | ) | 339.34 | ||||
| Issued | (251 | ) | 154.85 | ||||
| Outstanding at December 31, 2018 | 174 | $ | 190.73 |
- Acquisitions
2018 Acquisitions
During 2018, the Company 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, the Company made investments in other businesses of $17.0 million and payments on a seller note of $1.6 million.
The Company financed the acquisitions using a combination of existing cash and borrowings under its existing credit facility. The accounting for the acquisitions is preliminary as the Company is still completing the valuation of goodwill, intangible assets, income taxes and evaluation of acquired contingencies.
2017 Acquisitions
During 2017, the Company completed acquisitions with an aggregate purchase price of $725.1 million, net of cash acquired of $96.3 million and inclusive of notes payable of $29.3 million. During 2017, the Company made investments in other businesses of $39 million.
Cambridge Global Payments
On August 9, 2017, the Company acquired Cambridge, a leading business to business (B2B) international payments provider, for approximately $616.0 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 the Company's corporate payments footprint. The Company financed the acquisition using a combination of existing cash and borrowings under its existing credit facility. The results from Cambridge are reported in its North America segment. The following table summarizes the acquisition accounting for Cambridge (in thousands):
| Restricted cash | $ | 37,666 | |
| Trade and other receivables | 61,806 | ||
| Prepaid expenses and other current assets | 15,190 | ||
| Property and equipment | 7,106 | ||
| Other long term assets | 10,025 | ||
| Goodwill | 500,212 | ||
| Customer relationships and other identifiable intangible assets | 271,793 | ||
| Liabilities assumed | (197,335 | ) | |
| Deferred tax liabilities | (90,483 | ) | |
| Aggregate purchase price | $ | 615,980 |
The estimated fair value of intangible assets acquired and the related estimated useful lives consisted of the following (in thousands):
| Useful Lives (in Years) | Value | |||
| Banking relationships | 20 | $ | 705 | |
| Trade name and trademarks | Indefinite | 35,110 | ||
| Technology | 5 | 16,039 | ||
| Customer relationships - excluding Accounts Payable Solutions | 7-18 | 178,190 | ||
| Customer relationships - Accounts Payable Solutions | 20 | 41,749 | ||
| $ | 271,793 |
Along with the Company's acquisition of Cambridge, the Company signed noncompete agreements with certain parties with an estimated fair value of $5.8 million. Goodwill recorded is comprised primarily of expected synergies from combining the operations of the Company and Cambridge, as well as assembled workforce.
Other
During 2017, the Company acquired Creative Lodging Solutions ("CLS"), a small lodging tuck-in business, and a fuel card provider in Russia for approximately $109.1 million, net of cash acquired of $1.8 million and inclusive of a note payable of
$5.5 million. The Company financed the acquisitions using a combination of existing cash and borrowings under its existing credit facility.
The following table summarizes the acquisition accounting for the acquisitions (in thousands):
| Trade and other receivables | $ | 38,038 | |
| Prepaid expenses and other | 1,426 | ||
| Property and equipment | 5,745 | ||
| Goodwill | 59,946 | ||
| Other intangible assets | 53,459 | ||
| Liabilities assumed | (32,274 | ) | |
| Deferred tax liabilities | (17,218 | ) | |
| Aggregate purchase prices | $ | 109,122 |
The estimated fair value of intangible assets acquired and the related estimated useful lives consisted of the following (in thousands):
| Useful Lives (in Years) | Value | |||
| Trade name and trademarks | 1 | $ | 180 | |
| Technology | 4 | 1,750 | ||
| Customer relationships | 8-10 | 51,529 | ||
| $ | 53,459 |
Along with the Company's acquisition of CLS, the Company signed noncompete agreements with certain parties with an estimated fair value of $3.9 million.
- Goodwill and Other Intangible Assets
A summary of changes in the Company’s goodwill by reportable segment is as follows (in thousands):
| December 31, 2017 | Acquisitions | Acquisition Accounting Adjustments | Foreign Currency | December 31, 2018 | ||||||||||||||||
| Segment | ||||||||||||||||||||
| North America | $ | 3,084,123 | $ | 16,184 | $ | 4,036 | $ | (16,468 | ) | $ | 3,087,875 | |||||||||
| International | 1,631,700 | — | 20 | (177,521 | ) | 1,454,199 | ||||||||||||||
| $ | 4,715,823 | $ | 16,184 | $ | 4,056 | $ | (193,989 | ) | $ | 4,542,074 |
| December 31, 2016 | Acquisitions | Dispositions | Acquisition Accounting Adjustments | Foreign Currency | December 31, 2017 | |||||||||||||||||||
| Segment | ||||||||||||||||||||||||
| North America | $ | 2,640,409 | $ | 534,777 | $ | (92,046 | ) | $ | — | $ | 983 | $ | 3,084,123 | |||||||||||
| International | 1,554,741 | 21,325 | — | 3,752 | 51,882 | 1,631,700 | ||||||||||||||||||
| $ | 4,195,150 | $ | 556,102 | $ | (92,046 | ) | $ | 3,752 | $ | 52,865 | $ | 4,715,823 |
At December 31, 2018 and 2017, approximately $882.3 million and $988.0 million of the Company’s goodwill is deductible for tax purposes, respectively. Acquisition accounting adjustments recorded in 2018 and 2017 are a result of the Company completing its acquisition accounting and working capital adjustments for certain prior year acquisitions.
