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EX-32.2 - EXHIBIT 32.2 - FLEETCOR TECHNOLOGIES INCd34595dex322q32017.htm
EX-32.1 - EXHIBIT 32.1 - FLEETCOR TECHNOLOGIES INCd34595dex321q32017.htm
EX-31.2 - EXHIBIT 31.2 - FLEETCOR TECHNOLOGIES INCd34595dex312q32017.htm
EX-31.1 - EXHIBIT 31.1 - FLEETCOR TECHNOLOGIES INCd34595dex311q32017.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 __________________________________________________________
FORM 10-Q
 __________________________________________________________
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-35004
 __________________________________________________________
FleetCor Technologies, Inc.
(Exact name of registrant as specified in its charter)
 __________________________________________________________
Delaware
 
72-1074903
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
5445 Triangle Parkway, Peachtree Corners, Georgia
 
30092
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (770) 449-0479
 __________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one:)
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Emerging growth company
¨ 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý



Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 31, 2017
Common Stock, $0.001 par value
 
89,560,788
 



FLEETCOR TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
For the Three and Nine Month Periods Ended September 30, 2017
INDEX
 
 
 
Page
PART I—FINANCIAL INFORMATION
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 

i


PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
FleetCor Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
 
 
September 30, 2017
 
December 31, 2016
 
 
(Unaudited)
 
 
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
834,756

 
$
475,018

Restricted cash
 
183,515

 
168,752

Accounts and other receivables (less allowance for doubtful accounts of $47,779 and $32,506 at September 30, 2017 and December 31, 2016)
 
1,456,255

 
1,202,009

Securitized accounts receivable—restricted for securitization investors
 
794,000

 
591,000

Prepaid expenses and other current assets
 
252,975

 
90,914

Total current assets
 
3,521,501


2,527,693

Property and equipment, net
 
168,065

 
142,504

Goodwill
 
4,644,559

 
4,195,150

Other intangibles, net
 
2,876,440

 
2,653,233

Investments
 
33,526

 
36,200

Other assets
 
86,203

 
71,952

Total assets
 
$
11,330,294


$
9,626,732

Liabilities and stockholders’ equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
1,435,585

 
$
1,151,432

Accrued expenses
 
285,841

 
238,812

Customer deposits
 
731,501

 
530,787

Securitization facility
 
794,000

 
591,000

Current portion of notes payable and lines of credit
 
808,507

 
745,506

Other current liabilities
 
117,464

 
38,781

Total current liabilities
 
4,172,898


3,296,318

Notes payable and other obligations, less current portion
 
2,933,976

 
2,521,727

Deferred income taxes
 
742,498

 
668,580

Other noncurrent liabilities
 
50,504

 
56,069

Total noncurrent liabilities
 
3,726,978


3,246,376

Commitments and contingencies (Note 12)
 

 

Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value; 475,000,000 shares authorized; 121,837,990 shares issued and 89,558,913 shares outstanding at September 30, 2017; and 121,259,960 shares issued and 91,836,938 shares outstanding at December 31, 2016
 
122

 
121

Additional paid-in capital
 
2,165,326

 
2,074,094

Retained earnings
 
2,676,224

 
2,218,721

Accumulated other comprehensive loss
 
(466,367
)
 
(666,403
)
Less treasury stock 32,279,077 shares at September 30, 2017 and 29,423,022 shares at December 31, 2016
 
(944,887
)
 
(542,495
)
Total stockholders’ equity
 
3,430,418


3,084,038

Total liabilities and stockholders’ equity
 
$
11,330,294


$
9,626,732

See accompanying notes to unaudited consolidated financial statements.

1


FleetCor Technologies, Inc. and Subsidiaries
Unaudited Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues, net
 
$
577,877

 
$
484,426

 
$
1,639,547

 
$
1,316,593

Expenses:
 
 
 
 
 
 
 
 
Merchant commissions
 
27,687

 
28,214

 
82,690

 
78,755

Processing
 
111,283

 
96,233

 
316,429

 
256,738

Selling
 
45,060

 
34,180

 
122,854

 
92,680

General and administrative
 
92,043

 
77,904

 
275,046

 
209,084

Depreciation and amortization
 
69,156

 
57,084

 
198,731

 
141,848

Other operating, net
 
11

 
(244
)
 
49

 
(690
)
Operating income
 
232,637


191,055

 
643,748


538,178

Investment loss (income)
 
47,766

 
2,744

 
52,497

 
(2,247
)
Other (income) expense, net
 
(175,271
)
 
293

 
(173,626
)
 
1,056

Interest expense, net
 
29,344

 
17,814

 
76,322

 
49,905

Loss on extinguishment of debt
 
3,296

 

 
3,296

 

Total other (income) expense
 
(94,865
)

20,851

 
(41,511
)

48,714

Income before income taxes
 
327,502

 
170,204

 
685,259

 
489,464

Provision for income taxes
 
124,679

 
40,586

 
227,756

 
132,503

Net income
 
$
202,823


$
129,618

 
$
457,503


$
356,961

Basic earnings per share
 
$
2.23

 
$
1.40

 
$
4.99

 
$
3.85

Diluted earnings per share
 
$
2.18

 
$
1.36

 
$
4.87

 
$
3.75

Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic shares
 
90,751

 
92,631

 
91,619

 
92,604

Diluted shares
 
93,001

 
95,307

 
93,923

 
95,204

See accompanying notes to unaudited consolidated financial statements.



2


FleetCor Technologies, Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income
(In Thousands)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
202,823

 
$
129,618

 
$
457,503

 
$
356,961

Other comprehensive (loss) income:
 
 
 
 
 
 
Foreign currency translation gains (losses), net of tax
 
112,301

 
(52,409
)
 
168,655

 
(41,339
)
Reclassification of foreign currency translation loss to investment, net of tax
 
31,381

 

 
31,381

 

Total other comprehensive income (loss)
 
143,682


(52,409
)

200,036


(41,339
)
Total comprehensive income
 
$
346,505


$
77,209


$
657,539


$
315,622

See accompanying notes to unaudited consolidated financial statements.


3


FleetCor Technologies, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(In Thousands)
 
 
Nine Months Ended
September 30,
 
 
2017
 
2016
Operating activities
 
 
 
 
Net income
 
$
457,503

 
$
356,961

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation
 
35,096

 
25,706

Stock-based compensation
 
68,897

 
50,025

Provision for losses on accounts receivable
 
35,949

 
24,512

Amortization of deferred financing costs and discounts
 
5,411

 
5,568

Amortization of intangible assets
 
158,897

 
112,455

Amortization of premium on receivables
 
4,738

 
3,687

Loss on extinguishment of debt
 
3,296

 

Deferred income taxes
 
(38,092
)
 
(23,566
)
Investment loss (income)
 
52,497

 
(2,247
)
Gain on disposition of business
 
(174,984
)
 

Other non-cash operating income
 
(49
)
 
(690
)
Changes in operating assets and liabilities (net of acquisitions and dispositions):
 
 
 
 
Restricted cash
 
(12,105
)
 
(28,744
)
Accounts and other receivables
 
(440,011
)
 
(527,255
)
Prepaid expenses and other current assets
 
(86,648
)
 
(1,291
)
Other assets
 
(15,378
)
 