Other intangible assets consisted of the following at December 31 (in thousands):
| 2018 | 2017 | |||||||||||||||||||||||||
| Weighted- Avg Useful Life (Years) | Gross Carrying Amounts | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amounts | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||||
| Customer and vendor agreements | 17.1 | $ | 2,625,270 | $ | (776,383 | ) | $ | 1,848,887 | $ | 2,698,428 | $ | (605,347 | ) | $ | 2,093,081 | |||||||||||
| Trade names and trademarks—indefinite lived | N/A | 479,555 | — | 479,555 | 499,587 | — | 499,587 | |||||||||||||||||||
| Trade names and trademarks—other | 13.8 | 2,957 | (2,501 | ) | 456 | 2,986 | (2,207 | ) | 779 | |||||||||||||||||
| Software | 6.0 | 212,733 | (152,416 | ) | 60,317 | 219,019 | (116,654 | ) | 102,365 | |||||||||||||||||
| Non-compete agreements | 4.2 | 47,009 | (28,314 | ) | 18,695 | 48,221 | (19,076 | ) | 29,145 | |||||||||||||||||
| Total other intangibles | $ | 3,367,524 | $ | (959,614 | ) | $ | 2,407,910 | $ | 3,468,241 | $ | (743,284 | ) | $ | 2,724,957 |
Changes in foreign exchange rates resulted in a $117.4 million decrease to the carrying values of other intangible assets in the year ended December 31, 2018. Changes in foreign exchange rates resulted in a $24.2 million increase to the carrying values of other intangible assets in the year ended December 31, 2017. Amortization expense related to intangible assets for the years ended December 31, 2018, 2017 and 2016 was $216.3 million, $211.8 million and $161.6 million, respectively.
The future estimated amortization of intangibles at December 31, 2018 is as follows (in thousands):
| 2019 | $ | 198,491 | ||
| 2020 | 179,005 | |||
| 2021 | 173,111 | |||
| 2022 | 160,403 | |||
| 2023 | 154,375 | |||
| Thereafter | 1,062,970 |
- Property, Plant and Equipment
Property, plant and equipment, net consisted of the following at December 31 (in thousands):
| Estimated Useful Lives (in Years) | 2018 | 2017 | ||||||||
| Computer hardware and software | 3 to 5 | $ | 291,404 | $ | 244,655 | |||||
| Card-reading equipment | 4 to 6 | 20,117 | 25,462 | |||||||
| Furniture, fixtures, and vehicles | 2 to 10 | 18,308 | 18,846 | |||||||
| Buildings and improvements | 5 to 50 | 21,854 | 21,603 | |||||||
| Property, plant and equipment, gross | 351,683 | 310,566 | ||||||||
| Less: accumulated depreciation | (165,482 | ) | (130,509 | ) | ||||||
| Property, plant and equipment, net | $ | 186,201 | $ | 180,057 |
Depreciation expense related to property and equipment for the years ended December 31, 2018, 2017, and 2016 was $52.9 million, $46.6 million and $36.5 million, respectively. Depreciation expense includes $24.2 million, $21.8 million and $17.7 million for capitalized computer software costs for the years ended December 31, 2018, 2017 and 2016, respectively. At December 31, 2018 and 2017, the Company had unamortized computer software costs of $86.5 million and $75.8 million, respectively.
During 2018, the Company recorded a write-off of $8.7 million of capitalized software costs within other operating expense, net within its Consolidated Statements of Income.
- Accrued Expenses
Accrued expenses consisted of the following at December 31 (in thousands):
| 2018 | 2017 | |||||||
| Accrued bonuses | $ | 20,553 | $ | 15,119 | ||||
| Accrued payroll and severance | 15,932 | 18,500 | ||||||
| Accrued taxes | 85,346 | 63,698 | ||||||
| Accrued commissions/rebates | 60,593 | 47,198 | ||||||
| Other | 79,170 | 93,957 | ||||||
| $ | 261,594 | $ | 238,472 |
- Debt
The Company’s debt instruments at December 31 consist primarily of term notes, revolving lines of credit and a Securitization Facility as follows (in thousands):
| 2018 | 2017 | |||||||
| Term Loan A note payable (a), net of discounts | $ | 2,515,519 | $ | 2,646,255 | ||||
| Term Loan B note payable (a), net of discounts | 344,180 | 347,412 | ||||||
| Revolving line of credit A Facility(a) | 655,000 | 635,000 | ||||||
| Revolving line of credit B Facility(a) | 345,446 | 28,334 | ||||||
| Revolving line of credit C Facility(a) | 35,000 | — | ||||||
| Revolving line of credit B Facility —foreign swing line(a) | — | 6,879 | ||||||
| Other debt(c) | 37,902 | 43,736 | ||||||
| Total notes payable and other obligations | 3,933,047 | 3,707,616 | ||||||
| Securitization Facility(b) | 886,000 | 811,000 | ||||||
| Total notes payable, credit agreements and Securitization Facility | $ | 4,819,047 | $ | 4,518,616 | ||||
| Current portion | $ | 2,070,616 | $ | 1,616,512 | ||||
| Long-term portion | 2,748,431 | 2,902,104 | ||||||
| Total notes payable, credit agreements and Securitization Facility | $ | 4,819,047 | $ | 4,518,616 |
| (a) | The Company has a Credit Agreement, which has been amended multiple times and 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 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 foreign 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 includes 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 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 US 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 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. Principal payments of $498.3 million were made on the term loans during 2018.
| (b) | The Company is party to a $1.2 billion receivables purchase agreement (Securitization Facility) that was amended on August 30, 2018. 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. The Company has unamortized debt issuance costs of $1.3 million related to the Securitization Facility as of December 31, 2018 recorded within other assets in the consolidated balance sheet. |
The Securitization Facility provides for certain termination events, which includes nonpayment, upon the occurrence of which the administrator may declare the facility termination date to have occurred, may exercise certain enforcement rights with respect to the receivables, and may appoint a successor servicer, among other things.
| (c) | Other includes the long-term portion of deferred payments associated with business acquisitions, deferred rent and deferred revenue. |
The Company was in compliance with all financial and non-financial covenants at December 31, 2018.
The contractual maturities of the Company’s notes payable and other obligations at December 31, 2018 are as follows (in thousands):
| 2019 | $ | 1,184,616 | ||
| 2020 | 138,784 | |||
| 2021 | 128,236 | |||
| 2022 | 128,357 | |||
| 2023 | 2,022,265 | |||
| Thereafter | 330,789 |
- Income Taxes
Income before the provision for income taxes is attributable to the following jurisdictions for years ended December 31 (in thousands) :
| 2018 | 2017 | 2016 | ||||||||||
| United States | $ | 622,214 | $ | 524,669 | $ | 383,427 | ||||||
| Foreign | 472,911 | 368,921 | 259,492 | |||||||||
| Total | $ | 1,095,125 | $ | 893,590 | $ | 642,919 |
The provision for income taxes for the years ended December 31 consists of the following (in thousands):
| 2018 | 2017 | 2016 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 165,303 | $ | 303,514 | $ | 147,406 | ||||||
| State | 26,036 | 19,234 | 10,725 | |||||||||
| Foreign | 95,053 | 78,354 | 61,084 | |||||||||
| Total current | 286,392 | 401,102 | 219,215 | |||||||||
| Deferred: | ||||||||||||
| Federal | (19,688 | ) | (255,188 | ) | (18,723 | ) | ||||||
| State | 8,727 | 276 | 1,608 | |||||||||
| Foreign | 8,211 | 7,200 | (11,566 | ) | ||||||||
| Total deferred | (2,750 | ) | (247,712 | ) | (28,681 | ) | ||||||
| Total provision | $ | 283,642 | $ | 153,390 | $ | 190,534 |
The provision for income taxes differs from amounts computed by applying the U.S. federal tax rate of 21% for 2018 and 35%, for 2017 and 2016, respectively, to income before income taxes for the years ended December 31, 2018, 2017 and 2016 due to the following (in thousands):
| 2018 | 2017 | 2016 | |||||||||||||||||||
| Computed “expected” tax expense | $ | 229,976 | 21.0 | % | $ | 312,756 | 35.0 | % | $ | 225,022 | 35.0 | % | |||||||||
| Changes resulting from: | |||||||||||||||||||||
| Change in valuation allowance | 25,193 | 2.8 | 18,289 | 2.0 | 11,952 | 1.9 | |||||||||||||||
| Foreign income tax differential | 9,921 | 0.9 | (38,695 | ) | (4.3 | ) | (25,533 | ) | (4.0 | ) | |||||||||||
| State taxes net of federal benefits | 20,480 | 1.9 | 12,884 | 1.4 | 9,439 | 1.5 | |||||||||||||||
| Foreign-sourced nontaxable income | (28,861 | ) | (2.6 | ) | (8,836 | ) | (1.0 | ) | (13,659 | ) | (1.2 | ) | |||||||||
| Foreign Withholding Tax | 20,569 | 1.9 | 9,362 | 1.0 | 5,698 | — | |||||||||||||||
| IRC Section 199 deduction | — | — | (8,844 | ) | (1.0 | ) | (7,731 | ) | (1.2 | ) | |||||||||||
| Excess Tax Benefits Related to Stock-Based Compensation | (19,255 | ) | (1.8 | ) | (18,058 | ) | (2.0 | ) | (11,974 | ) | (1.9 | ) | |||||||||
| Impact of the Tax Act: | |||||||||||||||||||||
| One-Time Transition Tax | — | — | 195,779 | 21.9 | — | — | |||||||||||||||
| Foreign Tax Credit - One-Time Transition Tax | 17,385 | 1.6 | (113,955 | ) | (12.8 | ) | — | — | |||||||||||||
| Deferred Tax Effects | 7,128 | 0.1 | (209,965 | ) | (23.5 | ) | — | — | |||||||||||||
| Sub-part F Income/GILTI | 40,200 | 3.7 | 3,741 | 0.4 | — | — | |||||||||||||||
| Foreign Tax Credits | (52,095 | ) | (4.8 | ) | — | — | — | — | |||||||||||||
| Other | 13,001 | 1.2 | (1,068 | ) | 0.1 | (2,680 | ) | (0.4 | ) | ||||||||||||
| Provision for income taxes | $ | 283,642 | 25.9 | % | $ | 153,390 | 17.2 | % | $ | 190,534 | 29.7 | % |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31 are as follows (in thousands):
| 2018 | 2017 | |||||||
| Deferred tax assets: | ||||||||
| Accounts receivable, principally due to the allowance for doubtful accounts | $ | 8,518 | $ | 6,752 | ||||
| Accrued expenses not currently deductible for tax | 6,734 | 442 | ||||||
| Stock based compensation | 40,081 | 37,274 | ||||||
| Income tax credits | 26,770 | 376 | ||||||
| Net operating loss carry forwards | 53,221 | 41,168 | ||||||
| Investments | 39,062 | 37,804 | ||||||
| Accrued escheat | 3,608 | 4,768 | ||||||