(9,115
)
Accounts payable, accrued expenses and customer deposits
 
364,473

 
418,280

Net cash provided by operating activities
 
419,490


404,286

Investing activities
 
 
 
 
Acquisitions, net of cash acquired
 
(602,298
)
 
(1,331,079
)
Purchases of property and equipment
 
(49,459
)
 
(41,877
)
Proceeds from disposal of a business
 
316,501

 

Other
 
(6,327
)
 
1,411

Net cash used in investing activities
 
(341,583
)

(1,371,545
)
Financing activities
 
 
 
 
Proceeds from issuance of common stock
 
20,192

 
18,620

Repurchase of common stock
 
(402,392
)
 
(35,492
)
Borrowings on securitization facility, net
 
203,000

 
42,000

Deferred financing costs paid and debt discount
 
(11,230
)
 
(2,272
)
Proceeds from issuance of notes payable
 
780,656

 
600,000

Principal payments on notes payable
 
(388,656
)
 
(85,125
)
Borrowings from revolver – A Facility
 
845,000

 
1,105,107

Payments on revolver – A Facility
 
(804,808
)
 
(670,940
)
Borrowings on swing line of credit, net
 
7,800

 
5,188

Other
 
537

 
(673
)
Net cash used in financing activities
 
250,099


976,413

Effect of foreign currency exchange rates on cash
 
31,732

 
(50,871
)
Net increase (decrease) in cash and cash equivalents
 
359,738

 
(41,717
)
Cash and cash equivalents, beginning of period
 
475,018

 
447,152

Cash and cash equivalents, end of period
 
$
834,756


$
405,435

Supplemental cash flow information
 
 
 
 
Cash paid for interest
 
$
79,144

 
$
48,525

Cash paid for income taxes
 
$
257,349

 
$
79,599


4


See accompanying notes to unaudited consolidated financial statements.

5


FleetCor Technologies, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
September 30, 2017
1. Summary of Significant Accounting Policies
Basis of Presentation
Throughout this report, the terms “our,” “we,” “us,” and the “Company” refers to FleetCor Technologies, Inc. and its subsidiaries. The Company prepared the accompanying interim consolidated financial statements in accordance with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”). The unaudited consolidated financial statements reflect all adjustments considered necessary for fair presentation. These adjustments consist of normal recurring accruals and estimates that impact the carrying value of assets and liabilities. Actual results may differ from these estimates. Operating results for the three and nine month periods ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at the rates of exchange in effect at period-end. The related translation adjustments are made directly to accumulated other comprehensive income. Income and expenses are translated at the average monthly rates of exchange in effect during the period. Gains and losses from foreign currency transactions of these subsidiaries are included in net income. The Company recognized foreign exchange gains of $0.6 million and foreign exchange losses of $0.7 million in the three months ended September 30, 2017 and 2016, respectively, which are recorded within other (income) expense, net in the Unaudited Consolidated Statements of Income. The Company recognized foreign exchange losses of $0.2 million and $1.5 million in the nine month periods ended September 30, 2017 and 2016, respectively.
Derivatives

With its acquisition of Cambridge Global Payments ("Cambridge") in August 2017, the Company uses derivatives to facilitate cross-currency corporate payments by writing derivatives to customers, which are not designated as hedging instruments. The majority of this business' revenue is from exchanges of currency at spot rates, which enable customers to make cross-currency payments. In addition, this business 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 the Unaudited 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 Unaudited Consolidated Statements of Cash Flows.
Adoption of New Accounting Standards
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP and permits the use of either the retrospective or modified retrospective transition method. The update requires significant additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09, as amended by ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," is effective for years beginning after December 15, 2017, including interim periods, with early adoption permitted for years beginning after December 15, 2016. Since the issuance of ASU 2014-09, the FASB has issued additional interpretive guidance, including new accounting standards updates, that clarifies certain points of the standard and modifies certain requirements.

6



The Company has performed a review of the requirements of the new revenue standard and is monitoring the activity of the FASB and the transition resource group as it relates to specific interpretive guidance. The Company established an implementation team to assess the effects of the new revenue standard in a multi-phase approach. In the first phase, the Company is analyzing customer contracts for its most significant contract categories, applied the five-step model of the new standard to each contract category and comparing the results to our current accounting practices. The second phase, which includes quantifying the potential effects identified during the first phase, assessing additional contract categories and principal versus agent considerations, revising accounting policies and considering the effects on related disclosures and/or internal control over financial reporting is ongoing as of the end of the third quarter.

The new standard could change the amount and timing of revenue and expenses to be recognized under certain of our arrangement types. In addition, it could also increase the administrative burden on our operations to account for customer contracts and provide the more expansive required disclosures. More judgment and estimates may be required within the process of applying the requirements of the new standard than are required under existing GAAP, such as identifying performance obligations in contracts, estimating the amount of variable consideration to include in transaction price, allocating transaction price to each separate performance obligation and estimating expected customer lives. The Company has not completed its assessment or quantified the effect the new guidance will have on its consolidated financial statements, related disclosures and/or its internal control over financial reporting. This assessment will occur over the remainder of the calendar year and will include evaluating the application of the principal vs. agent cost to obtain a contract guidance. However, the Company's preliminary view is that the expected amount and timing of revenue to be recognized under ASU 2014-09 for its most significant contract categories, fuel card payments, corporate payments, toll payments, lodging payments and gift cards, will be similar to the amount and timing of revenue recognized under our current accounting practices. The Company also may be required to capitalize additional costs to obtain contracts with customers, and, in some cases, may be required to amortize these costs over a contractual time period. Finally, the Company expects disclosures about its revenues and related customer acquisition costs will be more extensive.

The Company plans to adopt ASU 2014-09, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, on January 1, 2018. The Company will apply the modified retrospective transition method, which would result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to contracts that are not completed at the date of initial application. Under this method, the Company would not restate the prior financial statements presented, therefore the new standard requires the Company to provide additional disclosures of the amount by which each financial statement line item is affected in the current reporting period during 2018, as compared to the guidance that was in effect before the change, and an explanation of the reasons for significant changes, if any.
Accounting for Leases
In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. This ASU also requires disclosures to provide additional information about the amounts recorded in the financial statements. This ASU is effective for the Company for annual periods beginning after December 15, 2018 and interim periods therein. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance for leases that exist or are entered into after the beginning of the earliest comparative period presented. The Company is currently evaluating the impact of ASU 2016-02 on our consolidated financial statements; however, we expect to recognize right of use assets and liabilities for our operating leases in the consolidated balance sheet upon adoption.
Accounting for Breakage
In March 2016, the FASB issued ASU 2016-04, “Liabilities-Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products”, which requires entities that sell prepaid stored value products redeemable for goods, services or cash at third-party merchants to derecognize liabilities related to those products for breakage. This ASU is effective for the Company for reporting periods beginning after December 15, 2017. Early adoption is permitted. The ASU must be adopted using either a modified retrospective approach with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption or a full retrospective approach. The Company’s adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
Cash Flow Classification
In August 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments", which amends the guidance in ASC 230, Statement of Cash Flows. This amended guidance reduces the diversity in practice that has resulted from the lack of consistent principles related to the classification of certain cash receipts and payments in the statement of cash flows. This ASU is effective for the Company for reporting periods beginning after December 15, 2017. Early adoption is permitted. Entities must apply the guidance retrospectively to all periods presented but may apply it prospectively from the earliest date practicable if retrospective application would be impracticable. The Company’s adoption of this ASU is not expected to have a material impact on the results of operations or financial condition.