| Other | 4,240 | 12,604 | ||||||
| Deferred tax assets before valuation allowance | 182,234 | 141,188 | ||||||
| Valuation allowance | (90,366 | ) | (59,349 | ) | ||||
| Deferred tax assets, net | 91,868 | 81,839 | ||||||
| Deferred tax liabilities: | ||||||||
| Intangibles—including goodwill | (483,361 | ) | (508,958 | ) | ||||
| Basis difference in investment in foreign subsidiaries | (38,200 | ) | (39,287 | ) | ||||
| Property and equipment, prepaid expenses and other | (59,101 | ) | (50,705 | ) | ||||
| Deferred tax liabilities | (580,662 | ) | (598,950 | ) | ||||
| Net deferred tax liabilities | $ | (488,794 | ) | $ | (517,111 | ) |
The Company’s deferred tax balances are classified in its balance sheets as of December 31 as follows (in thousands):
| 2018 | 2017 | |||||||
| Long term deferred tax assets and liabilities: | ||||||||
| Long term deferred tax assets | $ | 3,152 | $ | 1,801 | ||||
| Long term deferred tax liabilities | (491,946 | ) | (518,912 | ) | ||||
| Net deferred tax liabilities | $ | (488,794 | ) | $ | (517,111 | ) |
The valuation allowance for deferred tax assets changed during 2018 as follows (in thousands):
| Balance at December 31, 2015 | $ | 62,605 | ||
| Additions | 13,790 | |||
| Balance at December 31, 2016 | 76,395 | |||
| Additions | 5,332 | |||
| Reduction in valuation allowance due to rate change from Tax Act | (22,378 | ) | ||
| Balance at December 31, 2017 | 59,349 | |||
| Additions based on changes in deferred tax assets | 25,193 | |||
| Increase in valuation allowance due to rate change from Tax Act | 5,824 | |||
| Balance at December 31, 2018 | $ | 90,366 |
The valuation allowances relate to basis differences in cost method investments, capital loss carryforwards, income tax credits, foreign net operating loss carryforwards and state net operating loss carryforwards. The net change in the total valuation allowance for the year ended December 31, 2018 was an increase of $25.2 million. The valuation increase from the prior year was primarily due to foreign tax credits generated in Luxembourg due to the payment of various withholding taxes outside of Luxembourg. The decrease in 2017 was primarily due to changes in the Company's deferred tax asset related to basis differences in an equity method investment. The increase in 2016 was primarily due to changes in the Company's deferred tax asset related to basis differences in a cost method investment.
As of December 31, 2018, the Company had a net operating loss carryforward for state income tax purposes of approximately $552.4 million that is available to offset future state taxable income through 2029. Additionally, the Company had $68.9
million net operating loss carryforwards for foreign income tax purposes that are available to offset future foreign taxable income. The foreign net operating loss carryforwards will not expire in future years. The Company has provided a valuation allowance against $416.7 million of the net operating losses as it does not anticipate utilizing the losses in the foreseeable future.
During 2018 and 2017, the Company had recorded accrued interest and penalties related to the unrecognized tax benefits of $1.5 million and $1.3 million, respectively.
A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits including interest and penalties for the years ended December 31, 2018, 2017 and 2016 is as follows (in thousands):
| Unrecognized tax benefits at December 31, 2015 | $ | 21,834 | ||
| Additions based on tax provisions related to the current year | 3,332 | |||
| Additions based on tax provisions related to the prior year | 2,496 | |||
| Deductions based on settlement/expiration of prior year tax positions | (1,507 | ) | ||
| Unrecognized tax benefits at December 31, 2016 | 26,155 | |||
| Additions based on tax provisions related to the current year | 4,143 | |||
| Additions for tax positions due to acquisitions | 9,208 | |||
| Additions based on tax provisions related to the prior year | 1,171 | |||
| Deductions based on settlement/expiration of prior year tax positions | (9,119 | ) | ||
| Unrecognized tax benefits at December 31, 2017 | 31,558 | |||
| Additions based on tax provisions related to the current year | 3,755 | |||
| Additions based on tax provisions related to the prior year | 3,000 | |||
| Deductions based on settlement/expiration of prior year tax positions | (4,161 | ) | ||
| Unrecognized tax benefits at December 31, 2018 | $ | 34,152 |
As of December 31, 2018, the Company had total unrecognized tax benefits of $34.2 million all of which, if recognized, would affect its effective tax rate. It is not anticipated that there are any unrecognized tax benefits that will significantly increase or decrease within the next twelve months.
The Company files numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The statute of limitations for the Company’s U.S. federal income tax returns has expired for years prior to 2011. The statute of limitations for the Company’s U.K. income tax returns has expired for years prior to 2016. The statute of limitations has expired for years prior to 2015 for the Company’s Czech Republic income tax returns, 2015 for the Company’s Russian income tax returns, 2013 for the Company’s Mexican income tax returns, 2013 for the Company’s Brazilian income tax returns, 2013 for the Company’s Luxembourg income tax returns, 2014 for the Company’s New Zealand income tax returns, and 2016 for the Company’s Australian income tax returns.
Tax Act
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act introduced significant changes to U.S. income tax law. The following changes resulted from the Tax Act: (1) reduced the U.S. federal corporate tax rate from 35 percent to 21 percent; (2) required companies to pay a one-time Deemed Repatriation Transition Tax (“Transition Tax”) on certain unrepatriated earnings of foreign subsidiaries that can be paid over eight years; (3) introduced a new tax designed to tax global intangible low-taxed income (GILTI), which allows for the possibility of using foreign tax credits (FTCs) and a deduction of up to 50 percent to offset the income tax liability (subject to some limitations); (4) repealed the domestic production activity deduction beginning January 1, 2018; (5) added new limitations on the deductibility of certain executive compensation; and (6) added a new limitation on the deduction of interest expense beginning January 1, 2018.
The SEC staff issued SAB 118 on December 22, 2017, which allowed companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Due to the timing of the enactment and the complexity involved in applying the provisions of the Tax Act, the Company made reasonable estimates of the effects and recorded provisional amounts in its consolidated financial statements as of December 31, 2017 in accordance with SAB 118. As the Company collected and prepared necessary data, and interpreted the additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, the Company made adjustments, over the course of the year to the
provisional amounts including refinements to deferred taxes. The accounting for the tax effects of the Tax Act has been completed as of December 31, 2018.
The Company 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 Company recognized the following measurement period adjustments to the provisional amount included in 2017.
One-time Transition Tax
The Tax Act required the Company to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. The Company recorded a provisional amount for its one-time transitional tax liability of $81.8 million as of December 31, 2017. After the adjustments recognized during 2018, the provisional amount for the Company's one-time transition tax liability and income tax expense was $99.2 million, which represented its final transition tax liability. The increase to the transition tax was primarily the result of the Company's final foreign tax pools being lower than its estimated foreign tax pools, resulting in a decrease to utilized foreign tax credits. There were no other changes made to the one-time transition tax in 2018.
On January 15, 2019, the IRS finalized regulations that govern the transition tax. The Company is in the process of analyzing these regulations. The Company does not expect any material impact to its financial statements as a consequence of the final regulations.
Deferred Tax Effects
Due to the change in the statutory tax rate from the Tax Act, the Company remeasured its deferred taxes as of December 31, 2017 to reflect the reduced rate that will apply in future periods when these deferred taxes are settled or realized. The Company 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.
The Company has not recorded incremental income taxes for any additional outside basis differences of approximately $1.5 billion in its investments in foreign subsidiaries, as these amounts continue to be indefinitely reinvested in foreign operations. Determining the amount of unrecognized deferred tax liability related to any additional outside basis differences in these entities is not practicable.
Executive Compensation under Sec. 162(m)
The Tax Act repeals the exceptions to the section 162(m) deduction limitation for commissions and performance-based compensation. The Tax Act provides a transition rule which states that the expansion of section 162(m) does not apply to any remuneration paid under a written, binding contract in effect on November 2, 2017, which was not materially modified on or after this date. The Tax Act did not specifically define the criteria for a binding contract and no further guidance was provided on this topic during the tax year ended December 31, 2017. Additional guidance in the form of IRS Notice 2018-68 was received during the year ended December 31, 2018. Based on analysis of IRS Notice 2018-68, the Company determined there would be no impact to the 162(m) calculation for share-based awards granted prior to November 2, 2017. The Company has determined the calculation to be complete and no change was made during the measurement period.
Global Intangible Low Taxed Income (GILTI)
The U.S. tax law changes created new rules that allow the Company to make an accounting policy election to treat taxes due on GILTI inclusions in taxable income as either a current period expense or reflect such inclusions related to temporary basis differences in the Company’s measurement of deferred taxes. The Company has elected to treat the GILTI inclusion as a current period expense. The Company recorded tax expense related to GILTI, net of allowable foreign tax credits, of $10.2 million for the tax year ended December 31, 2018.
- Leases
The Company enters into noncancelable operating lease agreements for equipment, buildings and vehicles. The minimum lease payments for the noncancelable operating lease agreements are as follows (in thousands):
| 2019 | $ | 19,678 | ||
| 2020 | 16,658 | |||
| 2021 | 14,823 | |||
| 2022 | 11,733 | |||
| 2023 | 11,017 | |||
| Thereafter | 24,374 |
Rent expense for noncancelable operating leases approximated $22.4 million, $18.4 million and $15.1 million for the years ended December 31, 2018, 2017 and 2016, respectively. The leases are generally renewable at the Company’s option for periods of one to five years.