7


In November 2016, the FASB issued ASU 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash", which amends the guidance in ASC 230, Statement of Cash Flows, on the classification and presentation of restricted cash in the statement of cash flows. This ASU is effective for the Company for reporting periods beginning after December 15, 2017. Early adoption is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in this ASU should be applied using a retrospective transition method to each period presented. The Company is evaluating what impact if any the adoption of this ASU will have on the results of operations, financial condition, or cash flows.
Intangibles - Goodwill and Other Impairment
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment, which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on Step 1). The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for interim and annual goodwill impairment testing dates after January 1, 2017. The Company’s adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows, unless a goodwill impairment is identified.
Definition of a Business
In January 2017, the FASB issued ASU 2017-01, "Clarifying the Definition of a Business", which amends the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs. The guidance is effective for the Company for reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company’s adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows, however it could result in accounting for acquisitions as asset acquisitions versus business combinations upon adoption.
Accounting for Modifications to Stock-Based Compensation
In May 2017, the FASB issued ASU 2017-09, "Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting", which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. The guidance is effective for the Company for reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted. The Company's adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
Accounting for Derivative Financial Instruments
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", which amends the hedge accounting recognition and presentation requirements in ASC 815. The FASB issued accounting guidance to better align hedge accounting with a company’s risk management activities, simplify the application of hedge accounting and improve the disclosures of hedging arrangements. The guidance is effective for the Company for reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company's adoption of this ASU is not expected to have a material impact on the results of operations, financial condition, or cash flows.
2. Accounts Receivable
The Company maintains a $950 million revolving trade accounts receivable Securitization Facility. Accounts receivable collateralized within our Securitization Facility relate to our U.S. trade receivables resulting from charge card activity. Pursuant to the terms of the Securitization Facility, the Company transfers certain of its domestic receivables, on a revolving basis, to FleetCor Funding LLC (Funding) a wholly-owned bankruptcy remote subsidiary. In turn, Funding sells, without recourse, on a revolving basis, up to $950 million of undivided ownership interests in this pool of accounts receivable to a multi-seller, asset-backed commercial paper conduit (Conduit). Funding maintains a subordinated interest, in the form of over-collateralization, in a portion of the receivables sold to the Conduit. Purchases by the Conduit are financed with the sale of highly-rated commercial paper.
The Company utilizes proceeds from the sale of its accounts receivable as an alternative to other forms of financing to reduce its overall borrowing costs. The Company has agreed to continue servicing the sold receivables for the financial institution at market rates, which approximates the Company’s cost of servicing. The Company retains a residual interest in the accounts

8


receivable sold as a form of credit enhancement. The residual interest’s fair value approximates carrying value due to its short-term nature. Funding determines the level of funding achieved by the sale of trade accounts receivable, subject to a maximum amount.
The Company’s consolidated balance sheets and statements of income reflect the activity related to securitized accounts receivable and the corresponding securitized debt, including interest income, fees generated from late payments, provision for losses on accounts receivable and interest expense. The cash flows from borrowings and repayments, associated with the securitized debt, are presented as cash flows from financing activities.
The Company’s accounts receivable and securitized accounts receivable include the following at September 30, 2017 and December 31, 2016 (in thousands):  
 
 
September 30, 2017
 
December 31, 2016
Gross domestic accounts receivable
 
$
651,328

 
$
529,885

Gross domestic securitized accounts receivable
 
794,000

 
591,000

Gross foreign receivables
 
852,706

 
704,630

Total gross receivables
 
2,298,034


1,825,515

Less allowance for doubtful accounts
 
(47,779
)
 
(32,506
)
Net accounts and securitized accounts receivable
 
$
2,250,255


$
1,793,009

A rollforward of the Company’s allowance for doubtful accounts related to accounts receivable for nine months ended September 30 is as follows (in thousands):
 
 
2017
 
2016
Allowance for doubtful accounts beginning of period
 
$
32,506

 
$
21,903

Provision for bad debts
 
35,949

 
24,512

Write-offs
 
(20,676
)
 
(16,343
)
Allowance for doubtful accounts end of period
 
$
47,779

 
$
30,072

3. 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.

9


The following table presents the Company’s financial assets and liabilities which are measured at fair values on a recurring basis as of September 30, 2017 and December 31, 2016, (in thousands). 
 
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
September 30, 2017
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Repurchase agreements
 
$
363,335

 
$

 
$
363,335

 
$

Money market
 
50,341

 

 
50,341

 

Certificates of deposit
 
9,370

 

 
9,370

 

       Foreign exchange contracts
 
111,235

 
28

 
111,207

 

Total assets
 
$
534,281


$
28


$
534,253


$

Cash collateral for foreign exchange contracts
 
$
33,911

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
      Foreign exchange contracts contracts
 
$
106,175

 
$
353

 
$
105,822

 

Total liabilities
 
$
106,175

 
$
353

 
$
105,822

 
 
Cash collateral obligation for foreign exchange contracts
 
$
20,272

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Repurchase agreements
 
$
232,131

 
$

 
$
232,131

 
$

Money market
 
50,179

 

 
50,179

 

Certificates of deposit
 
48

 

 
48

 

Total cash equivalents
 
$
282,358


$


$
282,358


$


The Company has highly-liquid investments classified as cash equivalents, with original maturities of 90 days or less, included in our Consolidated Balance Sheets. The Company utilizes Level 2 fair value determinations derived from directly or indirectly observable (market based) information to determine the fair value of these highly liquid investments. The Company has certain cash and cash equivalents that are invested on an overnight basis in repurchase agreements, money markets and certificates of deposit. The value of overnight repurchase agreements is determined based upon the quoted market prices for the treasury securities associated with the repurchase agreements. The value of money market instruments is the financial institutions' month-end statement, as these instruments are not tradeable and must be settled directly by us with the respective financial institution. Certificates of deposit are valued at cost, plus interest accrued. Given the short-term nature of these instruments, the carrying value approximates fair value. Foreign exchange derivative contracts are carried at fair value, with changes in fair value recognized in the Unaudited Consolidated Statements of Income. The fair value of the Company's derivatives is derived with reference to a valuation from a derivatives dealer operating in an active market, which the Company accepts as the fair value of these instruments. The fair value represents what would be received and or paid by the Company if the contracts were terminated as of the reporting date. Cash collateral received for foreign exchange derivatives is recorded within customer deposits in our Unaudited Consolidated Balance Sheets at September 30, 2017. Cash collateral paid for foreign exchange derivatives is recorded within cash and cash equivalents in our Unaudited Consolidated Balance Sheets at September 30, 2017.
The level within the fair value hierarchy and the measurement technique are reviewed quarterly. Transfers between levels are deemed to have occurred at the end of the quarter. There were no transfers between fair value levels during the periods presented for 2017 and 2016.
The Company’s assets that are measured at fair value on a nonrecurring basis and are evaluated with periodic testing for impairment include property, plant and equipment, investments, goodwill and other intangible assets. Estimates of the fair value of assets acquired and liabilities assumed in business combinations are generally developed using key inputs such as management’s projections of cash flows on a held-and-used basis (if applicable), discounted as appropriate, management’s projections of cash flows upon disposition and discount rates. Accordingly, these fair value measurements are in Level 3 of the fair value hierarchy. See footnote 13 for discussion of Masternaut's other than temporary decline in fair value during the third quarter of 2017.
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