- Commitments and Contingencies
In the ordinary course of business, the Company is involved in various pending or threatened legal actions, arbitration proceedings, claims, subpoenas, and matters relating to compliance with laws and regulations (collectively, legal proceedings). Based on our current knowledge, management presently does not believe that the liabilities arising from these legal proceedings will have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, it is possible that the ultimate resolution of these legal proceedings could have a material adverse effect on our results of operations and financial condition for any particular period.
Shareholder Class Action and Derivative Lawsuits
On June 14, 2017, a shareholder filed a class action complaint in the United States District Court for the Northern District of Georgia against the Company and certain of its officers and directors on behalf of all persons who purchased or otherwise acquired the Company’s stock between February 5, 2016 and May 2, 2017. On October 13, 2017, the shareholder filed an amended complaint asserting claims on behalf of a putative class of all persons who purchased or otherwise acquired the Company's common stock between February 4, 2016 and May 3, 2017. The complaint alleges that the defendants made false or misleading statements regarding fee charges and the reasons for its earnings and growth in certain press releases and other public statements in violation of the federal securities laws. Plaintiff seeks class certification, unspecified monetary damages, costs, and attorneys’ fees. The Company disputes the allegations in the complaint and intends to vigorously defend against the claims.
On July 10, 2017, a shareholder derivative complaint was filed against the Company and certain of the Company’s directors and officers in the United States District Court for the Northern District of Georgia seeking recovery on behalf of the Company. The derivative complaint alleges that the defendants issued a false and misleading proxy statement in violation of the federal securities laws; that defendants breached their fiduciary duties by causing or permitting the Company to make allegedly false and misleading public statements concerning the Company’s fee charges, and financial and business prospects; and that certain defendants breached their fiduciary duties through allegedly improper sales of stock. The complaint seeks unspecified monetary damages on behalf of the Company, corporate governance reforms, disgorgement of profits, benefits and compensation by the defendants, restitution, costs, and attorneys’ and experts’ fees. On September 20, 2018, the court entered an order deferring the case pending a ruling on the parties’ anticipated motions for summary judgment in the putative shareholder class action, or until otherwise agreed to by the parties. On January 9, 2019, a similar shareholder derivative complaint was filed in the Superior Court of Gwinnett County, Georgia. The defendants dispute the allegations in the derivative complaints and intend to vigorously defend against the claims.
On February 1, 2019, Schultz Transfer Systems, Inc. filed a complaint against Fleetcor Technologies Operating Company, LLC (“Fleetcor LLC”) in the United States District Court for the Northern District of Georgia. The plaintiff alleges that it is a Fleetcor LLC customer and member of the Fuelman program, and that Fleetcor LLC overcharged the plaintiff for fees and fuel through the Fuelman program. Based on these allegations, the plaintiff asserts claims for breach of contract, breach of the covenant of good faith and fair dealing, fraud, fraudulent concealment, money had and received, and unjust enrichment. The plaintiff seeks to represent a class defined as all persons, including corporate entities, who were enrolled in the Fuelman program between June 2016 and the present. Fleetcor LLC’s response to the complaint is not yet due. Fleetcor LLC disputes the allegations in the complaint and intends to defend itself vigorously against these claims.
Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we are currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from the matters described above.
- Dispositions
Chevron Portfolio
The Company completed the sale of the Chevron customer portfolio to WEX inc. 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. The asset was previously reported within the Company's North America segment.
Telematics Businesses
As part of the Company's plan to exit the telematics business, on July 27, 2017, the Company sold NexTraq, a U.S. fleet telematics business, to Michelin Group for $316.5 million. The Company recorded a pre-tax gain on the disposal of NexTraq of $175.0 million during the third quarter of 2017, which is net of transaction closing costs. The Company recorded tax on the gain of disposal of $65.8 million. The gain on the disposal is included in other (income) expense, net in the accompanying Consolidated Statements of Income. NexTraq had historically been included in the Company's North America segment.
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.
- Derivative Financial Instruments
The Company uses derivatives to facilitate cross-currency corporate payments by writing derivatives to customers. As a result of the Cambridge acquisition during 2017, the Company writes derivatives, primarily foreign currency forward contracts, option contracts, and swaps, mostly with small and medium size enterprises that are customers and derives a currency spread from this activity.
Derivative transactions associated with the Company's Cambridge business include:
| • | Forward contracts, which are commitments to buy or sell at a future date a currency at a contract price and will be settled in cash. |
| • | Option contracts, which gives the purchaser, the right, but not the obligation to buy or sell within a specified time a currency at a contracted price that may be settled in cash. |
| • | Swap contracts, which are commitments to settlement in cash at a future date or dates, usually on an overnight basis. |
The credit risk inherent in derivative agreements represents the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. The Company performs a review of the credit risk of these counterparties at the inception of the contract and on an ongoing basis. The Company also monitors the concentration of its contracts with any individual counterparty against limits at the individual counterparty level. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements, but takes action when doubt arises about the counterparties' ability to perform. These actions may include requiring customers to post or increase collateral, and for all counterparties, the possible termination of the related contracts. The Company does not designate any of its foreign exchange derivatives as hedging instruments in accordance with ASC 815.