10


reset on a quarterly basis. These are each Level 2 fair value measurements, except for cash, which is a Level 1 fair value measurement.
4. 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 month period. On July 27, 2017, the Company's Board of Directors authorized an increase in the size of the Program by an additional $250 million and an extension of the Program by an additional 18 months. On November 1, 2017, the Company announced that its Board of Directors had authorized an increase in the size of the Program by an additional $350 million, resulting in total aggregate repurchases authorized under the Program of $1.1 billion. With the increase and giving effect to the Company's $590.1 million of previous repurchases, the Company may repurchase up to $510 million in shares of its common stock at any time prior to February 1, 2019.
Any stock repurchases may be made at times and in such amounts as deemed appropriate. The timing and amount of stock repurchases, if any, will depend on a variety of factors including the stock price, market conditions, corporate and regulatory requirements, and any additional constraints related to material inside information the Company may possess. Any repurchases have been and are expected to be funded by a combination of available cash flow from the business, working capital and debt.
On August 3, 2017, as part of the Program, the Company entered an Accelerated Share Repurchase agreement ("ASR Agreement") with a third-party financial institution to repurchase $250 million of its common stock. Pursuant to the ASR Agreement, the Company delivered $250 million in cash and received 1,491,647 shares based on a stock price of $142.46 on August 7, 2017. The ASR Agreement was completed on September 7, 2017, at which time the Company received 263,012 additional shares based on a final weighted average per share purchase price during the repurchase period of $142.48.
The Company accounted for the ASR Agreement as two separate transactions: (i) as shares of reacquired common stock for the shares delivered to us upon effectiveness of the ASR Agreement and (ii) as a forward contract indexed to the Company's common stock for the undelivered shares. The initial delivery of shares was included in treasury stock at cost and results in an immediate reduction of the outstanding shares used to calculate the weighted average common shares outstanding for basic and diluted earnings per share. The forward contracts indexed to our own common stock met the criteria for equity classification, and these amounts were initially recorded in additional paid-in capital and then reclassified to treasury stock upon completion of the ASR agreement.
Since the beginning of the Program, 4,114,104 shares for an aggregate purchase price of $590.1 million have been repurchased. There were 2,854,959 shares totaling $402.4 million repurchased under the Program during the nine months ended September 30, 2017.
5. Stock-Based Compensation
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 table below summarizes the expense recognized related to share-based payments recognized for the three and nine month periods ended September 30 (in thousands): 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Stock options
 
$
16,212

 
$
8,304

 
$
42,254

 
$
25,942

Restricted stock
 
8,443

 
9,101

 
26,643

 
24,083

Stock-based compensation
 
$
24,655


$
17,405


$
68,897


$
50,025

The tax benefits recorded on stock based compensation were $36.1 million and $28.4 million for the nine month periods ended September 30, 2017 and 2016, respectively.
The following table summarizes the Company’s total unrecognized compensation cost related to stock-based compensation as of September 30, 2017 (cost in thousands):

11


 
 
Unrecognized
Compensation
Cost
 
Weighted Average
Period of Expense
Recognition
(in Years)
Stock options
 
$
96,594

 
1.52
Restricted stock
 
12,425

 
0.43
Total
 
$
109,019

 
 

Stock Options
Stock options are granted with an exercise price estimated to be equal to the fair market value of the Company's stock 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 following summarizes the changes in the number of shares of common stock under option for the nine month period ended September 30, 2017 (shares and aggregate intrinsic value in thousands):
 
 
Shares
 
Weighted
Average
Exercise
Price
 
Options
Exercisable
at End of
Period
 
Weighted
Average
Exercise
Price of
Exercisable
Options
 
Weighted
Average Fair
Value of
Options
Granted 
During the Period
 
Aggregate
Intrinsic
Value
Outstanding at December 31, 2016
 
6,146

 
$
91.20

 
3,429

 
$
55.00

 
 
 
$
309,238

Granted
 
2,764

 
144.45

 
 
 
 
 
$
32.20

 
 
Exercised
 
(388
)
 
52.10

 
 
 
 
 
 
 
39,789

Forfeited
 
(265
)
 
142.93

 
 
 
 
 
 
 
 
Outstanding at September 30, 2017
 
8,257

 
$
109.20

 
3,956

 
$
71.26

 
 
 
$
376,264

Expected to vest as of September 30, 2017
 
8,257

 
$
109.20

 
 
 
 
 
 
 
 
The aggregate intrinsic value of stock options exercisable at September 30, 2017 was $330.4 million. The weighted average remaining contractual term of options exercisable at September 30, 2017 was 5.1 years.
The fair value of stock option awards granted was estimated using the Black-Scholes option pricing model during the nine months ended September 30, 2017 and 2016, with the following weighted-average assumptions for grants or modifications during the period:
 
 
September 30,
 
 
2017
 
2016
Risk-free interest rate
 
1.65
%
 
1.09
%
Dividend yield
 

 

Expected volatility
 
28.02
%
 
27.37
%
Expected life (in years)
 
3.4

 
3.4

Restricted Stock
Awards of restricted stock and restricted stock units are independent of stock option grants and are subject to forfeiture if employment terminates prior to vesting. The vesting of shares granted is generally based on the passage of time or performance, or a combination of these. Shares vesting based on the passage of time have vesting provisions of one to three years.
The following table summarizes the changes in the number of shares of restricted stock and restricted stock units for the nine months ended September 30, 2017 (shares in thousands): 

12


 
 
Shares
 
Weighted
Average
Grant Date
Fair Value
Outstanding at December 31, 2016
 
379

 
$
140.39

Granted
 
204

 
149.95

Vested
 
(204
)
 
136.85

Cancelled or forfeited
 
(48
)
 
153.24

Outstanding at September 30, 2017
 
331

 
$
149.24

6. Acquisitions
2017 Acquisitions

Cambridge Global Payments

On August 9, 2017, the Company acquired Cambridge, a leading business to business (B2B) international payments provider, for approximately $584.1 million in cash, net of cash acquired of $132.3 million and inclusive of a note payable of $23.9 million. Cambridge processes B2B cross-border payments, assisting business clients in making international payments to suppliers and employees. 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 for business in the United States and Canada and within its International segment for business in all other countries outside of the United States and Canada, since acquisition. The following table summarizes the preliminary acquisition accounting for Cambridge (in thousands):
Prepaid expenses and other
79,725

Property and equipment
7,106

Other long term assets
10,025

Goodwill
436,138

Customer relationships and other identifiable intangible assets
358,168

Liabilities assumed
(187,664
)
Deferred tax liabilities
(119,419
)
Aggregate purchase price
$
584,079

 
 
The estimated fair value of intangible assets acquired and the related estimated useful lives consisted of the following (in thousands):
 
Useful Lives (in Years)
Value
Customer relationships and other identifiable intangible assets
10
$
358,168

 
 
$
358,168


Acquisition accounting for Cambridge is preliminary as the Company is still completing the valuation for goodwill, intangible assets, income taxes, certain acquired contingencies, derivatives and the working capital adjustment period remains open. Goodwill recorded is comprised primarily of expected synergies from combining the operations of the Company and Cambridge, as well as assembled workforce. The allocation of the goodwill to the reporting units is not yet complete.

Other

On September 26, 2017, the Company acquired a fuel card provider in Russia. The accounting for this acquisition is preliminary as the Company is still completing the valuation of goodwill, intangible assets, income taxes and evaluation of acquired contingencies. The following table summarizes the preliminary acquisition accounting for the Russian acquisition (in thousands):

13


Trade and other receivables
$
8,175

Prepaid expenses and other
783

Property and equipment
206

Goodwill
9,209

Other intangible assets
46,034

Liabilities assumed
(11,078
)
Deferred tax liabilities
(9,211
)
Aggregate purchase prices
$
44,118

The estimated fair value of intangible assets acquired and the related estimated useful lives consisted of the following (in thousands):
 
Useful Lives (in Years)
Value
Customer relationships and other identifiable intangible assets
8
$
46,034

 
 
$
46,034

Subsequently, on October 13, 2017, the Company completed the acquisition of Creative Lodging Solutions ("CLS"), a small lodging tuck-in business.

2016 Acquisitions

STP
On August 31, 2016, the Company acquired all of the outstanding stock of Serviços e Tecnologia de Pagamentos S.A. (“STP”), for $1.23 billion, net of cash acquired of $40.2 million. STP is an electronic toll payments company in Brazil and provides cardless fuel payments at a number of Shell sites throughout Brazil. The purpose of this acquisition was to expand the Company's presence in the toll market in Brazil. The Company financed the acquisition using a combination of existing cash and borrowings under its existing credit facility. Results from the acquired business have been reported in the Company's international segment since the date of acquisition. The following table summarizes the acquisition accounting for STP (in thousands):
 
Trade and other receivables
$
243,157

Prepaid expenses and other
6,998

Deferred tax assets
20,644

Property and equipment
44,226

Other long term assets
14,280

Goodwill
663,040

Customer relationships and other identifiable intangible assets
548,682

Liabilities assumed
(315,082
)
Aggregate purchase price
$
1,225,945

 
 
The estimated fair value of intangible assets acquired and the related estimated useful lives consisted of the following (in thousands):
 
Useful Lives (in Years)
Value
Customer relationships
8.5-20
$
348,414

Trade names and trademarks - indefinite
N/A
154,851

Technology
6
45,417

 
 
$
548,682


In connection with the STP acquisition, the Company recorded contingent liabilities aggregating $15.1 million, recorded within other noncurrent liabilities and accrued expenses in the consolidated balance sheet at the date of acquisition. A portion of these acquired liabilities have been indemnified by the respective sellers. As a result, an indemnification asset of $15.1 million was

14


recorded within prepaid and other current assets and other long term assets in the consolidated balance sheet. Along with the Company's acquisition of STP, the Company signed noncompete agreements with certain parties with an estimated fair value of $23.2 million.

Goodwill recognized is comprised primarily of expected synergies from combining the operations of the Company and STP, as well as assembled workforce. The goodwill and definite lived intangibles acquired with this business will be deductible for tax purposes.

Other

During 2016, the Company acquired additional fuel card portfolios in the U.S. and the United Kingdom, additional Shell fuel card markets in Europe and Travelcard in the Netherlands totaling $76.7 million, net of cash acquired of $11.1 million. The following table summarizes the acquisition accounting for these acquisitions (in thousands):
 
Trade and other receivables
$
27,810

Prepaid expenses and other
5,097

Property and equipment
992

Goodwill
28,540

Other intangible assets
61,823

Deferred tax asset
146

Liabilities assumed
(42,550
)
Deferred tax liabilities
(5,123
)
Aggregate purchase prices
$
76,735

The estimated fair value of intangible assets acquired and the related estimated useful lives consisted of the following (in thousands):
 
Useful Lives (in Years)
Value
Customer relationships and other identifiable intangible assets
10-18
$
61,823

 
 
$
61,823

7. Goodwill and Other Intangible Assets
A summary of changes in the Company’s goodwill by reportable business segment is as follows (in thousands): 
 
 
December 31, 2016
 
Acquisitions
 
Dispositions
 
Acquisition Accounting
Adjustments
 
Foreign
Currency
 
September 30, 2017
Segment
 
 
 
 
 
 
 
 
 
 
 
 
North America
 
$
2,640,409

 
$
436,138

 
$
(92,046
)
 
$

 
$
707

 
$
2,985,208

International
 
1,554,741

 
9,209

 

 
3,751

 
91,650

 
1,659,351

 
 
$
4,195,150


$
445,347

 
$
(92,046
)
 
$
3,751


$
92,357


$
4,644,559

Goodwill related to our acquisition of Cambridge is recorded in the Company's North America segment at September 30, 2017, as the acquisition accounting is preliminary. The Company is continuing to evaluate the reporting units and segments allocation related to its acquisition of Cambridge. As of September 30, 2017 and December 31, 2016, other intangible assets consisted of the following (in thousands):
 

15


 
 
 
 
September 30, 2017
 
December 31, 2016
 
 
Weighted-
Avg
Useful
Lives
(Years)
 
Gross
Carrying
Amounts
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amounts
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer and vendor relationships
 
15.9
 
$
2,845,048

 
$
(565,374
)
 
$
2,279,674

 
$
2,449,389

 
$
(458,118
)
 
$
1,991,271

Trade names and trademarks—indefinite lived
 
N/A
 
476,648

 

 
476,648

 
510,952

 

 
510,952

Trade names and trademarks—other
 
14.6
 
2,805

 
(2,130
)
 
675

 
2,746

 
(2,021
)
 
725

Software
 
6.0
 
203,643

 
(106,786
)
 
96,857

 
211,331

 
(85,167
)
 
126,164

Non-compete agreements
 
4.9
 
38,628

 
(16,042
)
 
22,586

 
35,191

 
(11,070
)
 
24,121

Total other intangibles
 
 
 
$
3,566,772


$
(690,332
)

$
2,876,440


$
3,209,609


$
(556,376
)

$
2,653,233

Changes in foreign exchange rates resulted in a $53.8 million increase to the carrying values of other intangible assets in the nine months ended September 30, 2017. Amortization expense related to intangible assets for the nine months ended September 30, 2017 and 2016 was $158.9 million and $112.5 million, respectively. As part of the Company's plan to exit the telematics business, on July 27, 2017, the Company sold NexTraq, a U.S. fleet telematics business, to Michelin Group, resulting in a $41.8 million reduction in the net carrying values of other intangible assets.

8. Debt
The Company’s debt instruments consist primarily of term notes, revolving lines of credit and a Securitization Facility as follows (in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
Term notes payable—domestic(a), net of discounts
 
$
3,027,472

 
$
2,639,279

Revolving line of credit A Facility—domestic(a)
 
595,000

 
465,000

Revolving line of credit A Facility—foreign(a)
 
38,047

 
123,412

Revolving line of credit A Facility—swing line(a)
 
40,193

 
26,608

Other debt(c)
 
41,771

 
12,934

Total notes payable and other obligations
 
3,742,483


3,267,233

Securitization Facility(b)
 
794,000

 
591,000

Total notes payable, credit agreements and Securitization Facility
 
$
4,536,483


$
3,858,233

Current portion
 
$
1,602,507

 
$
1,336,506

Long-term portion
 
2,933,976

 
2,521,727

Total notes payable, credit agreements and Securitization Facility
 
$
4,536,483


$
3,858,233

 ______________________
(a)
The Company has a Credit Agreement, which has been amended multiple times and provides for senior secured credit facilities consisting of a revolving A credit facility in the amount of $1.285 billion, a term loan A facility in the amount of $2.69 billion and a term loan B facility in the amount of $350.0 million as of September 30, 2017. The revolving credit facility consists of (a) a revolving A credit facility in the amount of $800 million, with sublimits for letters of credit and swing line loans, (b) a revolving B facility in the amount of $450 million for swing line loans and multi-currency borrowings and, (c) a revolving C facility in the amount of $35 million for multi-currency borrowings in Australian Dollars or New Zealand Dollars. On January 20, 2017, the Company entered into the second amendment to the Credit Agreement, which established a new term B loan. On August 2, 2017, the Company entered into the third amendment to the Credit Agreement, which increased the total facility by $708.7 million and extended the terms of the credit facilities. The term A and revolver maturity dates are August 2, 2022 and the term B maturity date is August 2,2024. The term A and revolver pricing remains the same and the term B pricing was reduced by 25 basis points to LIBOR plus 200 basis points. 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. The Company has unamortized debt discounts of $6.4 million related to the term A facility, $0.7 million related to the term B facility and deferred financings costs of

16


$5.4 million at September 30, 2017. In August 2017, the Company expensed $3.3 million and capitalized $10.6 million of debt issuance costs associated with the refinancing of its Credit Facility.
(b)
The Company is party to a $950 million receivables purchase agreement (Securitization Facility) that was amended and restated on December 1, 2015. There is a program fee equal to one month LIBOR and the Commercial Paper Rate of 1.27% plus 0.90% and 0.85% plus 0.90% as of September 30, 2017 and December 31, 2016, respectively. The unused facility fee is payable at a rate of 0.40% per annum as of September 30, 2017 and December 31, 2016.
(c)
Other debt includes the long-term portion of contingent consideration and deferred payments associated with certain of our businesses.
The Company was in compliance with all financial and non-financial covenants at September 30, 2017.

9. Income Taxes
The provision for income taxes differs from amounts computed by applying the U.S. federal tax rate of 35% to income before income taxes for the three months ended September 30, 2017 and 2016 due to the following (in thousands):
 
 
 
2017
 
2016
Computed tax expense at the U.S. federal tax rate
 
$
114,626

 
35.0
 %
 
$
59,571

 
35.0
 %
Changes resulting from:
 
 
 
 
 
 
 
 
Foreign income tax differential
 
(9,247
)
 
(2.8
)%
 
(4,265
)
 
(2.5
)%
Excess tax benefits related to stock-based compensation
 
(4,360
)
 
(1.3
)%
 
(8,247
)
 
(4.9
)%
State taxes net of federal benefits
 
5,926

 
1.8
 %
 
1,678

 
1.0
 %
Foreign-sourced nontaxable income
 
1,558

 
0.5
 %
 
(6,691
)
 
(3.9
)%
Valuation allowance on investment loss
 
16,718

 
5.1
 %
 
960

 
0.6
 %
Other
 
(542
)
 
(0.2
)%
 
(2,420
)
 
(1.4
)%
Provision for income taxes
 
$
124,679

 
38.1
 %
 
$
40,586

 
23.9
 %

10. 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 three and nine months ended September 30 (in thousands, except per share data) follows:
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
202,823

 
$
129,618

 
$
457,503

 
$
356,961

Denominator for basic earnings per share
 
90,751

 
92,631

 
91,619

 
92,604

Dilutive securities
 
2,250

 
2,676

 
2,304

 
2,600

Denominator for diluted earnings per share
 
93,001


95,307


93,923

 
95,204

Basic earnings per share
 
$
2.23

 
$
1.40

 
$
4.99

 
$
3.85

Diluted earnings per share
 
$
2.18

 
$
1.36

 
$
4.87

 
$
3.75

Diluted earnings per share for the three month periods ended September 30, 2017 excludes the effect of 3.5 million shares 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 0.3 million shares of performance based restricted stock for which the performance criteria have not yet been achieved for both the three month periods ended September 30, 2017 and 2016, respectively.

17


11. Segments
The Company reports information about its operating segments in accordance with the authoritative guidance related to segments. The Company’s reportable segments represent components of the business for which separate financial information is evaluated regularly by the chief operating decision maker in determining how to allocate resources and in assessing performance. The Company operates in two reportable segments, North America and International. The Company began reporting its results from Cambridge acquired in the third quarter of 2017 in its North America segment for Cambridge's business in the United States and Canada and within its International segment for Cambridge's business in all other countries outside of the United States and Canada. The Company is continuing to evaluate the allocation of Cambridge results to its reporting units and segments. The results of operations from the fuel card business acquired in Russia are included within our International segment, from the date of acquisition. There were no inter-segment sales.

The Company’s segment results are as follows for the three and nine month periods ended September 30 (in thousands): 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenues, net:
 
 
 
 
 
 
 
 
North America
 
$
364,443

 
$
345,868

 
$
1,037,386

 
$
950,542

International
 
213,434

 
138,558

 
602,161

 
366,051

 
 
$
577,877


$
484,426


$
1,639,547


$
1,316,593

Operating income:
 
 
 
 
 
 
 
 
North America
 
$
138,748

 
$
135,760

 
$
394,646

 
$
367,221

International
 
93,889

 
55,295

 
249,102

 
170,957

 
 
$
232,637


$
191,055


$
643,748


$
538,178

Depreciation and amortization:
 
 
 
 
 
 
 
 
North America
 
$
37,600

 
$
32,739

 
$
104,161

 
$
96,351

International
 
31,556

 
24,345

 
94,570

 
45,497

 
 
$
69,156


$
57,084


$
198,731


$
141,848

Capital expenditures:
 
 
 
 
 
 
 
 
North America
 
$
9,167

 
$
11,980

 
$
30,901

 
$
28,501

International
 
7,692

 
5,140

 
18,558

 
13,376

 
 
$
16,859


$
17,120


$
49,459


$
41,877

12. 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

18


and misleading public statements concerning the Company’s fee charges, and financial and business prospects; and that certain defendants breached their fiduciary duties through allegedly improper sales of stock. The complaint seeks unspecified monetary damages on behalf of the Company, corporate governance reforms, disgorgement of profits, benefits and compensation by the defendants, restitution, costs, and attorneys’ and experts’ fees. On August 18, 2017, the court entered an order deferring the case pending a ruling on the defendants' motion to dismiss the putative shareholder class action, or until otherwise agreed to by the parties. The defendants dispute the allegations in the complaint and intend to vigorously defend against the claims.
Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires an extensive degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, the Company is currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from the matters described above.

13. Asset Dispositions

Telematics Businesses
As part of the Company's plan to exit the telematics business, on July 27, 2017, the Company sold NexTraq, a U.S. fleet telematics business, to Michelin Group for $316 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 Unaudited Consolidated Statements of Income. NexTraq has historically been included in the Company's North America segment.

On September 30, 2017, the Company entered into an amended Masternaut investment agreement that resulted in the loss of significant influence, and the Company began accounting for the Masternaut investment by applying the cost method.

The Company regularly evaluates the carrying value of its investment and during the third quarter of 2017, the Company determined that the fair value of its 44% investment in Masternaut had declined as a result of the Company's loss of significant influence due to the amendment of the Masternaut investment agreement, executed September 30, 2017. As a result, the Company determined that the carrying value of its investment exceeded its fair value, and concluded that this decline in value was other than temporary. The Company recorded a $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 three and nine months ended September 30, 2017, in the accompanying Unaudited Consolidated Statements of Income.



19


14. Derivative Financial Instruments
As a result of the Cambridge acquisition, the Company writes derivatives, primarily foreign currency forward contracts and option contracts, mostly with small and medium size enterprises that are customers and derives a currency spread from this activity, which was acquired during the third quarter of 2017. Derivative transactions include:
Forward contracts, which are commitments to buy or sell at a future date a currency at a contract price and will be settled in cash.
Option contracts, which gives the purchaser, the right, but not the obligation to buy or sell within a specified time a currency at a contracted price that may be settled in cash.
Swap contracts, which are commitments to settlement in cash at a future date or dates, usually on an overnight basis.
The primary 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 United States dollar notional amount of foreign exchange derivative customer contracts held by the Company as of September 30, 2017 (in millions) is presented in the table below. Notional amounts do not reflect the netting of offsetting trades, although these offsetting positions may result in minimal overall market risk. Aggregate derivative notional amounts can fluctuate from period to period in the normal course of business based on market conditions, levels of customer activity and other factors.
 
Net Notional
Foreign exchange contracts:
 
  Swaps
$
272.8

  Futures, forwards and spot
3,174.1

  Written options
1,338.6

  Purchased options
1,765.0

Total
$
6,550.5


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 Unaudited Consolidated Balance Sheet as of September 30, 2017 (in millions):
 
Derivative Assets
 
Derivative Liabilities
 
Fair Value
 
Fair Value
Derivatives - undesignated:
 
 
 
Over the counter
$
111.2

 
$
105.8

Exchange traded

 
0.4

Foreign exchange contracts
111.2

 
106.2

Cash collateral
(33.9
)
 
(20.3
)
Total net derivative assets and liabilities
$
77.3

 
$
85.9

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 in prepaid expense and other current assets and all derivative liabilities 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 other (income) expense, net in the Consolidated Statements of Income. At September 30, 2017, $150.7 million derivative assets and $70.9 million derivative liabilities were recorded in the Consolidated Balance Sheet.

20




Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. See “Special Cautionary Notice Regarding Forward-Looking Statements”. All foreign currency amounts that have been converted into U.S. dollars in this discussion are based on the exchange rate as reported by OANDA for the applicable periods.
This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.
General Business
Fleetcor is a leading global provider of commercial payment solutions. We primarily go to market with our fuel card payments product solutions, corporate payments products, toll products, lodging cards and gift cards. Our products are used in 53 countries around the world, with our primary geographies in the U.S., Brazil and the U.K., which accounted for approximately 92% of our revenue in 2016.  Our core products are primarily sold to businesses, retailers, major oil companies and marketers and government entities. Our payment programs enable our customers to better manage and control their commercial payments, card programs, and employee spending and provide card-accepting merchants with a high volume customer base that can increase their sales and customer loyalty. We also provide a suite of fleet related and workforce payment solution products, including mobile telematics services, fleet maintenance management and employee benefit and transportation related payments. In 2016, we processed approximately 2.2 billion transactions on our proprietary networks and third-party networks (which includes approximately 1.3 billion transactions related to our SVS product, acquired with Comdata). We believe that our size and scale, geographic reach, advanced technology and our expansive suite of products, services, brands and proprietary networks contribute to our leading industry position.
We provide our payment products and services in a variety of combinations to create customized payment solutions for our customers and partners. We collectively refer to our suite of product offerings as workforce productivity enhancement products for commercial businesses. We sell a range of customized fleet and lodging payment programs directly and indirectly to our customers through partners, such as major oil companies, leasing companies and petroleum marketers. We refer to these major oil companies, leasing companies, petroleum marketers, value-added resellers (VARs) and other referral partners with whom we have strategic relationships as our “partners.” We provide our customers with various card products that typically function like a charge card to purchase fuel, lodging, food, toll, transportation and related products and services at participating locations. While we refer to companies with whom we have strategic relationships as "partners", our legal relationships with these companies are contractual, and do not constitute legal partnerships.
We support our products with specialized issuing, processing and information services that enable us to manage card accounts, facilitate the routing, authorization, clearing and settlement of transactions, and provide value-added functionality and data, including customizable card-level controls and productivity analysis tools. In order to deliver our payment programs and services and process transactions, we own and operate proprietary “closed-loop” networks through which we electronically connect to merchants and capture, analyze and report customized information in North America and internationally. We also use third-party networks to deliver our payment programs and services in order to broaden our card acceptance and use. To support our payment products, we also provide a range of services, such as issuing and processing, as well as specialized information services that provide our customers with value-added functionality and data. Our customers can use this data to track important business productivity metrics, combat fraud and employee misuse, streamline expense administration and lower overall workforce and fleet operating costs. Depending on our customers’ and partners’ needs, we provide these services in a variety of outsourced solutions ranging from a comprehensive “end-to-end” solution (encompassing issuing, processing and network services) to limited back office processing services.
Executive Overview
We operate in two segments, which we refer to as our North America and International segments. Our revenue is reported net of the wholesale cost for underlying products and services. In this report, we refer to this net revenue as “revenue.” See “Results of Operations” for additional segment information. We report our results from Cambridge acquired in the third quarter of 2017 in our North America segment for Cambridge's business in the United States and Canada and within our International segment for Cambridge's business in all other countries outside of the United States and Canada. We are continuing to evaluate the

21


allocation of Cambridge results to our reporting units and segments. As part of our plan to exit the telematics business, on July 27, 2017, we sold NexTraq, a U.S. fleet telematics business, which has historically been included in our North America segment.
 
For the three and nine months ended September 30, 2017 and 2016, our North America and International segments generated the following revenue (in millions):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
(Unaudited)
 
Revenues, net
 
% of
total
revenues, net
 
Revenues, net
 
% of
total
revenues, net
 
Revenues, net
 
% of
total
revenues, net
 
Revenues, net
 
% of
total
revenues, net
North America
 
$
364.4

 
63.1
%
 
$
345.9

 
71.4
%
 
$
1,037.4

 
63.3
%
 
$
950.5

 
72.2
%
International
 
213.4

 
36.9
%
 
138.6

 
28.6
%
 
602.2

 
36.7
%
 
366.1

 
27.8
%
 
 
$
577.9

 
100.0
%
 
$
484.4

 
100.0
%
 
$
1,639.5

 
100.0
%
 
$
1,316.6

 
100.0
%

Revenues, net, Net Income and Net Income Per Diluted Share. Set forth below are revenues, net, net income and net income per diluted share for the three and nine months ended September 30, 2017 and 2016 (in thousands, except per share amounts).
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Unaudited)
 
2017
 
2016
 
2017
 
2016
Revenues, net
 
$
577,877

 
$
484,426

 
$
1,639,547

 
$
1,316,593

Net income
 
$
202,823

 
$
129,618

 
$
457,503

 
$
356,961

Net income per diluted share
 
$
2.18

 
$
1.36

 
$
4.87

 
$
3.75


Adjusted Revenues, Adjusted Net Income and Adjusted Net Income Per Diluted Share. Set forth below are adjusted revenues, adjusted net income and adjusted net income per diluted share for the three and nine months ended September 30, 2017 and 2016 (in thousands, except per share amounts).
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Unaudited)
 
2017
 
2016
 
2017
 
2016
Adjusted revenues
 
$
550,190

 
$
456,212

 
$
1,556,857

 
$
1,237,838

Adjusted net income
 
$
202,769

 
$
183,310

 
$
574,795

 
$
478,959

Adjusted net income per diluted share
 
$
2.18

 
$
1.92

 
$
6.12

 
$
5.03

We use adjusted revenues as a basis to evaluate our revenues, net of the commissions that are paid to merchants that participate in certain of our card programs. The commissions paid to merchants can vary when market spreads fluctuate in much the same way as revenues are impacted when market spreads fluctuate. Thus, we believe this is an effective way to evaluate our revenue performance on a consistent basis. We use adjusted net income and adjusted net income per diluted share to eliminate the effect of items that we do not consider indicative of our core operating performance on a consistent basis. Adjusted revenues, adjusted net income and adjusted net income per diluted share are supplemental non-GAAP financial measures of operating performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
Sources of Revenue
Transactions. In both of our segments, we derive revenue from transactions. As illustrated in the diagram below, a transaction is defined as a purchase by a customer. Our customers include holders of our card products and those of our partners, for whom we manage card programs, members of our proprietary networks who are provided access to our products and services and commercial businesses to whom we provide workforce payment productivity solutions. Revenue from transactions is derived from our merchant and network relationships, as well as our customers and partners. Through our merchant and network relationships we primarily offer fuel cards, corporate cards, virtual cards, purchasing cards, T&E cards, gift cards, stored value payroll cards, vehicle maintenance, food, fuel, toll and transportation cards and vouchers and lodging services to our customers.
The following diagram illustrates a typical transaction flow, for our fuel card, vehicle maintenance, lodging and food, toll and transportation card and voucher products. This illustration is not applicable to all of our businesses.

22


Illustrative Transaction Flowtranflowexamplea03.jpg
From our customers and partners, we derive revenue from a variety of program fees, including transaction fees, card fees, network fees and charges, which can be fixed fees, cost plus a mark-up or based on a percentage discount from retail prices. Our programs include other fees and charges associated with late payments and based on customer credit risk.
From our merchant and network relationships, we derive revenue mostly from the difference between the price charged to a customer for a transaction and the price paid to the merchant or network for the same transaction, as well as network fees and charges in certain businesses. As illustrated in the table below, the price paid to a merchant or network may be calculated as (i) the merchant’s wholesale cost of the product plus a markup; (ii) the transaction purchase price less a percentage discount; or (iii) the transaction purchase price less a fixed fee per unit.
The following table presents an illustrative revenue model for transactions with the merchant, which is primarily applicable to fuel based product transactions, but may also be applied to our vehicle maintenance, lodging and food, fuel, toll and transportation card and voucher products, substituting transactions for gallons. This representative model may not include all of our businesses.
Illustrative Revenue Model for Fuel Purchases
(unit of one gallon)
 
 
 
 
Merchant Payment Methods
Retail Price
 
$
3.00

 
i) Cost Plus Mark-up:
 
ii) Percentage Discount:
 
iii) Fixed Fee:
Wholesale Cost
 
(2.86
)
 
Wholesale Cost
 
$
2.86

 
Retail Price
 
$
3.00

 
Retail Price
 
$
3.00

 
 
 
 
Mark-up
 
0.05

 
Discount (3%)
 
(0.09
)
 
Fixed Fee
 
(0.09
)
FleetCor Revenue
 
$
0.14

 
 
 
 
 
 
 
 
 
 
 
 
Merchant Commission
 
$
(0.05
)
 
Price Paid to Merchant
 
$
2.91

 
Price Paid to Merchant
 
$
2.91

 
Price Paid to Merchant
 
$
2.91

Price Paid to Merchant
 
$
2.91

 
 
 
 
 
 
 
 
 
 
 
 
Revenues by geography, product and source. Set forth below are further breakdowns of revenue by geography, product and source for the three and nine months ended September 30, 2017 and 2016 (in millions).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Revenue by Geography*
 
2017

2016
 
2017
 
2016
(Unaudited)
 
Revenues, net
 
% of
total
revenues, net
 
Revenues, net
 
% of
total
revenues, net
 
Revenues, net
 
% of
total
revenues, net
 
Revenues, net
 
% of
total
revenues, net
United States
 
$
358

 
62
%
 
$
346

 
71
%
 
$
1,031

 
63
%
 
$
951

 
72
%
United Kingdom
 
61

 
11
%
 
56

 
12
%
 
174

 
11
%
 
175

 
13
%
Brazil
 
101

 
17
%
 
43

 
9
%
 
287

 
17
%
 
78

 
6
%
Other
 
58

 
10
%
 
40

 
8
%
 
148

 
9
%
 
113

 
9
%
Consolidated revenues, net
 
$
578

 
100
%
 
$
484

 
100
%
 
$
1,640

 
100
%
 
$
1,317

 
100
%
*Columns may not calculate due to impact of rounding.

23


Subsequent to 2016, as we continued to refine the level of detail behind the product category splits, we reclassified certain amounts into "Other" that we believe are more representative of that category.   This reclassification has been applied to the 2016 and 2017 comparable data disclosed in the "Revenue by Product Category" table below.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,8
Revenue by Product Category*
 
2017
 
2016
 
2017
 
2016
(Unaudited)
 
Revenues,
net
 
% of total revenues, net
 
Revenues,
net
 
% of total
revenues, net
 
Revenues,
net
 
% of
total
revenues, net
 
Revenues,
net
 
% of total
revenues, net
Fuel cards
 
$
276

 
48
%
 
$
259

 
53
%
 
$
815

 
50
%
 
$
741

 
56
%
Corporate Payments
 
72

 
12
%
 
46

 
10
%
 
169

 
10
%
 
132

 
10
%
Tolls
 
83

 
14
%
 
26

 
5
%
 
236

 
14
%
 
30

 
2
%
Lodging
 
33

 
6
%
 
28

 
6
%
 
86

 
5
%
 
74

 
6
%
Gift
 
55

 
9
%
 
58

 
12
%
 
144

 
9
%
 
138

 
10
%
Other
 
59

 
10
%
 
67

 
14
%
 
189

 
12
%
 
201

 
15
%
Consolidated revenues, net
 
$
578

 
100
%
 
$
484

 
100
%
 
$
1,640

 
100
%
 
$
1,317

 
100
%
*Columns may not calculate due to impact of rounding.
<
 
Three Months Ended September 30,
 
Nine Months Ended September 30,8
Major Sources of Revenue*
2017
 
2016
 
2017
 
2016
(Unaudited)
Revenues,
net
 
% of total
revenues, net
 
Revenues,
net
 
% of total
revenues, net
 
Revenues,
net
 
% of total
revenues, net
 
Revenues,
net
 
% of total
revenues, net
Customer