The aggregate equivalent U.S. dollar notional amount of foreign exchange derivative customer contracts held by the Company as of December 31, 2018 and 2017 (in millions) is presented in the table below. Notional amounts do not reflect the netting of offsetting trades, although these offsetting positions may result in minimal overall market risk. Aggregate derivative notional amounts can fluctuate from period to period in the normal course of business based on market conditions, levels of customer activity and other factors.
| Net Notional | |||||||
| 2018 | 2017 | ||||||
| Foreign exchange contracts: | |||||||
| Swaps | $ | 929.5 | $ | 515.4 | |||
| Futures, forwards and spot | 3,249.9 | 3,274.5 | |||||
| Written options | 3,688.8 | 2,934.2 | |||||
| Purchased options | 2,867.2 | 2,314.1 | |||||
| Total | $ | 10,735.4 | $ | 9,038.2 |
The majority of customer foreign exchange contracts are written in major currencies such as the U.S. Dollar, Canadian Dollar, British Pound, Euro and Australian Dollar.
The following table summarizes the fair value of derivatives reported in the Consolidated Balance Sheet as of December 31, 2018 and 2017 (in millions):
| December 31, 2018 | Fair Value, Gross | Fair Value, Net | |||||||||||||
| Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | ||||||||||||
| Derivatives - undesignated: | |||||||||||||||
| Foreign exchange contracts | $ | 109.5 | $ | 112.9 | $ | 68.8 | $ | 72.1 | |||||||
| Cash collateral | 9.6 | 73.1 | 9.6 | 73.1 | |||||||||||
| Total net derivative assets and liabilities | $ | 99.9 | $ | 39.8 | $ | 59.2 | $ | (1.0 | ) |
| December 31, 2017 | Fair Value, Gross | Fair Value, Net | |||||||||||||
| Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | ||||||||||||
| Derivatives - undesignated: | |||||||||||||||
| Over the counter | $ | 80.4 | $ | 68.2 | $ | 39.0 | $ | 26.8 | |||||||
| Exchange traded | — | 0.1 | — | 0.1 | |||||||||||
| Foreign exchange contracts | 80.4 | 68.3 | 39.0 | 26.9 | |||||||||||
| Cash collateral | 12.5 | 10.9 | 12.5 | 10.9 | |||||||||||
| Total net derivative assets and liabilities | $ | 67.9 | $ | 57.4 | $ | 26.5 | $ | 16.0 |
The fair values of derivative assets and liabilities associated with contracts that include netting language that the Company believes to be enforceable have been netted to present the Company's net exposure with these counterparties. The Company recognizes all derivative assets, net in prepaid expense and other current assets and all derivative liabilities, net in other current liabilities, both net at the customer level as right of offset exists, in its Consolidated Balance Sheets at their fair value. The gain or loss on the fair value is recognized immediately within revenues, net in the Consolidated Statements of Income. The Company does not offset fair value amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral. At December 31, 2018, $68.8 million derivative assets and $72.1 million derivative liabilities were recorded in other current assets and other current liabilities, respectively, in the Consolidated Balance Sheet. At December 31, 2017, $39.0 million derivative assets and $26.9 million derivative liabilities were recorded in other current assets and other current liabilities, respectively, in the Consolidated Balance Sheet. The Company receives cash from customers as collateral for trade exposures, which is recorded within restricted cash and customer deposits in the Consolidated Balance Sheet. The customer has the right to recall their collateral in the event exposures move in their favor, they unwind all outstanding trades or they cease to do business with the Company.
- Earnings Per Share
The Company reports basic and diluted earnings per share. Basic earnings per share is computed by dividing net income attributable to shareholders of the Company by the weighted average number of common shares outstanding during the reported period. Diluted earnings per share reflect the potential dilution related to equity-based incentives using the treasury stock method.
The calculation and reconciliation of basic and diluted earnings per share for the years ended December 31 (in thousands, except per share data) follows:
| 2018 | 2017 | 2016 | ||||||||||
| Net income | $ | 811,483 | $ | 740,200 | $ | 452,385 | ||||||
| Denominator for basic earnings per share | 88,750 | 91,129 | 92,597 | |||||||||
| Dilutive securities | 3,401 | 2,465 | 2,616 | |||||||||
| Denominator for diluted earnings per share | 92,151 | 93,594 | 95,213 | |||||||||
| Basic earnings per share | $ | 9.14 | $ | 8.12 | $ | 4.89 | ||||||
| Diluted earnings per share | 8.81 | 7.91 | 4.75 |
Diluted earnings per share for the years ended December 31, 2018, 2017, and 2016 excludes the effect 0.4 million, 0.1 million and 0.4 million shares, respectively, of common stock that may be issued upon the exercise of employee stock options because such effect would be antidilutive. Diluted earnings per share also excludes the effect of 0.1 million, 0.3 million and 0.2 million shares of performance based restricted stock for which the performance criteria have not yet been achieved for the years ended December 31, 2018, 2017 and 2016, respectively.
- Segments
The Company reports information about its operating segments in accordance with the authoritative guidance related to segments. The Company’s reportable segments represent components of the business for which separate financial information is evaluated regularly by the chief operating decision maker in determining how to allocate resources and in assessing performance. The Company operates in two reportable segments, North America and International. There were no inter-segment sales.
The Company’s segment results are as follows as of and for the years ended December 31 (in thousands):
| 20181 | 2017 | 2016 | ||||||||||
| Revenues, net: | ||||||||||||
| North America | $ | 1,571,466 | $ | 1,428,711 | $ | 1,279,102 | ||||||
| International | 862,026 | 820,827 | 552,444 | |||||||||
| $ | 2,433,492 | $ | 2,249,538 | $ | 1,831,546 | |||||||
| Operating income: | ||||||||||||
| North America | $ | 673,867 | $ | 541,598 | $ | 506,414 | ||||||
| International | 416,831 | 342,162 | 247,739 | |||||||||
| $ | 1,090,698 | $ | 883,760 | $ | 754,153 | |||||||
| Depreciation and amortization: | ||||||||||||
| North America | $ | 154,405 | $ | 139,418 | $ | 129,653 | ||||||
| International | 120,204 | 125,142 | 73,603 | |||||||||
| $ | 274,609 | $ | 264,560 | $ | 203,256 | |||||||
| Capital expenditures: | ||||||||||||
| North America | $ | 36,514 | $ | 40,747 | $ | 39,000 | ||||||
| International | 44,873 | 29,346 | 20,011 | |||||||||
| $ | 81,387 | $ | 70,093 | $ | 59,011 | |||||||
| Long-lived assets (excluding goodwill and investments): | ||||||||||||
| North America | $ | 1,799,149 | $ | 1,888,599 | $ | 1,664,224 | ||||||
| International | 942,594 | 1,131,610 | 1,203,465 | |||||||||
| $ | 2,741,743 | $ | 3,020,209 | $ | 2,867,689 |
1Reflects 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 Form 10-K and quarterly reports on Form 10-Q will not be restated to reflect ASC 606.
The table below presents the Company's long-lived assets (excluding goodwill and investments) at December 31 (in thousands).
| 2018 | 2017 | |||||||
| Long-lived assets (excluding goodwill): | ||||||||
| United States (country of domicile) | $ | 1,721,419 | $ | 1,808,043 | ||||
| Brazil | 541,891 | 688,809 | ||||||
| United Kingdom | 274,530 | 294,039 |
No single customer represented more than 10% of the Company’s consolidated revenue in 2018, 2017 and 2016.
- Selected Quarterly Financial Data (Unaudited)
| Fiscal Quarters Year Ended December 31, 2018* | First | Second | Third | Fourth | ||||||||||||
| Revenues, net | $ | 585,500 | $ | 584,985 | $ | 619,586 | $ | 643,422 | ||||||||
| Operating income | 260,087 | 264,783 | 281,090 | 284,738 | ||||||||||||
| Net income | 174,937 | 176,852 | 157,694 | 302,000 | ||||||||||||
| Basic earnings per share | $ | 1.95 | $ | 1.98 | $ | 1.78 | $ | 3.45 | ||||||||
| Diluted earnings per share | 1.88 | 1.91 | 1.71 | 3.33 | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic shares | 89,765 | 89,169 | 88,456 | 87,636 | ||||||||||||
| Diluted shares | 93,250 | 92,702 | 92,081 | 90,703 |
| Fiscal Quarters Year Ended December 31, 2017 | First | Second | Third | Fourth | ||||||||||||
| Revenues, net | $ | 520,433 | $ | 541,237 | $ | 577,877 | $ | 609,991 | ||||||||
| Operating income | 195,068 | 216,043 | 232,637 | 240,012 | ||||||||||||
| Net income | 123,693 | 130,987 | 202,823 | 282,696 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic earnings per share | $ | 1.34 | $ | 1.42 | $ | 2.23 | $ | 3.15 | ||||||||
| Diluted earnings per share | 1.31 | 1.39 | 2.18 | 3.05 | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic shares | 92,108 | 92,013 | 90,751 | 89,676 | ||||||||||||
| Diluted shares | 94,560 | 94,223 | 93,001 | 92,623 |
*2018 quarterly amounts reflect 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. See footnote 2, "Summary of Significant Accounting Policies", in the accompanying notes to the audited consolidated financial statements.
The sum of the quarterly earnings per common share amounts for 2018 and 2017 may not equal the earnings per common share for the 2018 and 2017 due to rounding.
The fourth quarter of 2018 includes: the $152.8 million gain as a result of the sale of the Chevron portfolio, a write-off of capitalized software costs of $8.8 million, a legal settlement of $5.5 million and restructuring costs of $5.0 million.
The fourth quarter of 2017 includes: the provisional net tax benefit of $128.2 million as a result of the Tax Act, an $11 million relating to a legal settlement, a $36.1 million impairment charge related to the Company’s minority investment in Masternaut, partially offset by a $31.8 million decrease in non-cash stock based compensation expense.
- Subsequent Events
Cash Flow Hedges
On January 22, 2019, the Company 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 the Company's variable rate debt, the sole source of which is due to changes in the 1-month LIBOR benchmark interest rate. The Company anticipates 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.
Previous: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK · Next: Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE