UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Fiscal Year Ended December 31, 20172019
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
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FLEETCOR TECHNOLOGIES, INC.
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| 72-1074903 | |||
( incorporation or organization) | (I.R.S. Employer Identification No.) | ||
| 3280 Peachtree Road, Suite 2400, | Atlanta, | Georgia | 30305 |
| (Address of principal executive offices) | ( | ||
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| FLT | ||
Securities registered pursuant to Section 12(g) of the Act:
NONE
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý☒ No ¨☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨☐ No ý☒
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 website, 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, or 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.
| Large accelerated filer | Accelerated filer | |||||
| Non-accelerated filer | 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☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $13,172,593,947$23,926,076,537 as of June 30, 2017,2019, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing sale price as reported on the New York Stock Exchange.
As of February 9, 2018,7, 2020, there were 89,808,85285,429,057 shares of common stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held on June 6, 201811, 2020 are incorporated by reference into Part III of this report.
FLEETCOR TECHNOLOGIES, INC.
FORM 10-K
For The Year Ended December 31, 20172019
INDEX
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| PART I | ||
| Item 1. | ||
| Item X. | ||
| Item 1A. | ||
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| Item 2. | ||
| Item 3. | ||
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| PART II | ||
| Item 5. | ||
| Item 6. | ||
| Item 7. | ||
| Item 7A. | ||
| Item 8. | ||
| Item 9. | ||
| Item 9A. | ||
| Item 9B. | ||
| PART III | ||
| Item 10. | ||
| Item 11. | ||
| Item 12. | ||
| Item 13. | ||
| Item 14. | ||
| PART IV | ||
| Item 15. | ||
| Item 16. | ||
Note About Forward-Looking Statements
This reportAnnual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about FLEETCOR’s beliefs, expectations and future performance, are forward-looking statements. Forward-looking statements can be identified by the use of words such as “anticipate,” “intend,” “believe,” “estimate,” “plan,” “seek,” “project” or “expect,” “may,” “will,” “would,” “could” or “should,” the negative of these terms or other comparable terminology.
These forward-looking statements are not a guarantee of performance, and you should not place undue reliance on such statements. We have based these forward-looking statements largely on our current expectations and projections about future events. Forward-looking statements are subject to many uncertainties and other variable circumstances, including those discussed in this report in Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” many of which are outside of our control, that could cause our actual results and experience to differ materially from any forward-looking statement.
These forward-looking statements may not be realized due to a variety of factors, including, without limitation:
the impact of macroeconomic conditions and whether expected trends, including in retail fuel prices, fuel price spreads, and fuel transaction patterns, develop as anticipated;
our ability to successfully execute our strategic plan, manage our growth and achieve our performance targets;
our ability to attract new and retain existing partners, fuel merchants, and lodging providers, their promotion and support of our products, and their financial performance;
the failure of management assumptions and estimates, as well as differences in, and changes to, economic, market, interest rate, interchange fees, foreign exchange rates, and credit conditions, including changes in borrowers’ credit risks and payment behaviors;
the risk of higher borrowing costs and adverse financial market conditions impacting our funding and liquidity, and any reduction in our credit ratings;
our ability to successfully manage our credit risks and the sufficiency of our allowance for possible loan losses;
our ability to securitize our loan receivables;
the occurrence of fraudulent activity, data breaches or failures of our information security controls or cybersecurity-related incidents that may compromise our systems or customers’ information;
any disruptions in the operations of our computer systems and data centers;
the international operational and political risks and compliance and regulatory risks and costs associated with international operations;
our ability to develop and implement new technology, products, and services;
any alleged infringement of intellectual property rights of others and our ability to protect our intellectual property;
the regulation, supervision, and examination of our business by foreign and domestic governmental authorities, as well as litigation and regulatory actions, including the lawsuit recently filed by the FTC;
the impact of regulations relating to privacy, information security and data protection; use of third-party vendors and ongoing third-party business relationships; and failure to comply with anti-money laundering and anti-terrorism financing laws;
changes in our senior management team and our ability to attract, motivate and retain qualified personnel consistent with our strategic plan;
tax legislation initiatives or challenges to our tax positions and/or interpretations, and state sales tax rules and regulations;
the risks of mergers, acquisitions and divestitures, including, without limitation, the related time and costs of implementing such transactions, integrating operations as part of these transactions and possible failures to achieve expected gains, revenue growth and/or expense savings from such transactions; and
the other factors and information in this Annual Report on Form 10-K and other filings that we make with the SEC under the Exchange Act and Securities Act. See “Risk Factors” in this Annual Report on Form 10-K.
Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included in this report are made only as of the date hereof. We do not undertake, and specifically disclaim, any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.
PART I
ITEM 1. BUSINESS
General
FLEETCOR is a leading global providerbusiness payment solutions company that simplifies the way businesses manage and pay their expenses. The FLEETCOR portfolio of commercial payment solutions. Webrands help businessescompanies automate, secure, digitize and control payments on behalf of all sizes control, simplifytheir employees and secure payment of various domestic and cross-border payables using specialized payment products.suppliers. We serve businesses, partners, merchants and partnersconsumer and payment networks in North America, Latin America, Europe, and Australasia.Asia Pacific. FLEETCOR’s predecessor company was organized in the United States in 1986, and FLEETCOR had its initial public offering in 2010 (NYSE: FLT).
FLEETCOR has two reportable segments, North America and International. We report these two segments as they align with our senior executive organizational structure, reflect how we organize and manage our employees around the world, manage operating performance, contemplate the differing regulatory environments in North America versus other geographies, and help us isolate the impact of foreign exchange fluctuations on our financial results.
Our payment solutions provide our customers with a payment method designed to be superior to and more robust and effective than what they use currently, whether they use a competitor’s product or another alternative method such as cash or check. Our solutions are comprised of payment products, networks and associated services.
Each category is unique in its focus, customer base and target markets, but they also share a number of characteristics: customers are primarily businesses, have recurring revenue models, have specialized networks which create barriers to entry, have high EBITDA margins, and have similar selling systems. Our productspayment solutions are used in 56more than 100 countries around the world, with our primary geographies being the U.S., Brazil and the United Kingdom, which combined accounted for approximately 90%87% of our revenue in 2017.2019.
FLEETCOR’s payment products generally function like a charge card, prepaid card, one-time use virtual card, and electronic RFID (radio-frequency identification), etc. While the actual payment mechanisms vary from category to category, they are structured to afford control and reporting to the end customer.
FLEETCOR uses both proprietary and third-party networks to deliver our payment solutions. FLEETCOR owns and operates proprietary networks with well-established brands throughout the world, bringing incremental sales and loyalty to affiliated merchants. Third-party networks are used to broaden payment product acceptance and use. In 2017, we processed approximately 3 billion transactions within these networks, of which approximately 1.4 billion were related to our Gift product line.
FLEETCOR capitalizes on its products’ specialization with sales and marketing efforts by deploying product-dedicated sales forces to target specific customer segments. We market our products directly through multiple sales channels, including field sales, telesales and digital marketing, and indirectly through our partners, which include major oil companies, leasing companies, petroleum marketers, value-added resellers (VARs) and referral partners.
We believe that our size and scale, product breadth and specialization, geographic reach, proprietary networks, robust distribution capabilities and advanced technology contribute to our industry leading position.
Products and services
We offer specialized payment solutions predominately for commercial businesses. Our payment solutions are intended to provide our customers with a payment method superior to that which they formerly used, whether they used a competitor’s product or another alternative method such as cash or check. Our solutions are comprised of payment products, networks and associated services.
Our payment products typically function like a charge card or prepaid card. FLEETCOR provides a variety of payment mechanisms such as a plastic card, electronic tag, or other form to the customer. We issue credit to the customer (or accept prepaid funds from the customer) to allow for purchases using the payment product. FLEETCOR then reports the purchases to the customer and invoices (or debits prepaid amounts) for payment of purchases made on the customer’s account.
Fuel payment product line
Our fuel payment product line is our largest product category, representing approximately 49%44% of our revenue in 2017.2019.
FLEETCOR offers fuel payment solutions to businesses and government entities who operate vehicle fleets, as well as to major oil companies, leasing companies and fuel marketers. Our fuel payment products are most often in the form of plastic cards, but also include other forms such as electronic RFID tags, mobile apps and paper vouchers. While predominately used to purchase fuel, many of our fuel payment products have additional purchasing capabilities to allow customers to purchase non-fuel items such as oil, vehicle maintenance supplies and services and building supplies.
Our fuel payment products, excluding paper vouchers, provide customers with tools and information to control their fuel and other fleet-related operating costs. Our proprietary processing and card management systems provide customers with customizable user-level controls, detailed transaction reporting, programmable alerts, configurable networks, contracted fuel price validation and audit, and vehicle efficiency analyses.analysis. Our customers can use these data, controls and tools to combat fraud and employee misuse, streamline expense administration and potentially lower their vehicle fleets’ operating costs. The combination of these specialized attributes allows our fuel payment products to compete well against less specialized products such as cash or general purpose credit cards when it comes to controlling fuel purchases.
For major oil companies, leasing companies and petroleum marketers, we provide program management services, which allow these partners to outsource the sales, marketing, credit, service, and system operations of their branded fuel card portfolios. Depending on our partners’ needs and internal capabilities, we provide our products and services in a variety of combinations ranging from a comprehensive “end-to-end” solution (encompassing issuing, processing and network services) to limited back office processing services. Our fuel payment product partners include British Petroleum (BP), its subsidiary Arco, Shell, and Speedway, and Casey's and over 775700 fuel marketers of all sizes.
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. Our contracts with our major oil company partners typically have initial terms of five to ten years with current remaining terms ranging from twoone to seven years. No single partner represented more than 10% of our consolidated revenue in any year during the last four years.
We use both proprietary and third-party networks to deliver our fuel payment solutions, including the following examples:
North America proprietary networks for fuel payment products
| • | Fuelman network—our primary proprietary fleet card network in the U.S. We have negotiated card acceptance and settlement terms with over 10,400 individual merchants, providing the Fuelman network with approximately 55,000 fueling sites and approximately 25,000 maintenance sites across the country. |
| • | Comdata network—our network of truck stops and fuel merchants for the over-the-road trucking industry. We have negotiated card acceptance and settlement terms at over 8,600 truck stops and fuel merchants across the U.S. and Canada. |
| • | Commercial Fueling Network (CFN)—our “members only” fueling network in the U.S. and Canada composed of approximately 2,600 fueling sites owned by CFN members themselves. The majority of these fueling sites are unattended cardlock facilities located in commercial and industrial areas. |
| • | Pacific Pride Fueling network—our "franchise" fueling network in the U.S. composed of approximately 1,100 fueling sites owned by more than 220 franchisees. The majority of these fueling sites are unattended cardlock facilities located in commercial and industrial areas. |
International proprietary networks for fuel payment products
| • | Allstar network—our proprietary fleet card network in the U.K. We have negotiated card acceptance and settlement terms with approximately 2,100 individual merchants, providing this network with approximately 7,300 fueling sites. |
| • | Keyfuels network—our proprietary fleet card network in the U.K. We have negotiated card acceptance and settlement terms with more than 500 individual merchants, providing the Keyfuels network with approximately 3,000 fueling sites. |
| • | CCS network—our primary proprietary fleet card network in the Czech Republic and Slovakia. We have negotiated card acceptance and settlement terms with several major oil companies on a brand-wide basis, including MOL, Benzina, OMV, Slovnaft and Shell, and with approximately 1,200 other merchants, providing the CCS network at over 2,800 fueling sites and 700 other sites accepting our cards. |
| • | Petrol Plus Region (PPR) network—our primary proprietary fleet card network in Russia, Ukraine, Belarus and Kazakhstan. We have negotiated card acceptance and settlement terms with over 600 individual merchants, providing the PPR network with approximately 13,300 fueling sites across the region. |
| • | Efectivale network—our proprietary fuel card and voucher network in Mexico. We have negotiated acceptance and settlement terms individual merchants, providing the network with over 8,300 fueling sites. |
| • | CTF network—our proprietary fuel and fleet controls solutions in Brazil, composed of over 23,000 highway and urban fueling sites through our partners, BR Distribuidora (Petrobas) and Ipiranga Distribuidora. |
| • | Travelcard network—our proprietary fuel card network in the Netherlands. We have negotiated card acceptance and settlement terms with over 1,500 individual merchants, providing this network over 7,600 fueling sites. |
| • | Fleet Card network—our proprietary fuel card network in Australia. We have negotiated card acceptance and settlement terms with approximately 6,000 individual merchants, providing this network with over 90% of fuel sites across Australia. |
| • | CardSmart network—our proprietary fuel card network in New Zealand. We have negotiated card acceptance and settlement terms with approximately 1,200 individual merchants, providing this network with approximately 95% of the fuel sites across New Zealand. |
Third-Party networks for fuel payments products
In addition to our proprietary “closed-loop” networks, we also utilize various third-party networks to deliver our payment programs and services. Examples of these networks include:
| • | Mastercard network—In the U.S. and Canada, we issue co-branded Mastercard products, which are accepted at over 176,000 fuel sites and 398,000 maintenance locations. These Mastercard products have additional purchasing capabilities which, when enabled, allow the cards to be accepted at approximately 10.9 million locations throughout the U.S. and Canada. |
| • | Visa network—In the U.K., we issue products that utilize the Visa payment network, which includes approximately 8,400 fuel sites and approximately 1,700 maintenance locations. These Visa products have additional purchasing capabilities which, when enabled, allow the cards to be accepted throughout the Visa network. |
| • | Major oil and fuel marketer networks—The proprietary networks of branded locations owned by our major oil and fuel marketer partners in both North America and internationally are generally utilized to support the proprietary, branded card programs of these partners. |
| • | UTA network—UNION TANK Eckstein GmbH & Co. KG (UTA) operates a network of over 61,000 points of acceptance in 40 European countries, including more than 49,000 fueling sites. The UTA network is generally utilized by European transport companies that travel between multiple countries. |
| • | DKV network—DKV operates a network of over 100,000 fleet card-accepting locations across more than 42 countries throughout Europe. The DKV network is generally utilized by European transport companies that travel between multiple countries. |
| • | Carnet network—A national debit network in Mexico, which includes approximately 12,700 fueling sites across the country. |
| • | Good Card network—In Brazil, we issue co-branded Good Card products, which are accepted at over 23,000 fuel sites. |
We distribute our fuel payment solutions through direct and indirect channels to businesses of all sizes. This includes businesses with small- to medium-sized fleets, which we believe represent an attractive segment of the global commercial fleet market given their relatively high use of less efficient payment products, such as cash and general purpose credit cards. We serve customers across numerous industry verticals and particularly those verticals with significant vehicle fueling needs such as trucking, construction, manufacturing, energy, and consumer products distribution.
Our indirect channel includes our partners, such as major oil companies, leasing companies and fuel marketers. We generally provide our fuel payments solutions to our partners who offer our services under their own brands on a “white-label” basis. In turn, we leverage our partners’ brands, retail outlets, websites, and sales forces to help distribute our fuel payment products.
In Brazil, we have designed proprietary equipment which, when installed at the fueling site and on the vehicle and combined with our processing system, significantly reduces the likelihood of unauthorized and fraudulent transactions. We offer this product to over-the-road trucking fleets, shipping fleets and other operators of heavily industrialized equipment, including sea-going vessels, mining equipment, agricultural equipment, and locomotives. We generally co-brand this product with BR Distribuidora (Petrobas) or Ipiranga Distribuidora, depending on which fuel distributor provides fuel to our fleet clients via its retail and wholesale distribution operations.
With regard to our fuel payment products, we compete with independent fuel card issuers, major oil companies and petroleum marketers. Excluding major oil companies, our most significant competitors in this product category include WEX, U.S. Bank Voyager Fleet Systems, World Fuel Services, Edenred, Sodexo, Alelo, DKV, and Radius Payment Solutions.
Long haul transportation services
In addition to, and often in conjunction with our fuel payment product, we provide trucking companies in North America with various products and services specifically relevant to their industry, including road tax compliance analysis and reporting, permit procurement, and cash movement and disbursement. We compete with several companies in providing these products and services, including EFS (WEX), Keller, and RTS Financial.
Lodging payment product line
We offer lodging payment solutions to businesses in North America that have employees who travel overnight for work purposes.purposes, and to airlines globally to accommodate both their traveling crews and distressed passengers whose flights have been canceled. We offer twocard-based lodging payment products a card-based solution for individual business travelers and non-card based solutionsolutions for crews.crews and distressed passengers. Our solutions can be customized to meet the specific needs of our customers, including access to a deeply discountdiscounted hotel networknetworks and customer-specific rate negotiation, the ability to customize the network to fit customers’ specific travel needs and policies, enhanced controls and reporting, and audit and tax management services.
Our lodging payment products operate on our proprietary CLC, Lodging network,CLS and Travelliance lodging networks, which includesinclude over 16,70033,900 hotels across the U.S. and Canada.88 countries. We also can secure hotel rooms outside our proprietary networknetworks if required by our customers. The size, scale and nature of our lodging customer base enable us to negotiate lodging nightly rates lower than the rates most companies could negotiate directly and far below the rates available to the general public.
Our customers can secure room nights with our solutions through our website or mobile app, by phone or email, or by walking into participating lodging properties and presenting their FLEETCOR lodging payment product credentials.
FLEETCOR has developed data management and payment processing systems to manage client billings and reports, which combined with our discounted hotel network, provide clients with savings and increased visibility into their lodging costs. The integration of our processing systems with airline logistics and crew management systems also enables us to deliver enhanced services to that industry vertical.
We distribute our lodging payment solutions mostly through direct channels to businesses of all sizes and serve customers across a wide range of industries, including airlines, trucking, railroads, construction, telecom, energy, food service, retail distribution, and emergency response services such as FEMA and the American Red Cross. We provide our custom lodging solutions to large customers and airlines under contracts.
Our lodging payment solutions compete with similar offerings from Travelliance, Egencia (Expedia), hotelengine.com, and in-house travel departments of large corporations.
corporations and airlines.
Toll payment product line
In Brazil, we offer an electronic toll and parking payments product to businesses and consumers in the form of RFID tags affixed to vehicles’ windshields. Our electronic toll and parking payments product operates on our proprietary Sem Parar network, which processed toll transactions for more than 3.25 million customers on 99% of the toll roads across Brazil. Our electronic tags may also be used to purchase parking, fuel and meals at select gas stations.affiliated merchant locations.
Electronic tolling provides convenience and faster travel and more convenience for customers, while also reducing manual labor and cash handling at merchants’ toll booths.booths and parking garages. At gas stations and drive through restaurants, payment via electronic tags is faster, safer and more secure for customers, which in turn increases loyalty and station throughput for merchants. Beyond these benefits, our electronic toll payment product also provides commercial customers with driver routing controls and fare auditing, mostly in the form of vehicle type and axle count configuration.
For certain commercial customers, we also offer prepaid paper vouchers as a means of payment on toll roads. We provide these vouchers to companies who contract with third-party drivers who do not have an electronic tag in their vehicles and for whom the companies are legally obligated to prepay tolls. Our electronic and paper toll vouchersvale-pedagio solutions are accepted for payment within our proprietary RODOCRED toll network on behalfthat covers approximately 99% of more than 96,000 customers on all tollnational roads acrossin Brazil.
We distribute our toll payment products through direct and indirect channels to customers of all sizes and across a broad number of industry verticals. To reach commercial customers, we utilize the same set of direct channels as our other commercially-focused product lines including field sales, telesales and digital marketing. To reach consumers, we also place proprietary manned kiosks and unmanned vending machines in areas with high consumer foot traffic, such as shopping malls.
Our indirect channel includes a range of resellers and referral partners, including retail establishments with high consumer foot traffic such as grocery stores, pharmacies and gas stations. We provide our toll payment product to these partners under our brand and, in select cases, under the partner’s brand.
Our electronic toll payment product competes with similar offerings such as Move Mais, ConectCar (Banco Itaú and Ipiranga), Veloe (Alelo), Repom (Edenred), and Visa Vale (Banco Bradesco).
Corporate payments product line
We offer a broad suite of corporate payments solutions with vertical-specific applications, which enable our customers to manage and control electronic payments across their enterprise, optimize corporate spending and offer innovative services that increase employee efficiency and customer loyalty. Our primary corporate payments products include virtual cards, purchasing cards, travel & entertainment (T&E) cards, payroll cards and cross-border payment facilitation. These products are predominately marketed in North America, with cross-border payments also offered in the United Kingdom and Australia. This collection of comprehensive solutions positions us to enable automation and savings across a customer’suser’s entire accounts payables (A/P) process, including both domestic and international payables.
A virtual card provides a single-use card number for a specific amount within a defined timeframe and serves as a highly-effective replacement for check payments. Virtual cards provide enhanced security relative to checks while reducing payment costs for our customers. Full remittance data accompanies each virtual card payment, providing significant reconciliation advantages to ACH payments. We have integrated our virtual card offering into most leading ERP systems, providing a seamless experience for accounts payable personnel to select our virtual card as the payment mechanism of choice.
FLEETCOR’s virtual card product operates on the Mastercard payment network. However, merchants affiliated to the MasterCard network are not obligated to accept virtual cards as a form of payment. As such, merchants must be enrolled into our proprietary vendor network to accept our virtual card product. We have built a proprietary network of approximately 700,000800,000 merchants that accept our virtual card payments, which has been growing at an average rate of 12,500 merchants per month.payments. This network is managed with proprietary technology that allows us to continuously expand virtual card acceptance and optimize the amount of virtual card spend we can capture. This network, coupled with a best-in-class, in-house vendor enrollment service, is a major competitive advantage.
Our purchasing and T&E cards operate on the MasterCardMastercard payment network and are accepted at approximately 10.710.9 million locations throughout the United States and Canada. These card products are generally sold in conjunction with our virtual card offering to augment our customers’ purchasing capabilities. FLEETCOR also provides full A/P outsourcing services for customers who send us their entire A/P file and allow us to execute payments across all modalities, including the aforementioned products as well as ACH, wires and checks. We also provide expense management software, which combines and leverages transaction data captured from our virtual, purchasing and T&E card products to help our customers analyze and control their corporate spending.
Our virtual, purchasing and T&E card products compete with similar offerings from large financial institutions such as Bank of America, Citibank, J.P. Morgan Chase, PNC Bank, U.S. Bank, Wells Fargo and American Express.
FLEETCOR offers a payroll card product in the form of a reloadable stored value card, which operates on the MasterCardMastercard payment network and the All Point ATM network. These cards are distributed to our customers’ employees and are funded by our customers with their employees’ earned wages. As cardholders, the employees may present the payroll card as a form of payment for personal purchases, transfer funds to their bank account or withdraw funds from participating ATMs.
Our payroll card product competes with similar offerings from First Data Corporation, Fidelity National Information Services, Global Cash Card, Green Dot Financial, Total System Services, Automatic Data Processing, Paychex and Heartland Payment Systems.
FLEETCOR’s cross-border payment services are offered predominantly to commercial customers, who range from small businesses to mid-cap corporate entities. Customers generally use our cross-border payment services to pay international suppliers, foreign office and personnel expenses, capital expenditures, and profit repatriation and dividends. We administer foreign exchange trades and payment settlement with recipients through a global network of banks, enabling us to send payments to recipients in over 200 countries and in over 140 currencies. We employ rigorous compliance standards in all geographies where we are licensed. By using transaction monitoring and watch list screening systems, we ensure payments are safe, secure, and meet all applicable regulatory requirements.
Our cross-border payment services compete with similar offerings from Western Union Business Solutions, Associated Foreign Exchange (AFEX), WorldFirst, Moneycorp, HiFX, Currencies Direct, GPS Capital Markets and large financial institutions.
FLEETCOR’s corporate payment solutions are enabled by our technology and operations. Our ERP integrations, API capabilities, strategic vendor enrollment, and transaction management tools enable us to optimize our customers’ electronic payables programs.
We distribute our corporate payment solutions through direct and indirect channels to businesses of all sizes and types across a broad number of industry verticals. We serve customers across numerous industry verticals, such as retail, healthcare, construction, manufacturing, hospitality, energy, entertainment, insurance and trade finance. As FLEETCOR both issues and processes its virtual cards and commercial cards, we have the control and flexibility to meet the unique needs of customers in different verticals.
We generally provide our domestic corporate payment solutions under contracts with our customers. Pricing terms vary based on usage volumes, incentives and contract duration. When our corporate payment solutions include short term credit, our contracts for those solutions contain credit and collection terms.
Our indirect channel includes a broad range of VARs and other referral partners that expand our reach into new customer segments, new industry verticals and new geographies faster and at a significantly lower cost. We provide our corporate payments solutions to these partners who offer our services under our brands or their own brands on a “white-label” basis. For example, we provide healthcare payment solutions through healthcare networks, corporate payment solutions through software and services providers and payroll card solutions through payroll service providers.
Gift payment product line
We provide fully integrated gift card product management and processing services in over 5561 different countries around the world. These products come in the form of plastic and digital gift cards, carry our customers’ brands and are generally accepted exclusively within the retail network, websites, and mobile applications of each respective customer.
Our services include card design, production and packaging, delivery and fulfillment, card and account management, transaction processing, promotion development and management, website design and hosting, program analytics, and card distribution channel management. The combination of our products and services provides a turnkey solution to our customers, who benefit in the form of brand promotion, cardholder loyalty, increased sales, interest income on prepaid balances, and breakage on abandoned card balances.
We distribute our gift payment products and services directly through a specialized, dedicated field sales force. We serve our commercial customers in numerous industry verticals, with a focus in restaurants, supermarkets, drugstores, airlines, hotels, apparel and other retail categories. We help our commercial customers manage distribution with omni-channel strategies which include card sales through the customers’ retail outlets, websites and mobile applications, as well as through third party
locations, such as supermarkets and drug stores. This third party distribution is generally provided by other companies, such as Blackhawk and InComm, who are reliant on access to our systems to meet their distribution obligations.
We compete with a number of national companies in providing gift cards, the largest of which include First Data Corporation and Vantiv. We also compete with businesses that rely on in-house solutions.
Additional products
FLEETCOR provides several other payment products that, due to their nature or size, are not considered primary product lines.
Fleet maintenance
We provide a vehicle maintenance service offering that helps fleet customers to manage their vehicle maintenance, service, and repair needs in the U.K. This product is provided through our proprietary 1link maintenance and repair network which
processes transactions for fleet customers through approximately 9,4008,700 service centers across the U.K. With regard to our fleet maintenance product,products, we compete with several companies including Ebbon-Dacs and Fleet on Demand.
Employee benefit payments
In Mexico, we offer prepaid food vouchers and cards that may be used as a form of payment in restaurants and grocery stores. These payment products operate on one of the following networks:
| • | Efectivale network—also our proprietary food card and voucher network in Mexico. We have negotiated acceptance and settlement terms providing the network with over 49,400 food locations, 8,300 fueling sites and 5,900 restaurants. |
| • | Carnet network—a national debit network in Mexico, which includes approximately 51,000 food locations and 12,700 fueling sites across the country. |
In Brazil, we offer prepaid transportation cards and vouchers that may be used as a form of payment on public transportation such as buses, subways and trains. Our proprietary VB Servicos, Comercio e Administracao LTDA (“VB”) distribution network distributes cards and vouchers to employees on behalf of approximately 26,00027,300 customers and negotiates with more than 1,4001,500 public transportation agencies across Brazil.
We provide these various payment products to businesses of all sizes and industry verticals and the businesses in turn offer the products to their employees as a form of benefit. With regard to our employee benefit payment products, we compete with numerous companies, the largest of which includes Edenred, Sodexo, Chèque Déjeuner, and Alelo.
Competition
We face considerable competition in our business. The most significant competitive factors in our business are the breadth of product and service features, credit extension, payment terms, customer service and account management, and price. For certain payment-related products, we also compete on the respective size or nature (i.e., open versus closed loop) of each product’s acceptance network. For certain payment processing services, systems and technology are also significant competitive factors. We believe that we generally compete favorably with respect to each of these factors. However, we may experience competitive disadvantages with respect to each of these factors from time to time as potential customers prioritize or value these competitive factors differently. As a result, a specific offering of our products and service features, networks and pricing may serve as a competitive advantage with respect to one customer and a disadvantage for another based on the customers’ preferences. The companies with whom we compete often vary by product line and/or geography, and are therefore identified by name in the respective product line discussions.
Sales and marketing
We market our products and services to prospective customers in North America and internationally through multiple channels including field sales, telesales, digital marketing, direct marketing, and point-of-sale marketing and the internet.marketing. We also leverage the sales and marketing capabilities of our strategic relationships. Worldwide, our sales and marketing employees are focused on acquiring new customers and retaining existing customers for our different products. We also utilize tradeshows, advertising and other awareness campaigns to further market our products and services.
We utilize proprietary and third-party databases to develop our prospect universe and segment those prospects by various characteristics, including industry, geography, size, and credit score,size, to identify potential customers. We develop customized offers for different types of potential customers and work to deliver those offers through the most effective marketing channel. We actively manage prospects across our various marketing channels to optimize our results and avoid marketing channel conflicts.
Our primary means of acquiring new customers include:
| • | Telesales—We have telesales representatives handling inbound and outbound sales calls. |
Our inbound call volume is primarily generated as a result of marketing activities, including direct marketing, point-of-sale marketing and the internet.
Our outbound phone calls typically target prospects that have expressed an initial interest in our services or have been identified through database analysis as prospective customers. Our telesales teams are generally dedicated to a specific product or service category and tend to target smaller prospects. We also leverage our telesales channel to cross-sell additional products to existing customers.
| • | Digital marketing—We manage numerous marketing websites around the world which tend to fall into two categories: product-specific websites and marketing portals. |
| • | Product-specific websites—Our product-specific websites, including fuelman.com, checkinncard.com, allstarcard.co.uk and semparar.com.br, focus on one or more specific products, provide the most in-depth information available online regarding those particular products, allow prospects to apply online (where appropriate) and allow customers to access and manage their accounts online. We manage product-specific websites for our own proprietary programs, as well as white labeled sites for our strategic relationships. |
| • | Marketing portals—Our marketing portals, including fleetcardsUSA.com and fuelcards.co.uk, serve as information sources for fleet operators interested in fleet card products. In addition to providing helpful information on fleet management, including maintenance, tax reporting and fuel efficiency, these websites allow fleet operators to research card products, compare the features and benefits of multiple products, and identify the card product which best meets the fleet manager’s needs. |
As part of our digital marketing strategy, we monitor and modify our marketing websites to improve our search engine rankings and test our advertising keywords to optimize our banner advertising placement and costs and our pay-per-click advertising spend among the major internet search firms such as Google and Yahoo.Bing.
| • | Direct marketing—We market directly to potential customers via mail and email. We test various program offers and promotions, and adopt the most successful features into subsequent direct marketing initiatives. We seek to enhance the sales conversion rates of our direct marketing efforts by coordinating timely follow-up calls by our telesales teams. |
| • | Point-of-sale marketing—We provide marketing literature at the point-of-sale within our proprietary networks and those of our partner relationships. Literature may include “take-one” applications, pump-top advertising and in-store advertising. Our point-of-sale marketing leverages the branding and distribution reach of the physical merchant locations. |
Account management
| • | Implementation and activation—We have dedicated implementation teams that are responsible for establishing the system set-up for each customer account. These teams focus on successful activation and utilization of our new customers and provide training and education on the use of our products and services. Technical support resources are provided to support the accurate and timely set-up of technical integrations between our proprietary processing systems and customer systems (e.g., payroll, enterprise resource planning and point-of-sale). Larger accounts are provided dedicated program managers who are responsible for managing and coordinating customer activities for the duration of the implementation. These program managers are responsible for the successful set-up of accounts to meet stated customer objectives. |
| • | Strategic account management—We assign designated account managers who serve as the single point of contact for our large accounts. Our account managers have in-depth knowledge of our programs and our customers’ operations and objectives. Our account managers train customer administrators and support them on the operation and optimal use of our programs, oversee account setup and activation, review online billing and create customized reports. Our account managers also prepare periodic account reviews, provide specific information on trends in their accounts and work together to identify and discuss major issues and emerging needs. |
| • | Account retention—We have proprietary, proactive strategies to contact customers who may be at risk of terminating their relationship with us. Through these strategies we seek to address service concerns, enhance product structures and provide customized solutions to address customer issues. |
| • | Customer service—Day-to-day servicing representatives are designated for customer accounts. These designated representatives are responsible for the daily service items and issue resolution of customers. These servicing representatives are familiar with the nuanced requirements and specifics of a customer’s program. Service representatives are responsible for customer training, fraud disputes, card orders, card maintenance, billing, etc. |
| • | Cardholder support—We provide cardholder support for individuals utilizing our payment products. This support allows cardholders to activate cards, check balances, and resolve issues in a timely and effective fashion. Cardholder support is conducted 24 hours a day, seven days per week in multiple languages utilizing telephony, web and call center technologies to deliver comprehensive and cost effective servicing. We have rigorous operational metrics in place to increase cardholder responsiveness to corporate and customer objectives. |
| • | Merchant network services—Our representatives work with merchants such as fuel, toll operators and vehicle maintenance providers to enroll them in one of our proprietary networks, install and test all network and terminal software and hardware and train them on the sale and transaction authorization process. In addition, our representatives provide transaction analysis and site reporting and address settlement issues. |
| • | Call center program administration—Off-hour call center support is provided to customers to handle time-sensitive requests and issues outside of normal business hours. |
| • | Management tools—We offer a variety of online servicing tools that enable customers to identify and provide authority to program administrators to self-service their accounts. |
| • | Credit underwriting and collections—We follow detailed application credit review, account management, and collections procedures for all customers of our payment solutions. We use multiple levers including billing frequency, payment terms, spending limits and security to manage risk in our portfolio. For the years ended December 31, 2019 and 2018, our bad debt expense was $74.3 million and $64.4 million, or 6 bps and 6 bps of billings, respectively. |
| • | New account underwriting—We use a combination of quantitative, third-party credit scoring models and judgmental underwriting to screen potential customers and establish appropriate credit terms and spend limits. Our underwriting process provides additional scrutiny for large credit amounts and we utilize tiered credit approval authority among our management. |
| • | Prepaid and secured accounts—We also offer products and services on a prepaid or fully-secured basis. Prepaid customer accounts are funded with an initial deposit and subsequently debited for each purchase transacted on the cards issued to the customer. Fully-secured customer accounts are secured with cash deposits, letters of credit and/or insurance bonds. The security is held until such time as the customer either fails to pay the account or closes its account after paying outstanding amounts. Under either approach, our prepaid and fully-secured offerings allow us to market to a broader universe of prospects, including customers who might otherwise not meet our credit standards. |
| • | Monitoring and account management—We use fraud detection programs, including both proprietary and third-party solutions, to monitor transactions and prevent misuse of our products. We monitor the credit quality of our portfolio periodically utilizing external credit scores and internal behavior data to identify high risk or deteriorating credit quality accounts. We conduct targeted strategies to minimize exposure to high risk accounts, including reducing spending limits and payment terms or requiring additional security. |
| • | Collections—As accounts become delinquent, we may suspend future transactions based on our risk assessment of the account. Our collections strategy includes a combination of internal and outsourced resources which use both manual and dialer-based calling strategies. We use a segmented collection strategy which prioritizes higher risk and higher balance accounts. For severely delinquent, high balance accounts we may pursue legal remedies. |
Technology
Our technology provides continuous authorization of transactions, processing of critical account and client information and settlement between merchants, issuing companies and individual commercial entities. We recognize the importance of state-of-the-art, secure, efficient and reliable technology in our business and have made significant investments in our applications and infrastructure. In 2017,2019, we spent more than $185approximately $200 million in capital and operating expenses to operate, protect and enhance our technology and expect to continue the build out of our proprietary processing platform in Europe and Asia, as well as the integration of our recently acquired businesses.technology.
Our technology function is based in the United States, Europe and Brazil and has expertise in the management of applications, transaction networks and infrastructure. We operate application development centers in the United States, United Kingdom, Netherlands, Russia, Czech Republic, Brazil and New Zealand. Our distributed application architecture allows us to maintain, administer and upgrade our systems in a cost-effective and flexible manner. We integrate our systems with third-party vendor applications for certain products, sales and customer relationship management and back-office support. Our technology
organization has undertaken and successfully executed large scale projects to develop or consolidate new systems, convert oil company and petroleum marketer systems and integrate acquisitions while continuing to operate and enhance existing systems.
Our technology infrastructure is supported by highly-secure data centers, with redundant locations. We operate our primary data centers, which are located in Atlanta, Georgia; Brentwood, Tennessee; Prague; Czech Republic; Las Vegas, Nevada; Lexington and Louisville, Kentucky; Sao Paulo, Brazil; Toronto, Canada and Moscow, Russia. We use only proven technology and haveexpect no foreseeable capacity limitations. Our systems align with industry standards for security with multiple industry certifications. Our network is configured with multiple layers of security to isolate our databases from unauthorized access. We use security protocols for communication among applications, and our employees access critical components on a need-only basis. As of December 31, 2017, we are not aware of any material breach of our data security systems. See Item 1A, “Risk Factors-WeWe may not be able to adequately protect our systems or the data we collect from continually evolving cybersecurity risks or other technological risks, which could subject us to liability and damage our reputation”reputation. See also "We are dependent on the efficient and uninterrupted operation of interconnected computer systems, telecommunications, data centers and call centers, including technology and network systems managed by multiple third parties, which could result in our inability to prevent disruptions in our services" and "We may experience software defects, system errors, computer viruses and development delays, which could damage customer relationships, decrease our profitability and expose us to liability" under Item 1A for afurther discussion of the risks we face in connection with our technology systems and potential data breach and cybersecurity risks facing the Company.
We maintain disaster recovery and business continuity plans. Our telecommunications and internet systems have multiple levels of redundancy to ensure reliability of network service. In 2017,2019, we experiencedachieved 99.9% up-time for authorizations.authorizations globally.
Proprietary processing systems
We operate several proprietary processing systems that provide features and functionality to run our card programs and product offerings, including our card issuing, processing and information services. Our processing systems also integrate with our proprietary networks, which provide brand awareness and connectivity to our acceptance locations that enables the “end-to-
Intellectual property
Our intellectual property is an important element of our business. We rely on trademark, copyright, trade secret, patent and other intellectual property laws, confidentiality agreements, contractual provisions and similar measures to protect our intellectual property. Our employees involved in technology development in some of the countries in which we operate, including the United States, are required to sign agreements acknowledging that all intellectual property created by them on our behalf is owned by us. We also have internal policies regarding the protection, disclosure and use of our confidential information. Confidentiality, license or similar agreements or clauses are generally used with our business partners and vendors to control access, use and distribution of our intellectual property. Unauthorized persons may attempt to obtain our intellectual property despite our efforts and others may develop similar intellectual property independently. We own trade names, service marks, trademarks and registered trademarks supporting a number of our brands, such as FLEETCOR, Fuelman, Comdata, and Comchek (among others) in the United States. We also own trademarks and registered trademarks in various foreign jurisdictions for a number of our brands, such as Cambridge, Keyfuels, AllStar, CTF, and Sem Parar (among others). We hold a number of patents and pending applications relating to payment cards and fuel tax returns.
Acquisitions
Since 2002, we have completed over 7580 acquisitions of companies and commercial account portfolios, including the acquisition of Cambridge Global Payments in August 2017.portfolios. Acquisitions have been an important part of our growth strategy, and it is our intention to continue to seek opportunities to increase our customer base and diversify our service offering through further strategic acquisitions. For a discussion of recent acquisitions, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Acquisitions”.
Regulatory
A substantial number of laws and regulations, both in the United States and in other jurisdictions, apply to businesses offering payment cards to customers or processing or servicing for payment cards and related accounts. These laws and regulations are often evolving and sometimes ambiguous or inconsistent, and the extent to which they apply to us is at times unclear. Failure to
comply with regulations may result in the suspension or revocation of licenses or registrations, the limitation, suspension, or termination of services, and/or the imposition of civil and criminal penalties, including fines. Certain of our services are also subject to rules set by various payment networks, such as MasterCard,Mastercard, as more fully described below.
The following, while not exhaustive, is a description of several federal and state laws and regulations in the United States that are applicable to our business. The laws and regulations of other jurisdictions also affect us, and they may be more or less restrictive than those in the United States and may also impact different parts of our operations. In addition, the legal and regulatory framework governing our business is subject to ongoing revision, and changes in that framework could have a significant effect on us.
Money Transmission and Payment Instrument Licensing Regulations
We are subject to various U.S. laws and regulations governing money transmission and the issuance and sale of payment instruments relating to certain aspects of our business. In the United States, most states license money transmitters and issuers of payment instruments. Through our subsidiaries, we are licensed in all states where required for business. Many states exercise authority over the operations of our services related to money transmission and payment instruments and, as part of this authority, subject us to periodic examinations, which may include a review of our compliance practices, policies and procedures, financial position and related records, privacy and data security policies and procedures, and other matters related to our business. SomeAs a result of these periodic examinations, state agencies conduct periodic examinations andsometimes issue us findings and recommendations, as a result of which weprompting us to make changes to our operations, such as improving our reporting processes, detailing our intercompany arrangements, and implementing new or revising existing policies and procedures, such as our anti-money laundering and the U.S. Department of Treasury'sTreasury’s Office of Foreign Assets Control ("OFAC"(“OFAC”) compliance program and complaints managementour complaints-management process, and improvements toimproving our documentation processes.
As a licensee, we are subject to certain restrictions and requirements, including net worth and surety bond requirements, record keeping and reporting requirements, requirements for regulatory approval of controlling stockholders or direct and indirect changes of control of the licensee and certain other corporate events, and requirements to maintain certain levels of permissible investments in an amount equal to our outstanding payment obligations. Many states also require money transmitters and issuers of payment instruments to comply with federal and/orand state anti-money laundering laws and regulations. Many states require prior approval for both directSee “Anti-Money Laundering and indirect changes of control of the licensee and certain other corporate events.Counter Terrorist Regulations.”
Government agencies may impose new or additional requirements on money transmission and sales of payment instruments, and we expect that compliance costs will increase in the future for our regulated subsidiaries.
Privacy and Information Security Regulations
We provide services that may be subject to various state, federal, and foreign privacy and information security laws and regulations, including, among others, the Financial Services ModernizationGramm-Leach Bliley Act, of 1999, which we refer to as the Gramm-Leach-Bliley Act,EU’s General Data Protection Regulation (the “GDPR”) and Directive 95/46/EC,its Network and theInformation Security directive, Canada’s Personal Information Protection and Electronic Documents Act, in Canada. and California’s Consumer Protection Act of 2018 (the “CCPA”).
These and similar laws and their implementing regulations restrict certain collection, processing, storage, use, and disclosure of personal information, require notice to individuals of privacy practices, and provide individuals with certain rights to prevent use and disclosure of protected information. These lawsSome also impose requirements for the safeguarding and proper destruction of personal information through the issuance of data security standards or guidelines. Certain federal, state and foreign laws and regulationsIn many cases they impose similar privacy obligations and, in certain circumstances, obligations to notify affected individuals, state officers or other governmental authorities, the media, and consumer reporting agencies, as well as businesses and governmental agencies, of security breaches affecting personal information. In addition, there are state and foreign laws restrictingsome restrict the ability to collect and utilize certain types of information such as Social Security and driver’s license numbers. In February 2013, the European Commission proposed additional European Union-wide legislation regarding cyber security in the form of the proposed NIS Directive. The NIS Directive was adopted by the European Parliament in July 2016 and entered into force in August 2016. The NIS Directive provides legal measures intended to boost the overall level of cybersecurity in the EU by ensuring: (1) Member States’ preparedness by requiring them to be appropriately equipped, for example, via a Computer Security Incident Response Team and a competent national NIS authority; (2) cooperation among all the Member States, by setting up a cooperation group, in order to support and facilitate strategic cooperation and the exchange of information among Member States; and (3) a culture of security across sectors vital to the EU’s economy and society, including banking, financial market infrastructures and digital infrastructure.
Certain of our products that access payment networks require compliance with Payment Card Industry (“PCI”) data security standards. Our subsidiary, Comdata Inc.See “Payment Card Industry Rules.”
Email and Text Marketing Laws
We may use direct email marketing and text-messaging to reach out to current or potential customers and therefore are subject to various statutes, regulations, and rulings, including the Telephone Consumer Protection Act (“TCPA”), the Controlling the Assault of Non-Solicited Pornography and Marketing Act (“CAN-SPAM Act”) and related Federal Communication Commission (“FCC”) orders. The TCPA, as interpreted and implemented by the FCC and U.S. courts imposes significant restrictions on the use of telephone calls and text messages to residential and mobile telephone numbers as a means of
communication when prior consent of the person being contacted has not been obtained. Violations of the TCPA may be enforced by the FCC or by individuals through litigation, including class actions. Statutory penalties for TCPA violations range from $500 to $1,500 per violation, which has been interpreted to mean per phone call.
FCC regulations promulgated under the CAN-SPAM Act establish requirements for “commercial messages,” give recipients the right to have companies stop emailing them, and spells out penalties for violations. Commercial messages are defined as “any electronic mail message the primary purpose of which is PCI 3.2 compliantthe commercial advertisement or promotion of a commercial product or service,” including email that promotes content on commercial websites. The law makes no exception for business-to-business email. Each separate email in violation of the CAN-SPAM Act is subject to penalties of up to $43,280.
Several states have enacted additional, more restrictive and punitive laws regulating commercial email. Foreign legislation exists as well, including Canada’s Anti-Spam Legislation and the European laws that have been enacted pursuant to European Union Directive 2002/58/EC and its Attestationamendments.
We use email as a significant means of Compliance is listed on MasterCard’s compliant
Federal Trade Commission Act
All persons engaged in commerce, including, but not limited to, us and our bank sponsors and customers are subject to Section 5 of the Federal Trade Commission Act prohibiting unfair or deceptive acts or practices, and certain products are subject to the jurisdiction of the Consumer Financial Protection Bureau ("CFPB"(“CFPB”) regarding the prohibition of unfair, deceptive, or abusive acts and practices (both, collectively, UDAAP). A number of state laws and regulations also prohibit unfair and deceptive business practices. Various federal and state regulatory enforcement agencies including the Federal Trade Commission (“FTC”), CFPB and the state attorneys general have authority to investigate and take action against businesses, merchants and financial institutions that are alleged to engage in UDAAP or violate other laws, rules and regulations. If we violateare accused of violating such laws, rules and regulations, we may be subject to enforcement actions and as a result, may incur losses and liabilities that may impact our business. A number of state laws and regulations also prohibit unfair and deceptive business practices.
Truth in Lending Act
The Truth in Lending Act, or TILA, was enacted as a consumer protection measure to increase consumer awareness of the cost of credit and to protect consumers from unauthorized charges or billing errors, and is implemented by the Federal Reserve’s Regulation Z. Most provisions of TILA and Regulation Z apply only to the extension of consumer credit, but a limited number of provisions apply to commercial cards as well. One example where TILA and Regulation Z are generally applicable is a limitation on liability for unauthorized use, although a business that acquires 10 or more credit cards for its personnel can agree to more expansive liability. Our cardholder agreements generally provide that these business customers waive, to the fullest extent possible, all limitations on liability for unauthorized card use.
Credit Card Accountability, Responsibility, and Disclosure Act of 2009
The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (“CARD Act”) is an act that, among other things, amended provisions of TILA that affect consumer credit and also directed the Federal Reserve Board to study the use of credit cards by small businesses and to make legislative recommendations. The report concluded that it is not clear whether the potential benefits outweigh the increased cost and reduced credit availability if the disclosure and substantive restrictions applicable to consumer cards were to be applied to small business cards. Legislation has been introduced, from time to time, to increase the protections afforded to small businesses that use payment cards. If legislation of this kind were enacted, our products and services for small businesses could be adversely impacted.
Equal Credit Opportunity Act
The Equal Credit Opportunity Act, or ECOA, together with Regulation B prohibit creditors from discriminating on certain prohibited bases, such as an applicant’s sex, race, nationality, age and marital status, and further requires that creditors disclose the reasons for taking any adverse action against an applicant or a customer seeking credit.
The Fair Credit Reporting Act
The Fair Credit Reporting Act, or FCRA, regulates consumer reporting agencies and the disclosure and use of consumer reports. We may obtain consumer reports with respect to an individual who guarantees or otherwise is obligated on a commercial card.
FACT Act
The Fair and Accurate Credit Transactions Act of 2003 amended FCRA and requires creditors to adopt identity theft prevention programs to detect, prevent and mitigate identity theft in connection with covered accounts, which can include business accounts for which there is a reasonably foreseeable risk of identity theft.
Anti-Money Laundering and Counter Terrorist Regulations
The Currency and Foreign Transactions Reporting Act, which is also known as the Bank Secrecy Act (the "BSA"“BSA”) and which has been amended by the USA PATRIOT Act of 2001, contains a variety of provisions aimed at fighting terrorism and money laundering. Our business in Canada is also subject to Proceeds of Crime (Money Laundering) and Terrorist Financing Act, or the PCTFA, which is a corollary to the BSA. Among other things, the BSA and implementing regulations issued by the U.S. Treasury Department require financial-services providers to establish anti-money laundering programs, to not engage in terrorist financing, to report suspicious activity, and to maintain a number of related records. In addition to economic sanctions programs, we are also subject to international laws and regulations focused on fighting terrorism and money laundering:
in Canada, Proceeds of Crime (Money Laundering) and Terrorist Financing Act, or the PCTFA;
in Australia, as a registered remittance dealer with AUSTRAC, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act); and
in the UK, as a registered Electronic Money Institution with the Financial Conduct Authority, the Proceeds of Crime Act, 2002 (as amended by the Serious Organised Crime and Police Act 2005), and the Terrorism Act 2000 (as amended by the Anti-Terrorism, Crime and Security Act 2001 and the Terrorism Act 2006).
Non-banks that provide certain financial services are required to register with the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (FinCEN) as “money services businesses” (MSBs). Through certain subsidiaries, we are
registered as MSBs. As a result, we have established anti-money laundering compliance programs that include: (i) internal policies and controls; (ii) designation of a compliance officer; (iii) ongoing employee training; and (iv) an independent review function. We have developed and implemented compliance programs comprised of policies, procedures, systems and internal controls to monitor and address various legal requirements and developments.
In addition, provisions of the BSA known as the Prepaid Access Rule issued by FinCEN impose certain obligations, such as registration and collection of consumer information, on “providers” of certain prepaid access programs, including the stored value products issued by our sponsor banks for which we serve as program manager. FinCEN has taken the position that, where the issuing bank has principal oversight and control of such prepaid access programs, no other participant in the distribution chain would be required to register as a provider under the Prepaid Access Rule. Despite this position, we have opted to register as a provider of prepaid access through our subsidiary, Comdata Inc. We are also subject to certain economic and trade sanctions programs that are administered by the OFAC that prohibit or restrict transactions to or from or dealings with specified countries, their governments and, in certain circumstances, their nationals, narcotics traffickers, and terrorists or terrorist organizations.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, effected comprehensive revisions to a wide array of federal laws governing financial institutions, financial services, and financial markets. Among its most notable provisions is the creation of the CFPB, which is charged with regulating consumer financial products or services and which is assuming much of the rulemaking authority under TILA, ECOA, FCRA, and other federal laws affecting the extension of credit. In addition to rulemaking authority over several enumerated federal consumer financial protection laws, the CFPB is authorized to issue rules prohibiting unfair, deceptive, and abusive acts and practices (UDAAP)UDAAP by persons offering consumer financial products or services and their service providers, and has authority to enforce these consumer financial protection laws and CFPB rules. The CFPB has not defined what is a consumer financial product or service but has indicated informally that, in some instances, small businesses may be covered under consumer protection.
As a service provider to certain of our bank sponsors, we may be subject to direct supervision and examination by the CFPB, in connection with certain of our products and services. CFPB rules, examinations and enforcement actions may require us to adjust our activities and may increase our compliance costs.
In addition, the Durbin Amendment to the Dodd-Frank Act provided that interchange fees that a card issuer or payment network receives or charges for debit transactions will now be regulated by the Federal Reserve and must be “reasonable and proportional” to the cost incurred by the card issuer in authorizing, clearing and settling the transaction. Payment network fees may not be used directly or indirectly to compensate card issuers in circumvention of the interchange transaction fee
restrictions. In July 2011, the Federal Reserve published the final rules governing debit interchange fees. Effective in October 2011, with certain exceptions, debit interchange rates are capped at $0.21 per transaction with an additional component of five basis points of the transaction’s value to reflect a portion of the issuer’s fraud losses plus, for qualifying issuing financial institutions, an additional $0.01 per transaction in debit interchange for fraud prevention costs. The cap on interchange fees is not expected to have a material direct impact on our results of operations because we qualify for an exemption for the majority of our debit transactions.
The implementation of the Dodd-Frank Act is ongoing, and as a result, its overall impact remains unclear. Its provisions, however, are sufficiently far reaching that it is possible that we could be further directly or indirectly impacted.
Anti-Bribery Regulations
The FCPA prohibits the payment of bribes to foreign government officials and political figures and includes anti-bribery provisions enforced by the Department of Justice and accounting provisions enforced by the SEC.Securities and Exchange Commission (the “SEC”). The statute has a broad reach, covering all U.S. companies and citizens doing business abroad, among others, and defining a foreign official to include not only those holding public office but also local citizens affiliated with foreign government-run or -owned organizations. The statute also requires maintenance of appropriate books and records and maintenance of adequate internal controls to prevent and detect possible FCPA violations.
Payment Card Industry Rules
Banks issuing payment cards bearing the MasterCardMastercard brand, and FLEETCOR to the extent that we provide certain services in connection with those cards and fleet customers acting as merchants accepting those cards, must comply with the bylaws, regulations and requirements that are promulgated by MasterCardMastercard and other applicable payment-card organizations, including the Payment Card IndustryPCI Data Security Standard, developed by MasterCard and VISA, the MasterCardMastercard Site Data Protection Program and other applicable data-security program requirements. A breach of such payment card network rules could subject
us to a variety of fines or penalties that may be levied by the payment networks for certain acts or omissions. The payment networks routinely update and modify their requirements. Our failure to comply with the networks’ requirements or to pay the fines they impose could cause the termination of our registration and require us to stop processing transactions on their networks. Our subsidiary, Comdata Inc., is PCI 3.2 compliant.
We are also subject to network operating rules promulgated by the National Automated Clearing House Association relating to payment transactions processed by us using the Automated Clearing House Network.
Escheat Regulations
We may be subject to unclaimed or abandoned property (escheat) laws in the United States that require us to turn over to certain government authorities the property of others that we hold that has been unclaimed for a specified period of time such as payment instruments that have not been presented for payment and account balances that are due to a customer following discontinuation of our relationship. We may be subject to audit by individual U.S. states with regard to our escheatment practices.
Prepaid Card Regulations
Prepaid card programs managed by usthat we manage are subject to various federal and state laws and regulations, in addition to those identified above, including the Credit Card Accountability Responsibility and DisclosureCARD Act of 2009 and the Federal Reserve’sReserve Board’s Regulation E, which impose requirements on general-use prepaid cards, store gift cards and electronic gift certificates. The CFPB issued a final rule on prepaid accounts that came into effect on April 1, 2019. The definition of prepaid account under this rule includes certain accounts that are capable of being loaded with funds and whose primary function is to conduct transactions with multiple, unaffiliated merchants, at ATMs or for person-to-person transfers. The requirements under this rule include, among other things, the disclosure of fees and other information to the consumer prior to the creation of a prepaid account; the extension of Regulation E liability limits and error-resolution requirements to all prepaid accounts; the application of Regulation Z credit card requirements to prepaid accounts with overdraft and credit features; and the submission of prepaid account agreements to the CFPB and the publication of such agreements to the general public.
These laws and regulations are evolving, unclear and sometimes inconsistent and subject to judicial and regulatory challenge and interpretation, and therefore the extent to which these laws and rules have applicationapply to, and their impact on, us is in flux. At this time we are unable to determine the impact that the clarification of these laws and their potential application and future interpretations, as well as new laws, may have on us in a number of jurisdictions. On October 5, 2016, the Consumer Financial Protection Bureau issued a final rule amending Regulations E and Z to create comprehensive consumer protections for prepaid financial products, and on January 25, 2018, the CFPB released final amendments to the final rule, clarifying certain disclosure provisions and reducing potential liability with respect to cardholders who are not registered and verified. These changes include a delay of the final rule’s effective date until April 1, 2019. The extensive nature of these regulations and the implementation dates for this additional rulemaking may result in additional compliance obligations and expense for our business.
State Usury Laws
Extensions of credit under many of our card products may be treated as commercial loans. In some states, usury laws limit the interest rates that can be charged not only on consumer loans but on commercial loans as well. To the extent that these usury
laws apply, we are limited in the amount of interest that we can charge and collect from our customers. Because we have substantial operations in multiple jurisdictions, we utilize choice of law provisions in our cardholder agreements as to the laws of which jurisdiction to apply. In addition, the interest rates on certain of our card products are set based upon the usury limit of the cardholder’s state. With respect to card products where we work with a partner or issuing bank, the partner bank may utilize the law of the jurisdiction applicable to the bank and “exports”“export” the usury limit of that state in connection with cards issued to residents of other states or we may use our choice of law provisions.
Derivatives Regulations
Rules adopted under the Dodd-Frank Act by the Commodity Futures Trading Commission (the “CFTC”), as well as the provisions of the European Market Infrastructure Regulation and its technical standards, which are directly applicable in the member states of the European Union, have subjected certain of the foreign exchange derivative contracts we offer to our customers as part of the Cambridge Global Payments (“Cambridge”) business, to reporting, recordkeeping, and other requirements. Additionally, certain foreign exchange derivatives transactions we may enter into in the future may be subject to centralized clearing requirements, or may be subject to margin requirements in the United States and European Union. Other jurisdictions outside the United States and the European Union are considering, have implemented, or are implementing regulations similar to those described above.
Other
We are subject to examination by our sponsor banks’ regulators, and must comply with certain regulations to which our sponsor banks are subject, as applicable. We are subject to audit by certain sponsor banks.
The Housing Assistance Tax Act of 2008 requires information returns to be made for each calendar year by merchants, acquiring entities, and third-party settlement organizations with respect to payments made in settlement of electronic payment transactions and third-party payment network transactions occurring in that calendar year. Reportable transactions are also subject to backup withholding requirements. We are required to comply with these requirements for the merchants in our Comdata network. We could be liable for penalties if our information return is not in compliance with these regulations.
Employees and labor relations
As of December 31, 2017,2019, we employed approximately 7,8908,700 employees, approximately 2,6203,450 of whom were located in the United States. We consider our employee relations to be good and have never experienced a work stoppage.
Additional Information
In addition, the SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically at https://www.sec.gov.
ITEM X. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding our executive officers, with their respective ages as of December 31, 2017.2019. Our officers serve at the discretion of our board of directors. There are no family relationships between any of our directors or executive officers.
| Name | Age | Position(s) | |||
| Ronald F. Clarke | Chief Executive Officer and Chairman of the Board of Directors | ||||
| Eric R. Dey | Chief Financial Officer | ||||
| John S. Coughlin | |||||
| Alexey | Group President— | ||||
| Alan King | Group President— | ||||
| Armando L. Netto | Group President—Brazil | ||||
Ronald F. Clarke has been our Chief Executive Officer since August 2000 and was appointed Chairman of our board of directors in March 2003. From 1999 to 2000, Mr. Clarke served as President and Chief Operating Officer of AHL Services, Inc., a staffing firm. From 1990 to 1998, Mr. Clarke served as Chief Marketing Officer and later as a division president with Automatic Data Processing, Inc. (ADP), a computer services company. From 1987 to 1990, Mr. Clarke was a principal with Booz Allen Hamilton, a global management consulting firm. Earlier in his career, Mr. Clarke was a marketing manager for General Electric Company, a diversified technology, media, and financial services corporation.
Eric R. Dey has been our Chief Financial Officer since November 2002. From October 2000 to October 2002, Mr. Dey served as Chief Financial Officer of NCI Corporation, a call center company. From July 1999 to October 2000, Mr. Dey served as Chief Financial Officer of Leisure Time Technology, a software development/manufacturing company. From 1994 to 1999, Mr. Dey served as Corporate Controller with Excel Communications, a telecommunications service provider. From 1984 to 1994, Mr. Dey held a variety of financial and accounting positions with PepsiCo, Inc., a global beverage, snack and food company.
Alan King joined us in August 2016 and serves as our Group President—UK,Europe, Australia and New Zealand. Mr. King began leading all European operations, in addition to his UK responsibilities in July 2019. Prior to joining us, Mr. King held various positions at MasterCard from 2005 to 2016, including Managing Director of MasterCard Prepaid Management Services, Group Head of Global Prepaid Solutions, Group General Manager for Market and Business Development in the UK and Ireland and General Manager of Global Accounts. Prior to MasterCard, Mr. King held leadership positions at VISA in the CEMEA region from 2003 to 2005 and at Citibank from 1998 to 2003, largely across commercial payments in international markets. Mr. King spent the early part of his career in the telecom and automotive industries, in various sales and marketing roles covering Europe.
ITEM 1A. RISK FACTORS
You should carefully consider the following risks applicable to us. If any of the following risks actually occur, our business, operating results, financial condition and the trading price of our common stock could be materially adversely affected. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See "Note“Note Regarding Forward-Looking Statements"Statements” in this report.
Risks related to our business
A decline in retail fuel prices could adversely affect our revenue and operating results.
Our fleet customers use our products and services primarily in connection with the purchase of fuel. Accordingly, our revenue is affected by fuel prices, which are subject to significant volatility. A decline in retail fuel prices could cause a decrease in our revenue from fees paid to us by merchants based on a percentage of each transaction purchase amount. We believe that in 2017,2019, approximately 13% our consolidated revenue was directly influenced by the absolute price of fuel. Changes in the absolute price of fuel may also impact unpaid account balances and the late fees and charges based on these amounts. A decline in retail fuel prices could adversely affect our revenue and operating results.
Fuel prices are dependent on several factors, all of which are beyond our control. These factors include, among others:
supply and demand for oil and gas, and market expectations regarding supply and demand;
actions by members of OPEC and other major oil-producing nations;
new oil production being developed in the U.S. and elsewhere;
political conditions in oil-producing and gas-producing nations, including insurgency, terrorism or war;
oil refinery capacity;
weather;
the prices of foreign exports;
speculative trading;
the implementation of fuel efficiency standards and the adoption by our fleet customers of vehicles with greater fuel efficiency or alternative fuel sources;
general worldwide economic conditions; and
governmental regulations, trade sanctions and embargos, taxes and tariffs.
A portion of our revenue is derived from fuel-price spreads. As a result, a contraction in fuel-price spreads could adversely affect our operating results.
Approximately 10%5% of our consolidated revenue in 20172019, was derived from transactions where our revenue is tied to fuel-price spreads. Fuel-price spreads equal the difference between the fuel price we charge to the fleet customer and the fuel price paid to the fuel merchant. In transactions where we derive revenue from fuel-price spreads, the fuel price paid to the fuel merchant is calculated as the merchant’s wholesale cost of fuel plus a commission. The merchant’s wholesale cost of fuel is dependent on several factors including, among others, the factors described above affecting fuel prices. The fuel price that we charge to our fleet customer is dependent on several factors including, among others, the fuel price paid to the fuel merchant, posted retail fuel prices and competitive fuel prices. We experience fuel-price spread contraction when the merchant’s wholesale cost of fuel increases at a faster rate than the fuel price we charge to our fleet customers, or the fuel price we charge to our fleet customers decreases at a faster rate than the merchant’s wholesale cost of fuel. Accordingly, when fuel-price spreads contract, we generate less revenue, which could adversely affect our operating results.
If we fail to adequately assess and monitor credit risks of our customers, we could experience an increase in credit loss.
We are subject to the credit risk of our customers which range in size from small sole proprietorships to large publicly traded companies. We use various methods to screen potential customers and establish appropriate credit limits, but these methods cannot eliminate all potential credit risks and may not always prevent us from approving customer applications that are not credit-worthy or are fraudulently completed. Changes in our industry, customer demand, and, in relation to our fleet customers, movement in fuel prices may result in periodic increases to customer credit limits and spending and, as a result, could lead to increased credit losses. We may also fail to detect changes to the credit risk of customers over time. Further, during a declining economic environment, we experience increased customer defaults and preference claims by bankrupt customers. If we fail to adequately manage our credit risks, our bad debt expense could be significantly higher than historic levels and adversely affect our business, operating results and financial condition. OurFor the years ended December 31, 2019 and 2018, our bad debt expense was $44.9$74.3 million in 2017 and $35.9$64.4 million, in 2016, or 76 bps in 2017 and 86 bps in 2016,of total billings, respectively.
Our card programs include a variety of fees and charges associated with transactions, cards, reports, optional services and late payments. Revenues for late fees and finance charges represent 6% of our consolidated revenue for the year ended December 31, 2017.2019. If the users of our cards decrease their transaction activity, or the extent to which they use optional services or pay invoices late, our revenue could be materially adversely affected. In addition, several market factors can affect the amount of our fees and charges, including the market for similar charges for competitive card products and the availability of alternative payment methods such as cash or house accounts. Furthermore, regulators and Congress have scrutinized the electronic payments industry’s pricing, charges and other practices related to its customers. Any legislative or regulatory restrictions on our ability to price our products and services could materially and adversely affect our revenue. Any decrease in our revenue derived from these fees and charges could materially and adversely affect our business, operating results and financial condition.
We operate in a competitive business environment, and if we are unable to compete effectively, our business, operating results and financial condition would be adversely affected.
The market for our products and services is highly competitive, and competition could intensify in the future. Our competitors vary in size and in the scope and breadth of the products and services they offer. In the fleet card business, our primary competitors in North America are small regional and large independent fleet card providers, major oil companies and petroleum marketers that issue their own fleet cards, and major financial services companies that provide card services to major oil companies and petroleum marketers. In the commercial payments business, we face a variety of competitors, some of which have greater financial resources, name recognition and scope and breadth of products and services. Competitors in the hotel card business include travel agencies, online lodging discounters, internal corporate procurement and travel resources, and independent services companies. We also compete for customers with providers of alternative payment mechanisms, such as merchants offering house cash accounts or other forms of credit. Our primary competitors in Europe, Australia and New Zealand are independent fleet card providers, major oil companies and petroleum marketers that issue branded fleet cards, and providers of card outsourcing services to major oil companies and petroleum marketers. Our primary competitors in Latin America are independent providers of fleet cards and vouchers for food, fuel, tolls, and transportation and major oil companies and providers of card outsourcing services to major oil companies and petroleum marketers who offer commercial fleet cards.
The most significant competitive factors in our business are the breadth of product and service features, network acceptance size, customer service, account management, and price. We may experience competitive disadvantages with respect to any of these factors from time to time as potential customers prioritize or value these competitive factors differently. As a result, a specific offering of our products and service features, networks and pricing may serve as a competitive advantage with respect to one customer and a disadvantage for another based on the customers’ preferences.
Some of our existing and potential competitors have longer operating histories, greater brand name recognition, larger customer bases, more extensive customer relationships or greater financial and technical resources than we do. In addition, our larger competitors may also have greater resources than we do to devote to the promotion and sale of their products and services and to pursue acquisitions. Many of our competitors provide additional and unrelated products and services to customers, such as treasury management, commercial lending and credit card processing. By providing these services that we do not provide, these competitors have an advantage of being able to bundle their products and services together and present them to existing customers with whom they have established relationships, sometimes at a discount. For example, in the commercial payments business, we compete with full service banks that are able to offer treasury management and commercial lending in addition to commercial payment solutions. If price competition continues to intensify, we may have to increase the incentives that we offer to our customers, decrease the prices of our products and services or lose customers, each of which could adversely affect our operating results. In the fleet card business, major oil companies and petroleum marketers and large financial institutions may choose to integrate fuel-card services as a complement to their existing card products and services, as well as offer add-on complementary services. As a result, they may be able to adapt more quickly to new or emerging technologies and changing opportunities, standards or customer requirements. To the extent that our competitors are regarded as leaders in specific categories, they may have an advantage over us as we attempt to further penetrate these categories.
Future mergers or consolidations among competitors, or acquisitions of our competitors by large companies may present competitive challenges to our business. Resulting combined entities could be at a competitive advantage if their fuel-card products and services are effectively integrated and bundled into sales packages with their widely utilized non-fuel-card-related products and services. Further, competitors may reduce the fees for their services, which could increase pricing pressure within our markets.
Overall, increased competition in our markets could result in intensified pricing pressure, reduced profit margins, increased sales and marketing expenses and a failure to increase, or a loss of, market share. We may not be able to maintain or improve our competitive position against our current or future competitors, which could adversely affect our business, operating results and financial condition.
Our fleet card business is dependent on several key strategic relationships, the loss of which could adversely affect our operating results.
We intend to seek to expand our strategic relationships with major oil companies and to establish additional relationships with other petroleum marketers. We refer to the major oil companies and petroleum marketers with whom we have strategic relationships as our “partners.” We use this term in the business sense to refer to strategic business relationships formed through contracts such as Card Program Agreements, and not in the legal sense of operating under legal partnership arrangements created pursuant to laws such as the Uniform Partnership Act. During 2017,2019, our top three strategic relationships with major oil companies accounted for less than 6%4% of our consolidated revenue. Our agreements with our major oil company partners typically have initial terms of five to ten years with current remaining terms ranging from about one to sixeight years.
The success of our business is in part dependent on our ability to maintain these strategic relationships and enter into additional strategic relationships with major oil companies. In our relationships with these major oil companies, our services are marketed under our partners’ brands. If these partners fail to maintain their brands or decrease the size of their branded networks, our ability to grow our business may be adversely affected. Also, our inability to maintain or further develop these relationships or add additional strategic relationships could materially and adversely affect our business and operating results.
To enter into a new strategic relationship or renew an existing strategic relationship with a major oil company, we often must participate in a competitive bidding process, which may focus on a limited number of factors, including pricing. The bidding and negotiating processes generally occur over a protracted time period. The use of these processes may affect our ability to effectively compete for these relationships. Our competitors may be willing to bid for these contracts on pricing or other terms that we consider uneconomical in order to win business. The loss of our existing major oil company partners or the failure to contract or delays in contracting with additional partners could materially and adversely affect our business, operating results and financial condition.
With respect to the closed loop networks we utilize, a portion of our growth is derived from acquiring new merchant relationships to serve our customers, new and enhanced product and service offerings, and cross-selling our products and services through existing merchant relationships. We rely on the continuing growth of our merchant relationships and our distribution channels in order to expand our customer base. There can be no guarantee that this growth will continue. Similarly, our growth also will depend on our ability to retain and maintain existing merchant relationships that accept our proprietary closed-loop networks in areas where our customers purchase fuel, maintenance services, and lodging. Our contractual agreements with fuel merchants and service garages typically have initial terms of one or two years and automatically renew on the same basis unless either party gives notice of termination. Our agreements with lodging providers typically have initial terms of one year and automatically renew on a month-to-month basis unless either party gives notice of termination. Furthermore, merchants with which we have relationships may experience bankruptcy, financial distress, or otherwise be forced to contract their operations. The loss of existing merchant relationships, failure to continue such relationships on similarly attractive economic terms, the contraction of our existing merchants’ operations or the inability to acquire new merchant relationships could adversely affect our ability to serve our customers and our business and operating results.
We have long standing relationships with major truck stop merchants to accept our over-the-road fuel cards. Over-the-road customers purchase a significant proportion of their fuel at major truck stop merchants. The loss of existing major truck stop
merchant relationships or failure to continue such relationships on similar terms could adversely affect our ability to serve our over-the-road fuel card customers and our business and operating results.
A decline in general economic conditions, and in particular, a decline in demand for fuel and other business related products and services would adversely affect our business, operating results and financial condition.
Our operating results are materially affected by conditions in the economy generally, both in the U.SU.S. and internationally. We generate revenue based in part on the volume of purchase transactions we process. Our transaction volume is correlated with general economic conditions, particularly in the U.S., Europe, Russia, Latin America, Australia and New Zealand, and the amount of business activity in economies in which we operate. Downturns in these economies are generally characterized by reduced commercial activity and, consequently, reduced purchasing of fuel and other business related products and services by our customers. The commercial payments industry in general, and our commercial payment solutions business specifically, depends heavily upon the overall level of spending. Unfavorable changes in economic conditions, including declining consumer confidence, inflation, recession, political climate or other changes, may lead our corporate customers to reduce their spending, resulting in reduced demand for, or use of, our products and services. In addition, unfavorable changes in economic conditions, may lead our fleet card customers to demand less fuel, or lead our partners to reduce their use of our products and services. As a result, a sustained deterioration in general economic conditions in the U.S. or abroad could have a material adverse effect on our revenue and profitability.
Further, economic conditions also may impact the ability of our customers or partners to pay for fuel or other services they have purchased and, as a result, our reserve for credit losses and write-offs of accounts receivable could increase. A weakening economy could also force some retailers and merchants to close, resulting in exposure to potential credit losses and transaction declines. In addition, demand for fuel and other business related products and services may be reduced by other factors that are beyond our control, such as the development and use of vehicles with greater fuel efficiency and alternative fuel sources.
We are unable to predict the likely duration of current economic conditions in the U.S., Europe, Russia, Latin America, Australia and New Zealand. As a result, weaknesses in general economic conditions or increases in interest rates in key countries in which we operate could adversely affect our business and operating results.
We have expanded our business to encompass new lines of business in the past. For example, we have entered into the corporate payments, stored value card, vehicle maintenance management and telematics business in the U.S. and Europe, and transaction processing, fuel, food, toll and transportation card and voucher businesses in Brazil and Mexico. We may continue to enter into new lines of business and offer new products and services in the future. There is no guarantee that we will be successful in integrating these new lines of business into our operations. If we are unable to do so, our operating results and financial condition may be adversely affected.
If we fail to develop and implement new technology, products and services, adapt our products and services to changes in technology, the marketplace requirements, or if our ongoing efforts to upgrade our technology, products and services are not successful, we could lose customers and partners.
The markets for our products and services are highly competitive and characterized by technological change, frequent introduction of new products and services and evolving industry standards. We must respond to the technological advances offered by our competitors and the requirements of our customers and partners, in order to maintain and improve upon our competitive position and fulfill contractual obligations. We may be unsuccessful in expanding our technological capabilities and developing, marketing or selling new products and services that meet these changing demands, which could jeopardize our competitive position. In addition, we engage in significant efforts to upgrade our products and services and the technology that supports these activities on a regular basis.
The products we deliver are designed to process complex transactions and provide reports and other information on those transactions, all at high volumes and processing speeds. Any failure to deliver an effective and secure product or service or any performance issue that arises with a new product or service could result in significant processing or reporting errors or other losses. We may rely on third parties to develop or co-develop our solutions or to incorporate our solutions into broader platforms for the commercial payments industry. We may not be able to enter into such relationships on attractive terms, or at all, and these relationships may not be successful. In addition, partners, some of whom may be our competitors or potential competitors, may choose to develop competing solutions on their own or with third parties. Even if we are successful in developing new services and technologies, these new services and technologies may not achieve broad acceptance due to a
variety of factors, including a lack of industry-wide standards, competing products and services, or resistance to these changes from our customers. In addition, we may not be able to derive revenue from these efforts.
If we are unsuccessful in completing the migration of material technology, otherwise upgrading our products and services and supporting technology or completing or gaining market acceptance of new technology, products and services, it would have a material adverse effect on our ability to retain existing customers and attract new ones in the impacted business line.
Our debt obligations, or our incurrence of additional debt obligations, could limit our flexibility in managing our business and could materially and adversely affect our financial performance.
At December 31, 2017,2019, we had approximately $4.47$4.99 billion of debt outstanding under our Credit Facility and Securitization Facility. In addition, we are permitted under our credit agreement to incur additional indebtedness, subject to specified limitations. Our substantial indebtedness currently outstanding, or as may be outstanding if we incur additional indebtedness, could have important consequences, including the following:
we may have difficulty satisfying our obligations under our debt facilities and, if we fail to satisfy these obligations, an event of default could result;
we may be required to dedicate a substantial portion of our cash flow from operations to required payments on our indebtedness, thereby reducing the availability of cash flow for acquisitions, working capital, capital expenditures and other general corporate activities. See "Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations—ContractualOperations-Contractual Obligations,"” which sets forth our payment obligations with respect to our existing long-term debt;
covenants relating to our debt may limit our ability to enter into certain contracts or to obtain additional financing for acquisitions, working capital, capital expenditures and other general corporate activities;
covenants relating to our debt may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, including by restricting our ability to make strategic acquisitions;
we may be more vulnerable than our competitors to the impact of economic downturns and adverse developments in the industry in which we operate;
we are exposed to the risk of increased interest rates because certain of our borrowings are subject to variable rates of interest;
although we have no current intention to pay any dividends, we may be unable to pay dividends or make other distributions with respect to your investment; and
we may be placed at a competitive disadvantage against any less leveraged competitors.
The occurrence of one or more of these potential consequences could have a material adverse effect on our business, financial condition, operating results, and ability to satisfy our obligations under our indebtedness.
In addition, we and our subsidiaries may incur substantial additional indebtedness in the future. Although our credit agreements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of additional indebtedness that could be incurred in compliance with these restrictions could be substantial. If new debt is added to our existing debt levels, the related risks that we will face would increase.
We meet a significant portion of our working capital needs through a securitization facility, which we must renew every three years.
We meet a significant portion of our working capital needs through a securitization facility, pursuant to which we sell accounts receivable to a special-purpose entity that in turn sells undivided participation interests in the accounts receivable to certain purchasers, who finance their purchases through the issuance of short-term commercial paper. The securitization facility has a three year term. Although we have been able to renew our Securitization Facility annuallysecuritization facility in the past, there can be no assurance that we will continue to be able to renew this facility in the future on terms acceptable to us. For example, the market for commercial paper experienced significant volatility during the financial crisis that began in 2008. Also, a significant rise in fuel prices could cause our accounts receivable to increase beyond the capacity of the securitization facility. There can be no
assurance that the size of the facility can be expanded to meet these increased working capital needs. Further, we may not be able to fund such increases in accounts receivable with our available cash resources. Our inability to meet working capital needs could adversely affect our financial condition and business, including our relationships with merchants, customers and partners. Further, we are exposed to the risk of increased interest rates because our borrowings under the Securitization Facility are subject to variable rates of interest. We renewed our Securitization Facilitysecuritization facility as of November 14, 2017,August 30, 2018, with an expiration date of November 14, 2020.
Changes in the method pursuant to which the LIBOR rates are determined and potential phasing out of LIBOR after 2021 may adversely affect our results of operations.
LIBOR and certain other “benchmarks” are the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. In particular, on July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. Accordingly, there is considerable uncertainty regarding the publication of LIBOR beyond 2021. The Federal Reserve Board convened the Alternative Reference Rates Committee (“ARRC”) to identify a set of alternative reference rates for possible use as market benchmarks. Based on the ARRC’s recommendation, the Federal Reserve Bank of New York began publishing the Secured Overnight Financing Rate (“SOFR”) and two other alternative rates beginning in April 2018. Since then, certain derivative products and debt securities tied to SOFR have been introduced, and a number of industry groups are developing transition plans to SOFR as the new market benchmark.
We are not able to predict whether LIBOR will actually cease to be available after 2021 or whether SOFR will become the market benchmark in its place. Any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the performance of LIBOR relative to its historic values. If the methods of calculating LIBOR change from current methods for any reason, or if LIBOR ceases to perform as it has historically, our interest expense associated with the unhedged portion of our outstanding indebtedness or any future indebtedness we incur may increase. Further, if LIBOR ceases to exist, we may be forced to substitute an alternative reference rate, such as SOFR or a different benchmark interest rate or base rate borrowings, in lieu of LIBOR under our current and future indebtedness and cash flow hedges. Any such alternative reference rate may be calculated differently than LIBOR and may increase the interest expense associated with our existing or future indebtedness.
Finally, the replacement or disappearance of LIBOR may adversely affect the value of and return on our LIBOR-based obligations and the availability, pricing and terms of cash flow hedges we use to hedge our variable interest rate risk. Alternative reference rates or modifications to LIBOR may not align for our assets, liabilities, and hedging instruments, which could reduce the effectiveness of certain of our interest rate hedges, and could cause increased volatility in our earnings. We may also incur expenses to amend and adjust our indebtedness and swaps to eliminate any differences between any alternative reference rates used by our cash flow hedges and our outstanding indebtedness.
Any of these occurrences could materially and adversely affect our borrowing costs, business and results of operations.
We are subject to risks related to volatility in foreign currency exchange rates, and restrictions on our ability to utilize revenue generated in foreign currencies.
As a result of our foreign operations, we are subject to risks related to changes in currency rates for revenue generated in currencies other than the U.S. dollar. For the year ended December 31, 2017,2019, approximately 37%40% of our revenue was denominated in currencies other than the U.S. dollar (primarily, British pound, Brazilian real, Canadian dollar, Russian ruble, Mexican peso, Czech koruna, Euro, Australian dollar and New Zealand dollar). Revenue and profit generated by international operations may increase or decrease compared to prior periods as a result of changes in foreign currency exchange rates. Resulting exchange gains and losses are included in our net income. Volatility in foreign currency exchange rates may materially adversely affect our operating results and financial condition.
Furthermore, we are subject to exchange control regulations that restrict or prohibit the conversion of more than a specified amount of our foreign currencies into U.S. dollars, and, as we continue to expand, we may become subject to further exchange control regulations that limit our ability to freely utilize and transfer currency in and out of particular jurisdictions. These restrictions may make it more difficult to effectively utilize the cash generated by our operations and may adversely affect our financial condition.
We have been an active business acquirer in the U.S. and internationally, and, as part of our growth strategy, we expect to seek to acquire businesses, commercial account portfolios, technologies, services and products in the future. We have substantially expanded our overall business, customer base, headcount and operations through acquisitions. The acquisition and integration of each business involves a number of risks and may result in unforeseen operating difficulties and expenditures in assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired business. Furthermore, acquisitions may:
involve our entry into geographic or business markets in which we have little or no prior experience;
involve difficulties in retaining the customers of the acquired business;
involve difficulties and expense associated with regulatory requirements, competition controls or investigations;
result in a delay or reduction of sales for both us and the business we acquire; and
disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our current business.
In addition, international acquisitions often involve additional or increased risks including, for example:
difficulty managing geographically separated organizations, systems and facilities;
difficulty integrating personnel with diverse business backgrounds, languages and organizational cultures;
difficulty and expense introducing our corporate policies or controls;
increased expense to comply with foreign regulatory requirements applicable to acquisitions;
difficulty entering new foreign markets due to, among other things, lack of customer acceptance and a lack of business knowledge of these new markets; and
political, social and economic instability.
In addition, the integration process following an acquisition requires significant management attention and resources. Integration of acquisitions could result in the distraction of our management, the disruption of our ongoing business or inconsistencies on our services, standards, controls, procedures and policies, any of which could affect our ability to achieve the anticipated benefits of an acquisition or otherwise adversely affect our business and financial results.
To complete future acquisitions, we may determine that it is necessary to use a substantial amount of our cash or engage in equity or debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters that make it more difficult for us to obtain additional capital in the future and to pursue other business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all, which could limit our ability to engage in acquisitions. Moreover, we can make no assurances that the anticipated benefits of any acquisition, such as operating improvements or anticipated cost savings, would be realized or that we would not be exposed to unexpected liabilities in connection with any acquisition.
Further, an acquisition may negatively affect our operating results because it may require us to incur charges and substantial debt or other liabilities, may cause adverse tax consequences, substantial depreciation and amortization or deferred compensation charges, may require the amortization, write-down or impairment of amounts related to deferred compensation, goodwill and other intangible assets, may include substantial contingent consideration payments or other compensation that reduce our earnings during the quarter in which incurred, or may not generate sufficient financial return to offset acquisition costs.
We have foreign operations in, or provide services for commercial card accounts in Australia, Austria, Azerbaijan, Belarus, Belgium, Brazil, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Gibraltar, Greece, Hong Kong, Hungary, Ireland, Italy, Kazakhstan, Latvia, Lithuania, Luxembourg, Macau, Malaysia, Mexico, Moldova, Mongolia, the Netherlands, New Zealand, Norway, Pakistan, Papua New Guinea, Peru, Philippines, Poland, Portugal, Romania, Russia, Singapore, Slovakia, Slovenia,more than 100 countries throughout North America, South America, Europe, Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, Ukraine, United Arab EmiratesOceania and the United Kingdom.Asia. We also expect to seek to expand our operations into various additional countries in Asia, Europe and Latin America as part of our growth strategy.
Some of the countries where we operate, and other countries where we will seek to operate, such as Russia, Brazil and Mexico, have undergone significant political, economic and social change in recent years, and the risk of unforeseen changes in these countries may be greater than in the U.S. For example, Russia and Ukraine are experiencing significant unrest, which could escalate into broader armed conflict and additional economic sanctions by the U.S.,U.S, the United Nations or other countries against Russia. In addition, political discourse in the U.S. may impact business practices in Mexico and other jurisdictions. In addition, changes in laws or regulations, including with respect to payment service providers, taxation, information technology, data transmission and the Internet, revenues from non-U.S. operations or in the interpretation of existing laws or regulations, whether caused by a change in government or otherwise, could materially adversely affect our business, operating results and financial condition.
In addition, conducting and expanding our international operations subjects us to other risks that we do not generally face in the U.S. These include:
difficulties in managing the staffing of our international operations, including hiring and retaining qualified employees;
difficulties and increased expense introducing corporate policies and controls in our international operations;
increased expense related to localization of our products and services, including language translation and the creation of localized agreements;
potentially adverse tax consequences, including the complexities of foreign value added tax systems, restrictions on the repatriation of earnings and changes in tax rates;
increased expense to comply with foreign laws and legal standards, including laws that regulate pricing and promotion activities and the import and export of information technology, which can be difficult to monitor and are often subject to change;
increased expense to comply with U.S. laws that apply to foreign operations, including the Foreign Corrupt Practices Act (the "FCPA"“FCPA”) and OFAC regulations;
increased expense to comply with U.K. laws that apply to foreign operations, including the U.K. Bribery Act;
longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
increased financial accounting and reporting burdens and complexities;
political, social and economic instability;
terrorist attacks and security concerns in general; and
reduced or varied protection for intellectual property rights and cultural norms in some geographies that are simply not respectful of intellectual property rights.
The occurrence of one or more of these events could negatively affect our international operations and, consequently, our operating results. Further, operating in international markets requires significant management attention and financial resources. Due to the additional uncertainties and risks of doing business in foreign jurisdictions, international acquisitions tend to entail risks and require additional oversight and management attention that are typically not attendant to acquisitions made within the U.S. We cannot be certain that the investment and additional resources required to establish, acquire or integrate operations in other countries will produce desired levels of revenue or profitability.
We are dependent on the efficient and uninterrupted operation of interconnected computer systems, telecommunications, data centers and call centers, including technology and network systems managed by multiple third parties, which could result in our inability to prevent disruptions in our services.
Our ability to provide reliable service to customers, cardholders and other network participants depends upon uninterrupted operation of our data centers and call centers as well as third-party labor and services providers. Our business involves processing large numbers of transactions, the movement of large sums of money and the management of large amounts of data. We rely on the ability of our employees, contractors, suppliers, systems and processes to complete these transactions in a secure, uninterrupted and error-free manner.
Our subsidiaries operate in various countries and country specific factors, such as power availability, telecommunications carrier redundancy, embargoes and regulation can adversely impact our information processing by or for our local subsidiaries.
We engage backup facilities for each of our processing centers for key systems and data. However, there could be material delays in fully activating backup facilities depending on the nature of the breakdown, security breach or catastrophic event (such as fire, explosion, flood, pandemic, natural disaster, power loss, telecommunications failure or physical break-in). We have controls and documented measures to mitigate these risks but these mitigating controls might not reduce the duration, scope or severity of an outage in time to avoid adverse effects.
We may experience software defects, system errors, computer viruses and development delays, which could damage customer relationships, decrease our profitability and expose us to liability.
Our business depends heavily on the reliability of proprietary and third-party processing systems. A system outage could adversely affect our business, financial condition or results of operations, including by damaging our reputation or exposing us
to third-party liability. To successfully operate our business, we must be able to protect our processing and other systems from interruption, including from events that may be beyond our control. Events that could cause system interruptions include fire, natural disaster, unauthorized entry, power loss, telecommunications failure, computer viruses, terrorist acts and war. Although we have taken steps to protect against data loss and system failures, there is still risk that we may lose critical data or experience system failures.
Our products and services are based on sophisticated software and computing systems that are constantly evolving. We often encounter delays and cost overruns in developing changes implemented to our systems. In addition, the underlying software may contain undetected errors, viruses or defects. Defects in our software products and errors or delays in our processing of electronic transactions could result in additional development costs, diversion of technical and other resources from our other development efforts, loss of credibility with current or potential customers, harm to our reputation or exposure to liability claims. In addition, we rely on technologies supplied to us by third parties that may also contain undetected errors, viruses or defects that could adversely affect our business, financial condition or results of operations. Although we attempt to limit our potential liability for warranty claims through disclaimers in our software documentation and limitation of liability provisions in our licenses and other agreements with our customers, we cannot assure that these measures will be successful in limiting our liability.
We may incur substantial losses due to fraudulent use of our payment cards or vouchers.
Under certain circumstances, when we fund customer transactions, we may bear the risk of substantial losses due to fraudulent use of our payment cards or vouchers. We do not maintain insurance to protect us against such losses. We bear similar risk relating to fraudulent acts of employees or contractors, for which we maintain insurance. However, the conditions or limits of coverage may be insufficient to protect us against such losses.
Criminals are using increasingly sophisticated methods to engage in illegal activities involving financial products, such as skimming and counterfeiting payment cards and identity theft. A single significant incident of fraud, or increases in the overall level of fraud, involving our cards and other products and services, could result in reputational damage to us, which could reduce the use and acceptance of our cards and other products and services or lead to greater regulation that would increase our compliance costs. Fraudulent activity could also result in the imposition of regulatory sanctions, including significant monetary fines, which could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to adequately protect our systems or the data we collect from continually evolving cybersecurity risks or other technological risks, which could subject us to liability and damage our reputation.
We electronically receive, process, store and transmit data and sensitive information about our customers and merchants, including bank account information, social security numbers, expense data, and credit card, debit card and checking account numbers. We endeavor to keep this information confidential; however, our websites, networks, information systems, services and technologies may be targeted for sabotage, disruption or misappropriation. The uninterrupted operation of our information systems and our ability to maintain the confidentiality of the customer and consumer information that resides on our systems are critical to the successful operation of our business. Unauthorized access to our networks and computer systems could result in the theft or publication of confidential information or the deletion or modification of records or could otherwise cause interruptions in our service and operations. Although
While we have not suffered any material losses relating to cyber-attacks or other information security breaches, we discovered unauthorized access to certain of our systems during the second quarter of 2018, which we previously disclosed. Following the discovery of suspicious activity primarily on systems involving the Company’s gift card business, the Company took prompt action to stop the activity and limit the improper use of accessed private label gift card information (these gift cards do not contain personally identifiable information such as consumer names, Social Security numbers, driver’s license numbers and other sensitive personal data) with the help of technology forensic firms. The Company also contacted federal law enforcement and merchants known to be affected. The investigation has now been concluded and, based on the findings of the investigation, the unauthorized access was limited to what was reported in the Company’s quarterly report on Form 10-Q filed May 10, 2018, and we do not expect the unauthorized access to have a material impact on the Company’s results of operations. Other than this unauthorized access incident, we are not aware of any material breach of our or our associated third parties’ computer systems, or material losses relating to cyber-attacks or other information security breaches,although we and others in our industry are regularly the subject of attempts by bad actors to gain unauthorized access to these computer systems and data or to obtain, change or destroy confidential data (including personal consumer information of individuals) through a variety of means, including computer viruses, malware and phishing.
Because techniques used to sabotage or obtain unauthorized access to our systems and the data we collect change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Threats to our systems and our associated third parties’ systems can derive from human error,
fraud or malice on the part of employees or third parties, or may result from accidental technological failure. Computer viruses can be distributed and could infiltrate our systems or those of our associated third parties. In addition, denial of service or other attacks could be launched against us for a variety of purposes, including to interfere with our services or create a diversion for other malicious activities. Although we believe we have sufficient controls in place to prevent disruption and misappropriation
and to respond to such attacks, any inability to prevent security breaches could have a negative impact on our reputation, expose us to liability, decrease market acceptance of electronic transactions and cause our present and potential clients to choose another service provider. Any of these developments could have a material adverse effect on our business, operating results and financial condition.
We could also be subject to liability for claims relating to misuse of personal information, such as unauthorized marketing purposes and violation of data privacy laws. For example, we are subject to statutes, regulations, and rulings relevant to the direct email marketing and text-messaging industries, including the TCPA, the CAN-SPAM Act, FCC orders, state-enacted laws regulating commercial email and foreign legislation (such as the Canadian Anti-Spam Legislation and European laws enacted pursuant to European Union Directive 2002/58/EC and its amendments). While we believe we are in compliance with the relevant laws and regulations, if we were ever found to be in violation, our business, financial condition, operating results and cash flows could be materially adversely affected. We cannot provide assurance that the contractual requirements related to security and privacy that we impose on our service providers who have access to customer and consumer data will be followed or will be adequate to prevent the unauthorized use or disclosure of data. In addition, we have agreed in certain agreements to take certain protective measures to ensure the confidentiality of customer data. The costs of systems and procedures associated with such protective measures, as well as the cost of deploying additional personnel, training our employees and hiring outside experts, may increase and could adversely affect our ability to compete effectively. Any failure to adequately enforce or provide these protective measures could result in liability, protracted and costly litigation, governmental and card network intervention and fines, remediation costs, and with respect to misuse of personal information of our customers, lost revenue and reputational harm. While we maintain insurance covering certain security and privacy damages and claim expenses we may not carry insurance or maintain coverage sufficient to compensate for all liability and such insurance may not be available for renewal on acceptable terms or at all, and in any event, insurance coverage would not address the reputational damage that could result from a security incident.
In addition, under payment network rules, regulatory requirements, and related obligations, we may be responsible for the acts or failures to act of certain third parties, such as third party service providers, vendors, partners and others, which we refer to collectively as associated participants. The failure of our associated participants to safeguard cardholder data and other information in accordance with such rules, requirements and obligations could result in significant fines and sanctions and could harm our reputation and deter existing and prospective customers from using our services. We cannot assure you that there are written agreements in place with every associated participant or that such written agreements will ensure the adequate safeguarding of such data or information or allow us to seek reimbursement from associated participants. Any such unauthorized use or disclosure of data or information also could result in litigation that could result in a material adverse effect on our business, financial condition and results of operations.
The market for our commercial payment, fleet and stored value card services is evolving and may not continue to develop or grow.
A substantial portion of our revenue is based on the volume of payment card transactions by our customers. If businesses do not continue to use, or increase their use of, credit, debit or stored value cards as a payment mechanism for their transactions, it could have a material adverse effect on our business, financial condition and results of operations. We believe that future growth in the use of credit, debit and stored value cards and other electronic payments will be driven by the cost, ease-of-use, and quality of services offered. In order for us to consistently increase and maintain profitability, businesses must continue to use and increase the use of electronic payment methods, including credit, debit and stored value cards. Moreover, if there is an adverse development in the payments industry in general, such as new legislation or regulation that makes it more difficult for customers to do business, or a well-publicized data security breach that undermines the confidence of the public in electronic payment systems, it could have a material adverse effect on our business, financial condition and results of operations.
Our fleet card businesses rely on the acceptance and use of payment cards by businesses to purchase fuel for their vehicle fleets. If the use of fleet cards by businesses does not continue to grow, it could have a material adverse effect on our business, operating results and financial condition. In order to consistently increase and maintain our profitability, businesses and partners must continue to adopt our services. Similarly, growth in the acceptance and use of fleet cards will be impacted by the acceptance and use of electronic payment transactions generally.
Furthermore, new technologies may displace credit, debit and/or stored value cards as payment mechanisms for purchase transactions by businesses. A decline in the acceptance and use of credit, debit and/or stored value cards, and electronic
payment transactions generally, by businesses and merchants could have a material adverse effect on our business, operating results and financial condition. The market for our lodging cards, food vouchers and cards, transportation and toll road payments, telematics solutions and fleet maintenance management services is also evolving and those portions of our business are subject to similar risks.
If we fail to retain any of our stored value gift card customers, it will be difficult to find a replacement customer on a timely basis or at all, which will reduce our revenue.
Most of our stored value gift card customers in the U.S. are national retailers. During 2017,2019, a majority of our gift card revenue was derived from the design and purchase of gift card inventory, with the remaining portion of our 20172019 gift card revenue derived primarily from processing fees. If we fail to retain any of these customers, it will be difficult to find a replacement customer on a timely basis or at all because there is a limited number of national retailers in the U.S. and nearly all of those
other national retailers already have a gift card solution in place, either in-house or with one of our competitors. As such, any loss of a stored value gift card customer would reduce our revenue.
Legislation and regulation of greenhouse gases (“GHG”) and related divestment and other efforts could adversely affect our business.
We are aware of the increasing focus of local, state, regional, national and international regulatory bodies on GHG emissions and climate change issues. Legislation to regulate GHG emissions has periodically been introduced in the U.S. Congress, and there has been a wide-ranging policy debate, both in the U.S. and internationally, regarding the impact of these gases and possible means for their regulation. Several states and geographic regions in the U.S. have adopted legislation and regulations to reduce emissions of GHGs. Additional legislation or regulation by these states and regions, the EPA, and/or any international agreements to which the U.S. may become a party, that control or limit GHG emissions or otherwise seek to address climate change could adversely affect our partners’ and merchants’ operations, and therefore ours. See “Our fleet card business is dependent on several key strategic relationships, the loss of which could adversely affect our operating results.” and “If we are unable to maintain and expand our merchant relationships, our closed loop fleet card and lodging card businesses may be adversely affected.” Because our business depends on the level of activity in the oil industry, existing or future laws or regulations related to GHGs and climate change, including incentives to conserve energy or use alternative energy sources, could have a negative impact on our business if such laws or regulations reduce demand for fuel.
In addition to the regulatory efforts described above, there have also been efforts in recent years aimed at the investment community, including investment advisors, sovereign wealth funds, public pension funds, universities and other groups, promoting the divestment of fossil fuel equities as well as to pressure lenders and other financial services companies to limit or curtail activities with companies engaged in the extraction of fossil fuel reserves. If these efforts are successful, our ability to access capital markets may be limited and our stock price may be negatively impacted.
Members of the investment community have recently increased their focus on sustainability practices with regard to the oil and gas industry, including practices related to GHGs and climate change. An increasing percentage of the investment community considers sustainability factors in making investment decisions, and an increasing number of our partners and merchants consider sustainability factors in awarding work. If we are unable to successfully address sustainability enhancement, we may lose partners or merchants, our stock price may be negatively impacted, our reputation may be negatively affected, and it may be more difficult for us to effectively compete.
Adverse weather conditions, natural catastrophes, or public health crises, across a geographic region, can cause a decline in the number and amount of payment transactions we process, which could have a material adverse effect on our business, financial condition and results of operations.
When travel is severely curtailed across a geographic region during adverse weather conditions, or as a result of a natural catastrophe or public health crises, the number and amount of transactions we process can be significantly diminished, particularly in our fleet business, and revenue can materially decline. For example, during parts of January 2014, severe winter weather shut down a large portion of the eastern United States.U.S. Natural catastrophes such as hurricanes in east Texas (Hurricane Harvey) and in Florida (Hurricane Irma), each in 2017, wildfires in California in 2017 and 2018 and in Colorado in 2012 and flooding in Arkansas in 2019, had similar effects on a more local basis. In December 2019 and January 2020, an outbreak of COVID-19, a new strain of coronavirus in Wuhan, China has resulted in travel disruption and has effected certain companies’ operations in China, although, at this point, the extent to which the coronavirus may impact our results is uncertain. Prolonged adverse weather events or travel bans due to medical quarantine or in response to natural catastrophes, especially those that impact regions in which we process a large number and amount of payment transactions, could have a material adverse effect on our business, financial condition and results of operations.
Our fuel card, workforce payment solutions and gift card businesses’ results are subject to seasonality, which could result in fluctuations in our quarterly net income.
Our fuel card and workforce payment solutions businesses have experienced in the past, and expect to continue to experience, seasonal fluctuations in revenues and profit, which are impacted during the first and fourth quarter each year by the weather, holidays in the U.S., Christmas being celebrated in Russia in January, and lower business levels in Brazil due to summer break and the Carnival celebration. Our gift card business has experienced in the past, and expects to continue to experience, seasonal fluctuations in revenues as a result of consumer spending patterns. Historically gift card business revenues have been strongest in the third and fourth quarters and weakest in the first and second quarters, as the retail industry has its highest level of activity during and leading up to the Christmas holiday season.
Our balance sheet includes significant amounts of goodwill and intangible assets. The impairment of a significant portion of these assets would negatively affect our financial results.
Our balance sheet includes goodwill and intangible assets that represent approximately 66%59% of our total assets at December 31, 2017.2019. These assets consist primarily of goodwill and identified intangible assets associated with our acquisitions. We also expect to engage in additional acquisitions, which may result in our recognition of additional goodwill and intangible assets. Under current accounting standards, we are required to amortize certain intangible assets over the useful life of the asset, while goodwill and indefinite lived intangible assets are not amortized. On at least an annual basis, we assess whether there have been impairments in the carrying value of goodwill and indefinite lived intangible assets. If the carrying value of the asset is determined to be impaired, it is written down to fair value by a charge to operating earnings. An impairment of a significant portion of goodwill or intangible assets could materially negatively affect our operating results and financial condition.
If we are unable to protect our intellectual property rights and confidential information, our competitive position could be harmed and we could be required to incur significant expenses in order to enforce our rights.
To protect our proprietary technology, we rely on copyright, trade secret, patent and other intellectual property laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. Despite our precautions, it may be possible for third parties to obtain and use without our consent confidential information or infringe on our intellectual property rights, and our ability to police that misappropriation or infringement is uncertain, particularly in countries outside of the U.S. In addition, our confidentiality agreements with employees, vendors, customers and other third parties may not effectively prevent disclosure or use of proprietary technology or confidential information and may not provide an adequate remedy in the event of such unauthorized use or disclosure.
Protecting against the unauthorized use of our intellectual property and confidential information is expensive, difficult and not always possible. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our confidential information, including trade secrets, or to determine the validity and scope of the proprietary rights of others. This litigation could be costly and divert management resources, either of which could harm our business, operating results and financial condition. Accordingly, despite our efforts, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property and proprietary information.
We cannot be certain that the steps we have taken will prevent the unauthorized use or the reverse engineering of our proprietary technology. Moreover, others may independently develop technologies that are competitive to ours or infringe our intellectual property. The enforcement of our intellectual property rights also depends on our legal actions against these infringers being successful, and we cannot be sure these actions will be successful, even when our rights have been infringed.
Furthermore, effective patent, trademark, service mark, copyright and trade secret protection may not be available in every country in which we may offer our products and services.
Claims by others that we or our customers infringe their intellectual property rights could harm our business.
Third parties have in the past, and could in the future claim that our technologies and processes underlying our products and services infringe their intellectual property. In addition, to the extent that we gain greater visibility, market exposure, and add new products and services, we may face a higher risk of being the target of intellectual property infringement claims asserted by third parties. We may, in the future, receive notices alleging that we have misappropriated or infringed a third party’s intellectual property rights. There may be third-party intellectual property rights, including patents and pending patent applications that cover significant aspects of our technologies, processes or business methods. Any claims of infringement or misappropriation by a third party, even those without merit, could cause us to incur substantial defense costs and could distract our management from our business, and there can be no assurance that we will be able to prevail against such claims. Some of our competitors may have the capability to dedicate substantially greater resources to enforcing their intellectual property rights and to defending claims that may be brought against them than we do. Furthermore, a party making such a claim, if successful,
could secure a judgment that requires us to pay substantial damages, potentially including treble damages if we are found to have willfully infringed a patent. A judgment could also include an injunction or other court order that could prevent us from offering our products and services. In addition, we might be required to seek a license for the use of a third party’s intellectual property, which may not be available on commercially reasonable terms or at all. Alternatively, we might be required to develop non-infringing technology, which could require significant effort and expense and might ultimately not be successful.
Third parties may also assert infringement claims against our customers relating to their use of our technologies or processes. Any of these claims might require us to defend potentially protracted and costly litigation on their behalf, regardless of the merits of these claims, because under certain conditions we may agree to indemnify our customers from third-party claims of intellectual property infringement. If any of these claims succeed, we might be forced to pay damages on behalf of our customers, which could adversely affect our business, operating results and financial condition.
Finally, we use open source software in connection with our technology and services. Companies that incorporate open source software into their products, from time to time, face claims challenging the ownership of open source software. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software. Open source software is also provided without warranty, and may therefore include bugs, security vulnerabilities or other defects. Some open source software licenses require users of such software to publicly disclose all or part of the source code to their software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. While we monitor the use of open source software in our technology and services and try to ensure that none is used in a manner that would require us to disclose the source code to the related technology or service, such use could inadvertently occur and any requirement to disclose our proprietary source code could be harmful to our business, financial condition and results of operations.
Our success is dependent, in part, upon our executive officers and other key personnel, and the loss of key personnel could materially adversely affect our business.
Our success depends, in part, on our executive officers and other key personnel. Our senior management team has significant industry experience and would be difficult to replace. The market for qualified individuals is competitive, and we may not be able to attract and retain qualified personnel or candidates to replace or succeed members of our senior management team or other key personnel. The loss of key personnel could materially adversely affect our business.
Changes in laws, regulations and enforcement activities may adversely affect our products and services and the markets in which we operate.
The electronic payments industry is subject to increasing regulation in the U.S. and internationally. Domestic and foreign government regulations impose compliance obligations on us and restrictions on our operating activities, which can be difficult to administer because of their scope, mandates and varied requirements. We are subject to a number of government regulations, including, among others: interest rate and fee restrictions; credit access and disclosure requirements; collection and pricing regulations; compliance obligations; security and data breach requirements; identity theft avoidance programs; and anti-money laundering compliance programs. Government regulations can also include licensing or registration requirements. While a large portion of these regulations focuses on individual consumer protection, legislatures continue to consider whether to include business customers, especially smaller business customers, within the scope of these regulations. As a result, new or expanded regulation focusing on business customers or changes in interpretation or enforcement of regulations may have an adverse effect on our business and operating results, due to increased compliance costs and new restrictions affecting the terms under which we offer our products and services.
For example, certain of our subsidiaries are currently licensed as money transmitters on the state level by the banking departments or other state agencies. Continued licensing by these states is subject to periodic examinations and ongoing satisfaction of compliance requirements regarding safety and soundness, including maintenance of certain levels of net worth, surety bonding, permissible investments in amounts sufficient to cover our outstanding payment obligations with respect to certain of our products subject to licensure, and record keeping and reporting. If our subsidiaries are unable to obtain, maintain or renew necessary licenses or comply with other relevant state regulations, they will not be able to operate as a money transmitter in those states or provide certain other services and products, which could have a material adverse effect on our business, financial condition and results of operations.
In addition, certain of our subsidiaries are subject to regulation by the Financial Crimes Enforcement Network, or FinCEN, and must comply with applicable anti-money laundering requirements, including implementation of an effective anti-money laundering program. Changes in this regulatory environment, including changing interpretations and the implementation of new or varying regulatory requirements by the government, may significantly affect or change the manner in which we currently conduct some aspects of our business.
Regulatory changes may also restrict or eliminate present and future business opportunities available to certain of our subsidiaries. For example, the Durbin Amendment to the Dodd-Frank Act, which serves to limit interchange fees, may restrict or otherwise impact the way our subsidiaries do business or limit their ability to charge certain fees to customers. The Consumer Financial Protection Bureau ("CFPB")CFPB is also engaged in rule making and regulation of the payments industry, in particular with respect to prepaid cards, and in October 2016, thecards. The CFPB issued a final rule amending Regulations Eon prepaid accounts that came into effect on April 1, 2019. The rule’s definition of prepaid account includes certain accounts that are capable of being loaded with funds and Zwhose primary function is to create comprehensive consumer protectionsconduct transactions with multiple, unaffiliated merchants, at ATMs or for prepaid financial products. The extensive nature of these regulations and the implementation dates for this additional rulemaking may result in additional compliance obligations and expense for our business.person-to-person transfers. The CFPB’s focus on the protection of consumers might also extend to many of our small business customers. As a service provider to certain of our bank sponsors, we are subject to direct supervision and examination by the CFPB, in connection with certain of our products and services. CFPB rules, examinations and enforcement actions may require us to adjust our activities and may increase our compliance costs. Changing regulations or standards in the area of privacy and data protection could also adversely impact us. In addition, certain of our bank partners are subject to regulation by federal and state authority and, as a result, could pass through some of those compliance obligations to us.
Our business is subject to U.S. federal anti-money laundering laws and regulations, including the BSA. Our business in Canada is also subject to Proceeds of Crime (Money Laundering) and Terrorist Financing Act, or the PCTFA, which is a corollary to the BSA. The BSA, among other things, requires money services businesses (such as money transmitters, issuers of money orders and official checks and providers of prepaid access) to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity and maintain transaction records. The PCTFA imposes similar requirements.
Many of these laws and regulations are evolving, unclear and inconsistent across various jurisdictions, and ensuring compliance with them is difficult and costly. With increasing frequency, federal and state regulators are holding businesses like ours to higher standards of training, monitoring and compliance, including monitoring for possible violations of laws by our customers and people who do business with our customers while using our products. If we fail or are unable to comply with existing or changed government regulations in a timely and appropriate manner, we may be subject to injunctions, other sanctions and the payment of fines and penalties, and our reputation may be harmed, which could have a material adverse effect on our business, financial condition and results of operations.
Our partner banks also operate in a highly regulated industry, which recently has been the subject of extensive structural reforms that are expected to negatively affect the conduct and scope of their businesses, their ability to maintain or expand offerings of products and services, and the costs of their operations. These legislative and regulatory changes could prompt our partner banks to alter the extent or the terms of their dealings with us in ways that may have adverse consequences for our business.
In addition, recently implemented and pending changes in accounting standards (for example, changes relating to revenue recognition for customer contracts that will becomebecame effective for fiscal 2018) may adversely affect our results of operations.
Finally, we have endeavored to structure our businesses in accordance with existing tax laws and interpretations, including those related to state occupancy taxes, value added taxes in foreign jurisdictions, payroll taxes and restrictions on repatriation of funds or transfers of revenue between jurisdictions. Changes in tax laws, their interpretations or their enforcement could increase our tax liability, further limit our utilization of funds located in foreign jurisdictions and have a material adverse effect on our business and financial condition.
For more information about laws, regulations and enforcement activities that may adversely affect our products and services and the markets in which we operate, see “Business- Regulatory.”
Derivatives Regulations
regulations have added costs to our business and any additional requirements, such as future registration requirements and increased regulation of derivative contracts, may result in additional costs or impact the way we conduct our hedging activities, as well as impact how we conduct our business within our international payments provider operations.
Rules adopted under the Dodd-Frank Act by the Commodity Futures Trading Commission (the "CFTC"“CFTC”), as well as the provisions of the European Market Infrastructure Regulation and its technical standards, which are directly applicable in the member states of the European Union, have subjected certain of the foreign exchange derivative contracts we offer to our customers as part of Cambridge'sthe Cambridge Global Payments (“Cambridge”) business, to reporting, recordkeeping,record keeping, and other requirements. Additionally, certain foreign exchange derivatives transactions we may enter into in the future may be subject to centralized clearing requirements, or may be subject to margin requirements in the United StatesU.S. and European Union. Other jurisdictions outside the United StatesU.S. and the European Union are considering, have implemented, or are implementing regulations similar to those described above. Derivatives regulations have added costs to our business and any additional requirements,
such as future registration requirements and increased regulation of derivative contracts, may result in additional costs or impact the way we conduct our hedging activities, as well as impact how we conduct our business within our international payments provider operations. In particular, the CFTC has recently issued a proposed rule that, if adopted as proposed, would increase the likelihood that we will have to register one or more of our subsidiaries with the CFTC as swap dealers. Swap dealers are subject to a comprehensive regulatory framework and compliance with this framework will lead to additional costs, including costs relating to regulatory capital and margin requirements, and may impact how we conduct our hedging activities and derivatives business with customers. We are currently evaluating the impact the proposed rule, if adopted, would have on our hedging activities and operations.
Our compliance with these requirements has resulted, and may continue to result, in additional costs to our business and may impact our international payments provider business operations. Furthermore, our failure to comply with these requirements could result in fines and other sanctions, as well as necessitate a temporary or permanent cessation to some or all of our derivative related activities. Any such fines, sanctions or limitations on our business could adversely affect our operations and financial results. Additionally, the regulatory regimes for derivatives in the United StatesU.S. and European Union, such as under the Dodd-Frank Act and the European Markets in Financial Instruments Directive known as "MiFID“MiFID II,"” are continuing to evolve and changes to such regimes, our designation under such regimes, or the implementation of new rules under such regimes, such as future registration requirements and increased regulation of derivative contracts, may result in additional costs to our business. Other jurisdictions outside the United StatesU.S. and the European Union are considering, have implemented, or are implementing regulations similar to those described above and these may result in greater costs to us as well.
Governmental regulations designed to protect or limit access to personal information could adversely affect our ability to effectively provide our services.
Governmental bodies in the U.S. and abroad have adopted, or are considering the adoption of, laws and regulations restricting the transfer of, and requiring safeguarding of, non-public personal information. For example, in the U.S., all financial institutions must undertake certain steps to help protect the privacy and security of consumer financial information. In connection with providing services to our clients, we are required by regulations and arrangements with payment networks, our sponsor bank and certain clients to provide assurances regarding the confidentiality and security of non-public consumer information. These arrangements require periodic audits by independent companies regarding our compliance with industry standards such as PCI standards and also allow for similar audits regarding best practices established by regulatory guidelines. The compliance standards relate to our infrastructure, components, and operational procedures designed to safeguard the confidentiality and security of non-public consumer personal information received from our customers. Our ability to maintain compliance with these standards and satisfy these audits will affect our ability to attract and maintain business in the future. If we fail to comply with these regulations, we could be exposed to suits for breach of contract or to governmental proceedings. In addition, our client relationships and reputation could be harmed, and we could be inhibited in our ability to obtain new clients. If more restrictive privacy laws or rules are adopted by authorities in the future on the federal or state level or internationally, our compliance costs may increase, our opportunities for growth may be curtailed by our compliance capabilities or reputational harm and our potential liability for security breaches may increase, all of which could have a material adverse effect on our business, financial condition and results of operations.
In the U.S., Canada, the European Union and in other jurisdictions around the world, we are subject to numerous and disparate consumer laws (including laws on disputed transactions) as well as regulations on eCommercee-commerce or similar legislation. IfBecause we are found to have breached any consumer, eCommerce or similar legislation in any country, we may be subject to enforcement actions that require us to change our business practices in a manner which may negatively impact revenue, as well as litigation, fines, penalties and adverse publicity that could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business in a manner that harms our financial position.
While we have implemented processes and procedures to comply with these laws, if we or the third parties on which we rely for data fail to adhere to or successfully implement appropriate processes and procedures in response to existing or future regulations, it could result in legal and monetary liability, fines, penalties, or damage to our reputation in the collection, use, sharing or disclosuremarketplace, any of personally identifiable information or additional requirements and liability for security and data integritywhich could require us to modify our solutions and features, possibly inhave a material manner,adverse effect on our business, financial condition and results of operations. Additionally, any changes to these laws, their interpretation, or enforcement by the government or private parties that further restrict the way we contact and communicate with our potential customers or generate leads could limitadversely affect our ability to develop new servicesattract customers and features. For example, the EU-wide General Data Protection Regulation, or GDPR, which was passed by the European Union Parliament in the spring of 2016 and will become fully effective in May 2018, following a two-year implementation period, will replace the data protection laws of each European Union member state. The GDPR will implement more stringent operational requirements for processors and controllers of personal data, including, for example, increased requirements to erase an individual’s information upon request, mandatory data breach notification requirements and onerous new obligations on service providers. It also significantly increases penalties for non-compliance, including where we act as a service provider (e.g., data processor). If our privacy or data security measures fail to comply with applicable current or future laws and regulations, we may be subject to litigation, regulatory investigations, enforcement notices requiring us to change the way we use personal data or our marketing practices, fines, for example, of up to 20,000,000 Euros or up to 4% of the total worldwide annual turnover of the preceding financial year (whichever is higher) under the GDPR, or other liabilities, as well as negative publicity and a potential loss of business.
Unfavorable resolution of tax contingencies or changes to enacted tax rates could adversely affect our tax expense and results of operations.
Our tax returns and positions are subject to review and audit by federal, state, local, and international taxing authorities. An unfavorable outcome to a tax audit could result in higher tax expense, thereby negatively impacting our results of operations. We have established contingent liabilities for material known tax exposures relating to deductions, transactions and other matters involving some uncertainty as to the proper tax treatment of the item. These liabilities reflect what we believe to be reasonable assumptions as to the likely final resolution of each issue if raised by a taxing authority. There can be no assurance that, in all instances, an issue raised by a tax authority will be finally resolved at a financial cost less than any related liability. An unfavorable resolution, therefore, could negatively impact our financial position, operating results and cash flows in the current and/or future periods.
Our acquisition documents include warranties, covenants and conditions regarding various tax matters that occurred prior to the acquisition, supported by indemnification and, in some cases, holdbacks or escrows from the sellers. The obligations of the
sellers are also generally subject to various limitations. In the event of a tax claim related to a pre-acquisition tax year, we would seek to recover costs and losses from the sellers under the acquisition agreement. However, there is no assurance that any indemnification, holdback or escrow would be sufficient or that we would recover such costs or losses, which could negatively impact our financial position, operating results and cash flows in the current and/or future periods.
We record deferred income taxes to reflect the impact of temporary differences between the amounts of assets and liabilities for financial accounting and income tax purposes. Deferred income taxes are determined using enacted tax rates. Changes in enacted tax rates may negatively impact our operating results.
The recently passed Tax Cuts and Jobs Act (the "Tax Act"“Tax Act”) actand similar tax reform laws in other jurisdictions could adversely affect our business and financial condition.
Various other jurisdictions including members of the Organization for Economic Cooperation and Development are considering changes to the newly enacted federaltheir tax law. The impact of thislaws including provisions intended to address base erosion and profit shifting by taxpayers. Any tax reform on holders of our common stock is also uncertain and could be adverse.adopted in these or other countries may exacerbate the risks described above.
We generate a portion of our revenue from our lodging card business, which is affected by conditions in the hotel industry generally and has a concentration of customers in the railroad and trucking industries.
Our lodging card business earns revenue from customers purchasing lodging from the hotel industry and derives a significant portion of this revenue from end users in the railroad and trucking industries. Therefore, we are exposed to risks affecting each of these industries. For example, unfavorable economic conditions adversely impacting the hotel, railroad and trucking industries generally could cause a decrease in demand for our products and services in our lodging card business, resulting in decreased revenue, or increased credit risk and related losses, resulting in increased expenses. In addition, mergers or consolidations in these industries could reduce our customer and partnership base, resulting in a smaller market for our products and services.
We contract with government entities and are subject to risks related to our governmental contracts.
In the course of our business we contract with domestic and foreign government entities, including state and local government customers, as well as federal government agencies. As a result, we are subject to various laws and regulations that apply to companies doing business with federal, state and local governments. The laws relating to government contracts differ from other commercial contracting laws and our government contracts may contain pricing terms and conditions that are not common among commercial contracts. In addition, we may be subject to investigation from time to time concerning our
compliance with the laws and regulations relating to our government contracts. Our failure to comply with these laws and regulations may result in suspension of these contracts or administrative or other penalties.
Litigation and regulatory actions could subject us to significant fines, penalties or requirements resulting in significantly increased expenses, damage to our reputation and/or material adverse effects on our business.
We are subject to claims and a number of judicial and administrative proceedings considered normal in the course of our current and past operations, including employment-related disputes, contract disputes, intellectual property disputes, government inquiries, investigations, audits and regulatory proceedings, customer disputes and tort claims. Responding to proceedings may be difficult and expensive, and we may not prevail. In some proceedings, the claimant seeks damages as well as other relief, which, if granted, would require expenditures on our part or changes in how we conduct business. There can be no certainty that we will not ultimately incur charges in excess of presently established or future financial accruals or insurance coverage, or that we will prevail with respect to such proceedings. Regardless of whether we prevail or not, such proceedings could have a material adverse effect on our business, reputation, financial condition and results of operations. From time to time, we have had, and expect to continue to receive, inquiries from regulatory bodies and administrative agencies relating to the operation of our
In June 2017, a shareholder filed a class action complaint in the Unites 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. InThe 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, and seeks unspecified monetary damages, costs, and attorneys’ fees. On October 3, 2019, the parties executed a term sheet to settle the case for a payment of $50 million for the benefit of the class. The full settlement amount is covered by our insurance policies. On December 12, 2019, the court granted the lead plaintiff’s motion for preliminary approval of the settlement. Additionally, in July 2017, a shareholder derivative complaint was filed against 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. See “Part II-Item 3 - Legal Proceedings” below for additional information aboutCompany, and on January 9, 2019, a second shareholder derivative complaint was filed in the lawsuit and the derivative complaint.Superior Court of Gwinnett County, Georgia. We cannot at this time predictbe certain that the outcome of these matters or reasonably determine the probability ofwill not have a material adverse result or reasonably estimate range of potential exposure, if any, that these matters might have on us, our business, our financial condition or our results of operations, although such effects could be materially adverse.operations. In addition, in the future, we may need to record litigation reserves with respect to thesethis and any similar matters. Further, regardlessthese types of how these matters proceed, it could divert our management’s attention and other resources away from our business.
From time to time, we have had, and expect to continue to receive, inquiries from regulatory bodies and administrative agencies relating to the operation of our business. We have received a Civil Investigative Demand from the Federal Trade Commission, along with proposals to resolve potential claims, arising from our advertising and marketing practices, which relate principally to our North American Fuel Card business. Any potential claims or any such inquiries or potential claims have resulted in, and may continue to result in, various audits, reviews and investigations, which can be time consuming and expensive. These types of inquiries, audits, reviews, and investigations could result in the institution of administrative or civil proceedings, sanctions and the payment of fines and penalties, various forms of injunctive relief and redress, changes in personnel, and increased review and scrutiny by customers, regulatory authorities, the media and others, which could be significant and could have a material adverse effect on our business, reputation, financial condition and results of operations.
If we fail to comply with the applicable requirements of MasterCard,Mastercard, it could seek to fine us, suspend us or terminate our registrations through our financial institution sponsors.
A significant source of our revenue comes from processing transactions through the MasterCardMastercard networks. In order to offer MasterCardMastercard programs to our customers, one of our subsidiaries is registered as a member service provider with MasterCardMastercard through sponsorship by MasterCardMastercard member banks in both the U.S. and Canada. Registration as a service provider is dependent upon our being sponsored by member banks. If our sponsor banks should stop providing sponsorship for us or determine to provide sponsorship on materially less favorable terms, we would need to find other financial institutions to provide those services or we would need to become a MasterCardMastercard member, either of which could prove to be difficult and expensive. Even if we pursue sponsorship by alternative member banks, similar requirements and dependencies would likely still exist. In addition, MasterCardMastercard routinely updates and modifies its requirements. Changes in the requirements may make it significantly more expensive for us to provide these services. If we do not comply with MasterCardMastercard requirements, it could seek to fine us, suspend us or terminate our registration, which allows us to process transactions on its networks. The termination of our registration, or any changes in the payment network rules that would impair our registration, could require us to stop providing MasterCardMastercard payment processing services. If we are unable to find a replacement financial institution to provide sponsorship or become a member, we may no longer be able to provide such services to the affected customers, which would have a material adverse effect our business, financial condition and results of operations.
Changes in MasterCardMastercard interchange fees could decrease our revenue.
A portion of our revenue is generated by network processing fees charged to merchants, known as interchange fees, associated with transactions processed using our MasterCard-brandedMastercard-branded cards. Interchange fee amounts associated with our MasterCardMastercard network cards are affected by a number of factors, including regulatory limits in the United StatesU.S. and Europe and fee changes imposed by MasterCard.Mastercard. In addition, interchange fees are the subject of intense legal and regulatory scrutiny and competitive pressures in the electronic payments industry, which could result in lower interchange fees generally in the future. Temporary or permanent decreases in the interchange fees associated with our MasterCardMastercard network card transactions, could adversely affect our business and operating results.
If we are not able to maintain and enhance our brands, it could adversely affect our business, operating results and financial condition.
We believe that maintaining and enhancing our brands is critical to our customer relationships, and our ability to obtain partners and retain employees. The successful promotion of our brands will depend upon our marketing and public relations efforts, our ability to continue to offer high-quality products and services and our ability to successfully differentiate our services from those of our competitors. In addition, future extension of our brands to add new products or services different from our current offerings may dilute our brands, particularly if we fail to maintain our quality standards in these new areas. The promotion of
our brands will require us to make substantial expenditures, and we anticipate that the expenditures will increase as our markets become more competitive and we expand into new markets. To the extent that these activities yield increased revenues, this revenue may not offset the expenses we incur. There can be no assurance that our brand promotion activities will be successful.
Failure to comply with the FCPA, anti-money laundering regulations, economic and trade sanctions regulations and similar laws and regulations associated with our international activities, could subject us to penalties and other adverse consequences.
As we continue to expand our business internationally, we may continue to expand into certain foreign countries, particularly those with developing economies, where companies often engage in business practices that are prohibited by U.S., U.K. and other foreign regulations, including the FCPA, the U.K. Bribery Act, the 2013 Brazilian Clean Companies Act and the 2013 Russian Law on Preventing Corruption. These laws and regulations generally prohibit us, our employees, consultants and agents from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. We have implemented policies to discourage such practices; however, there can be no assurances that all of our employees, consultants and agents, including those that may be based in or from countries where practices that violate U.S. laws may be customary, will not take actions in violation of our policies, for which we may be ultimately responsible. Violations of the FCPA or similar laws may result in severe criminal or civil sanctions and, in the U.S., suspension or debarment from U.S. government contracting, which could negatively affect our business, operating results and financial condition.
In addition, we are subject to anti-money laundering laws and regulations, including the BSA. Among other things, the BSA requires money services businesses (such as money transmitters and providers of prepaid access) to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity, and maintain transaction records.
We are also subject to certain economic and trade sanctions programs that are administered by OFAC, which prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers, and terrorists or terrorist organizations. Other group entities may be subject to additional foreign or local sanctions requirements in other relevant jurisdictions.
Similar anti-money laundering and counter-terrorist financing and proceeds of crime laws apply to movements of currency and payments through electronic transactions and to dealings with persons specified in lists maintained by the country equivalent to OFAC lists in several other countries and require specific data retention obligations to be observed by intermediaries in the payment process. Our businesses in those jurisdictions are subject to those data retention obligations.
Violations of these laws and regulations may result in severe criminal or civil sanctions and, in the U.S., suspension or debarment from U.S. government contracting, which could negatively affect our business, operating results and financial condition. Likewise, any investigation of any potential violations of these laws and regulations by U.S. or foreign authorities could also have an adverse impact on our reputation, business, financial condition and operating results. In addition, we cannot predict the nature, scope or effect of future regulatory requirements to which our international operations might be subject or the manner in which existing laws and regulations might be administered or interpreted.
Global economic downturns or slower growth or declines in the money transfer, payment service, and other markets in which we operate, including downturns, or declines, related to interruptions in migration patterns, and difficult conditions in global financial markets andfinancial market disruptions could adversely affect our business, financialcondition, results of operations, and cash flows.
The global economy has experienced in recent years, and may experience, downturns, volatility and disruption, and we face certain risks relating to such events, including:
Our international payments provider business provides currency conversion and foreign exchange hedging services to our customers, exposing us to foreign currency exchange risk. In order to help mitigate these risks, we enter into derivative contracts. However, these contracts do not eliminate all of the risks related to fluctuating foreign currency rates.
Our international payments provider business is heavily dependent on global trade. A downturn in global trade or the failure of long-term import growth rates to return to historic levels could have an adverse effect on our business, financial condition, results of operations, cash flows, and our cash management strategies. Additionally, as customer
hedging activity in our international payments provider business generally varies with currency volatility, we have experienced and may experience in the future lower foreign exchange revenues in periods of lower currency volatility.
The counterparties to the derivative financial instruments that we use in our international payments provider business to reduce our exposure to various market risks, including changes in foreign exchange rates, may fail to honor their obligations, which could expose us to risks we had sought to mitigate. This includes the exposure generated when we write derivative contracts to our customers as part of our cross-currency payments business, and we typically hedge the net exposure through offsetting contracts with established financial institution counterparties. That failure could have an adverse effect on our financial condition, results of operations, and cash flows.
Risks associated with operations outside the U.S. and foreign currencies could adversely affect our business, financial condition, results of operations, and cash flows.
We have additional foreign exchange risk and associated foreign exchange risk management requirements due to the nature of our international payments provider business. The majority of this business'business’ revenue is from exchanges of currency at spot rates, which enable customers to make cross-currency payments. Additionally, this business also writes foreign currency forward and option contracts for our customers. The duration of these derivative contracts at inception is generally less than one year. The credit risk associated with our derivative contracts increases when foreign currency exchange rates move against our customers, possibly impacting their ability to honor their obligations to deliver currency to us or to maintain appropriate collateral with us.
Our international payments provider business aggregates its foreign exchange exposures arising from customer contracts, including the derivative contracts described above, and hedges the resulting net currency risks by entering into offsetting contracts with established financial institution counterparties. If we are unable to obtain offsetting positions, our business, financial condition, results of operations, and cash flows could be adversely affected.
We face credit, liquidity and fraud risks from our agents, consumers, businesses, and third-party processorsother third parties that could adversely affect our business, financial condition, results of operations, and cash flows.
We are exposed to credit risk in our international payments provider business relating to: (a) derivatives written by us to our customers and (b) the extension of trade credit when transactions are paid to recipients prior to our receiving cleared funds from the sending customers. The credit risk associated with our derivative contracts increases when foreign currency exchange rates move against our customers, possibly impacting their ability to honor their obligations to deliver currency to us or
to maintain appropriate collateral with us. If a customer becomes insolvent, files for bankruptcy, commits fraud or otherwise fails to pay us, we may be exposed to the value of an offsetting position with a financial institution counterparty for the derivatives or may bear financial risk for those receivables where we have offered trade credit.
If we are unable to maintain our relationships with banks needed to conduct our services, or fail to comply with our contract requirements, our business, financial condition, results of operations, and cash flows would be adversely affected.
In our international payments provider business, we facilitate payment and foreign exchange solutions, primarily cross-border, cross-currency transactions, for small and medium size enterprises and other organizations. Increased regulation and compliance requirements are impacting these businesses by making it more costly for us to provide our services or by making it more cumbersome for businesses to do business with us. Any factors that increase the cost of cross-border trade for us or our customers or that restrict, delay, or make cross-border trade more difficult or impractical, such as trade policy or higher tariffs, could negatively impact our revenues and harm our business. We may also have difficulty establishing or maintaining banking relationships needed to conduct our services due to banks’ policies. If we are unable to maintain our current business or
banking relationships or establish new relationships under terms consistent with those currently in place, our ability to continue to offer our services may be adversely impacted, which could have an adverse effect on our business, financial condition, results of operations, and cash flows.
Risks related to ownership of our common stock
Our stock price could be volatile and our stock could decline in value.
The market price of our common stock may fluctuate substantially as a result of many factors, some of which are beyond our control. Factors that could cause fluctuations in the market price of our common stock include the following:
quarterly variations in our results of operations;
results of operations that vary from the expectations of securities analysts and investors;
results of operations that vary from those of our competitors;
changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
announcements by us or our competitors of significant contracts, acquisitions, or capital commitments;
announcements by third parties of significant claims or proceedings against us;
regulatory developments in the U.S. and abroad;
future sales of our common stock, and additions or departures of key personnel; and
general domestic and international economic, market and currency factors and conditions unrelated to our performance.
In addition, the stock market in general has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to operating performance of individual companies. These broad market factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in significant liabilities and, regardless of the outcome, could result in substantial costs and the diversion of our management’s attention and resources.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Our disclosure controls and procedures are designed to reasonably ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated and communicated to management and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the "SEC").SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are and will be met. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected.
Anti-takeover provisions in our charter documents could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.
Our corporate documents and the Delaware General Corporation Law contain provisions that may enable our board of directors to resist a change in control of FLEETCOR even if a change in control were to be considered favorable by you and other stockholders. These provisions:
authorize our board of directors to issue preferred stock and to determine the rights and preferences of those shares, which may be senior to our common stock, without prior stockholder approval;
establish advance notice requirements for nominating directors and proposing matters to be voted on by stockholders at stockholder meetings; and
prohibit our stockholders from calling a special meeting and prohibit stockholders from acting by written consent; and
In addition, Delaware law imposes some restrictions on mergers and other business combinations between any holder of 15% or more of our outstanding voting stock and us. These provisions could discourage, delay or prevent a transaction involving a change in control of FLEETCOR. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.
We do not expect to pay any dividends on our common stock for the foreseeable future.
We currently expect to retain all future earnings, if any, for future operation, expansion and debt repayment and have no current plans to pay any cash dividends to holders of our common stock for the foreseeable future. Any decision to declare and pay
dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our operating results, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, we must comply with the covenants in our credit agreements in order to be able to pay cash dividends, and our ability to pay dividends generally may be further limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have no unresolved written comments regarding our periodic or current reports from the staff of the SEC.
ITEM 2. PROPERTIES
We lease all of the real property used in our business, except as noted below. The following table lists each of our material facilities and its location, use and approximate square footage, at December 31, 2017.
2019.
| Facility | Use | Approximate size | |
| Square Feet | |||
| Comdata sales, operations and customer support | 135,000 | ||
| Louisville, Kentucky | SVS sales, operations and customer support | 66,000 | |
| Lexington, Kentucky | CLS operations | 60,100 | |
| Peachtree Corners, Georgia | Operations | 57,000 | |
| Atlanta, Georgia | Corporate headquarters and operations | ||
| Wichita, Kansas | CLC operations and customer support | 38,000 | |
| Beaverton, Oregon | NvoicePay sales, operations and customer support | 32,600 | |
| Toronto, Canada | Cambridge global headquarters | 27,600 | |
| Schaumburg, Illinois | Travelliance sales, operations and customer support | 17,000 | |
| Bloomington, Minnesota | Travelliance sales, operations and customer support | 13,300 | |
| Phoenix, Arizona | Sales | 13,000 | |
| Portland, Oregon | SOLE Financial sales, operations and customer support | 11,100 | |
| Covington, Louisiana | Corporate accounting and treasury | 11,000 | |
| Salem, Oregon | Pacific Pride sales, operations and customer support | 10,000 | |
| Austin, Texas | Comdata operations | ||
| New York, New York | Cambridge U.S. headquarters | 5,900 | |
| International Segment | |||
| Melbourne, Australia | Business Fuel Cards sales | 6,200 | |
| Sao Paulo, Brazil | STP, CTF, VB Servicios and DB headquarters, sales, operations and customer support | 100,300 | |
| Osasco, Brazil | CTF and VB Servicios operations and STP collections and operations | 21,600 | |
| Rio de Janeiro, Brazil | DB Trans and AExpresso headquarters, sales, operations and customer support | 15,300 | |
| Prague, Czech Republic | CCS headquarters and Shell Europe (Germany, Austria, Poland, Hungary, Switzerland, Czech Republic and Slovakia, France, Belgium, Netherlands and Luxembourg) operations, credit and collections, customer service, sales and finance | 38,400 | |
| Nuremberg, Germany | Shell Europe sales | 6,900 | |
| Mexico City, Mexico(1) | |||
| Almere, Netherlands | Travelcard headquarters, sales, customer support, operations, credit and collections | 5,600 | |
| Auckland, New Zealand | CardLink headquarters, sales, operations and customer support | 7,200 | |
| Moscow, Russia | PPR and NKT headquarters, sales, customer support, operations, credit and collections | ||
| Swindon, United Kingdom | Allstar and TFC operations, sales and customer support, human resources and finance | 18,300 | |
| EPYX headquarters, sales, operations and customer support | |||
| (1) | We own |
We also own approximately 1.5 acres of land in Nashville, Tennessee, for employee parking. Additionally, we lease a number of minor additional facilities not listed above, including local sales and operations offices less than 3,2505,000 square feet, small storage facilities and a small number of service stations in the United Kingdom; which are not included in the above list.Kingdom. We believe our facilities are adequate for our needs for at least the next 12 months. We anticipate that suitable additional or alternative facilities will be available to accommodate foreseeable expansion of our operations.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we are subject to various pending and potential 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. PlaintiffOn July 17, 2019, the court granted plaintiff's motion for class certification. The complaint seeks class certification, unspecified monetary damages, costs, and attorneys’ fees. On October 3, 2019, the parties executed a term sheet to settle the case for a payment of $50 million for the benefit of the class. The full settlement amount is covered by the Company’s insurance policies. On December 12, 2019, the court granted the lead plaintiff’s motion for preliminary approval of the settlement. The Company disputes the allegations in the complaint and intends to vigorously defend against the claims.settlement is without any admission of the allegations in the complaint.
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 (“Federal Derivative Action”) seeking recovery on behalf of the Company. The derivative complaintFederal Derivative Action alleges that the defendants issued a false and misleading proxy statement in violation of the federal securities laws; that defendants breached their fiduciary duties by causing or permitting the Company to make allegedly false and misleading public statements concerning the Company’s fee charges, and financial and business prospects; and that certain defendants breached their fiduciary duties through allegedly improper sales of stock. The complaint seeks unspecified monetary damages on behalf of the Company, corporate governance reforms, disgorgement of profits, benefits and compensation by the defendants, restitution, costs, and attorneys’ and experts’ fees. On August 18, 2017,September 20, 2018, the court entered an order deferring the caseFederal Derivative Action pending a ruling on motions for summary judgment in the defendants' motion to dismissshareholder class action, notice a settlement has been reached in the putative shareholder class action, or until otherwise agreed to by the parties. After preliminary approval of the proposed settlement of the shareholder class action was granted, the stay on the Federal Derivative Action was lifted. Plaintiffs amended their complaint on February 22, 2020 and FleetCor has an April 10, 2020 date by which to move to dismiss or otherwise respond to the amended complaint in the Federal Derivative Action. On January 9, 2019, a similar shareholder derivative complaint was filed in the Superior Court of Gwinnett County, Georgia (“State Derivative Action”), which was stayed pending a ruling on motions for summary judgment in the shareholder class action, notice a settlement has been reached in the shareholder class action, or until otherwise agreed by the parties. On the parties’ joint motion, the court has continued the stay of the State Derivative Action “pending further developments in the first-filed Federal Derivative Action.” The defendants dispute the allegations in the complaintderivative complaints and intend to vigorously defend against the claims.
In October 2017, the Federal Trade Commission (“FTC”) issued a Notice of Civil Investigative Demand to the Company for the production of documentation and a request for responses to written interrogatories. After discussions with the Company, the FTC proposed in October 2019 to resolve potential claims relating the Company’s advertising and marketing practices, principally in its U.S. direct fuel card business within its North American Fuel Card business. The parties reached impasse primarily related to what the Company believes are unreasonable demands for redress made by the FTC.
On December 20, 2019, the FTC filed a lawsuit in the Northern District of Georgia against the Company and Ron Clarke. See FTC v. FleetCor and Ronald F. Clarke, No. 19-cv-05727 (N.D. Ga.). The complaint alleges the Company and Clarke violated the FTC Act’s prohibitions on unfair and deceptive acts and practices. The complaint seeks among other things injunctive relief, consumer redress, and costs of suit. The Company continues to believe that the FTC’s claims are without merit. The Company has incurred and continues to incur legal and other fees related to this complaint. Any settlement of this matter, or defense against the lawsuit, could involve costs to the Company, including legal fees, fines, penalties, and remediation expenses. At
this time, in view of the complexity and ongoing nature of the matter, we are unable to estimate a reasonably possible loss or range of possible losses resulting from litigation proceedings is inherently difficult and requires an extensive degree of judgment, particularly whereloss that we may incur to settle this matter or defend against the matters involve indeterminate claims for monetary damages, and are inlawsuit brought by 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.FTC.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange (NYSE) under the symbol “FLT.” As of December 31, 2017,2019, there were 146257 holders of record of our common stock. The table set forth below provides the intra-day high and low sales prices per share of our common stock for the four quarters during 2017 and 2016.
| High | Low | |||||||
| 2017: | ||||||||
| First Quarter | $ | 171.78 | $ | 142.62 | ||||
| Second Quarter | 157.36 | 121.52 | ||||||
| Third Quarter | 157.40 | 138.43 | ||||||
| Fourth Quarter | 194.51 | 153.45 | ||||||
| 2016: | ||||||||
| First Quarter | $ | 150.25 | $ | 107.56 | ||||
| Second Quarter | 156.58 | 133.64 | ||||||
| Third Quarter | 174.84 | 137.26 | ||||||
| Fourth Quarter | 176.42 | 140.75 | ||||||
DIVIDENDS AND SHARE REPURCHASES
We currently expect to retain all future earnings, if any, for use in the operation and expansion of our business. We have never declared or paid any dividends on our common stock and do not anticipate paying cash dividends to holders of our common stock in the foreseeable future. In addition, our credit agreements restrict our ability to pay dividends. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and covenants in our existing financing arrangements and any future financing arrangements.
Any stock repurchases may be made at times and in such amounts as deemed appropriate. The timing and amount of stock repurchases, if any, will depend on a variety of factors including the stock price, market conditions, corporate and regulatory requirements, and any additional constraints related to material inside information we may possess. Any repurchases have been repurchased.and are expected to be funded by a combination of available cash flow from the business, working capital and debt.
On December 14, 2018, as part of the Program, we entered an accelerated share repurchase ("ASR") agreement ("2018 ASR Agreement") with a third-party financial institution to repurchase $220 million of our common stock. Pursuant to the 2018 ASR Agreement, we delivered $220 million in cash and received 1,057,035 shares based on a stock price of $176.91 on December 14, 2018. The 2018 ASR Agreement was completed on January 29, 2019, at which time we received 117,751 additional shares based on a final weighted average per share purchase price during the repurchase period of $187.27.
On December 18, 2019, we entered into another ASR agreement ("2019 ASR Agreement") with a third-party financial institution to repurchase $500 million of its common stock. Pursuant to the 2019 ASR Agreement, we delivered $500 million in cash and received 1,431,989 shares based on a stock price of $285.70 on December 18, 2019. The 2019 ASR Agreement was completed February 20, 2020, at which time we received 175,340 additional shares based on a final weighted average per share purchase price during the repurchase period of $306.81.
We did not make any purchasesaccounted for the 2018 ASR Agreement and the 2019 ASR Agreement 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 our own common stock met the criteria for equity classification, and these amounts were initially recorded in additional paid-in capital.
The following table presents information with respect to purchase of common stock of the Company made during the three months ended December 31, 20172019 by the Company as defined in Rule 10b-18(a)(3) under the Exchange Act.Act:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of the Publicly Announced Plan | Maximum Value that May Yet be Purchased Under the Publicly Announced Plan (in thousands) | ||||||||||
| October 1, 2019 through October 31, 2019 | 49 | $ | 297.49 | 9,238,809 | $ | 1,489,074 | ||||||||
| November 1, 2019 through November 30, 2019 | 149,848 | $ | 293.43 | 9,388,657 | $ | 1,445,105 | ||||||||
| December 1, 2019 through December 31, 2019 | 1,731,000 | $ | 287.51 | 11,119,657 | $ | 947,420 | ||||||||
PERFORMANCE GRAPH
The following graph assumes $100 invested on December 31, 2012,2014, at the closing price ($53.65)148.71) of our common stock on that day, and compares (a) the percentage change of our cumulative total stockholder return on the common stock (as measured by dividing (i) the difference between our share price at the end and the beginning of the period presented by (ii) the share price at the beginning of the periods presented) with (b) (i) the Russell 2000 Index, and (ii) the S&P 500® Data Processing & Outsourced Services.Services and (iii) S&P 500.
| Period Ending | FLEETCOR Technologies, Inc. | Russell 2000 | S&P Data Processing and Outsourced Services | |||||||||
| 12/31/2012 | $ | 100.00 | $ | 100.00 | $ | 100.00 | ||||||
| 3/31/2013 | $ | 142.91 | $ | 112.03 | $ | 112.20 | ||||||
| 6/30/2013 | $ | 151.54 | $ | 115.09 | $ | 118.85 | ||||||
| 9/30/2013 | $ | 205.33 | $ | 126.42 | $ | 130.25 | ||||||
| 12/31/2013 | $ | 218.40 | $ | 137.00 | $ | 151.76 | ||||||
| 3/31/2014 | $ | 214.54 | $ | 138.11 | $ | 144.46 | ||||||
| 6/30/2014 | $ | 245.67 | $ | 140.46 | $ | 144.86 | ||||||
| 9/30/2014 | $ | 264.90 | $ | 129.71 | $ | 146.72 | ||||||
| 12/31/2014 | $ | 277.19 | $ | 141.84 | $ | 170.19 | ||||||
| 3/31/2015 | $ | 281.30 | $ | 147.50 | $ | 173.97 | ||||||
| 6/30/2015 | $ | 290.89 | $ | 147.64 | $ | 175.73 | ||||||
| 9/30/2015 | $ | 256.51 | $ | 129.59 | $ | 172.99 | ||||||
| 12/31/2015 | $ | 266.41 | $ | 133.74 | $ | 188.13 | ||||||
| 3/30/2016 | $ | 277.26 | $ | 131.16 | $ | 188.59 | ||||||
| 6/30/2016 | $ | 266.78 | $ | 135.62 | $ | 185.00 | ||||||
| 9/30/2016 | $ | 323.82 | $ | 147.37 | $ | 199.67 | ||||||
| 12/31/2016 | $ | 263.78 | $ | 159.78 | $ | 199.15 | ||||||
| 3/31/2017 | $ | 282.26 | $ | 163.17 | $ | 216.67 | ||||||
| 6/30/2017 | $ | 268.80 | $ | 166.64 | $ | 232.21 | ||||||
| 9/30/2017 | $ | 288.48 | $ | 175.53 | $ | 259.13 | ||||||
| 12/31/2017 | $ | 358.68 | $ | 180.79 | $ | 280.89 | ||||||
RECENT SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 6. SELECTED FINANCIAL DATA
We derived the consolidated statement of income and other financial data for the years ended December 31, 2017, 20162019, 2018 and 20152017 and the selected consolidated balance sheet data as of December 31, 20172019 and 20162018 from the audited consolidated financial statements included elsewhere in this report. We derived the selected historical financial data for the years ended December 31, 20142016 and 20132015 and the selected consolidated balance sheets as of December 31, 2015, 20142017, 2016 and 20132015 from our audited consolidated financial statements that are not included in this report.
The selected consolidated financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and notes thereto included elsewhere in this report. Our historical results are not necessarily indicative of the results to be expected in any future period.
| (in thousands, except per share data) | 2017 | 2016 | 2015 | 2014 | 2013 | 20191 | 20182 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||
| Consolidated statement of income data: | ||||||||||||||||||||||||||||||||||||||||
| Revenues, net | $ | 2,249,538 | $ | 1,831,546 | $ | 1,702,865 | $ | 1,199,390 | $ | 895,171 | $ | 2,648,848 | $ | 2,433,492 | $ | 2,249,538 | $ | 1,831,546 | $ | 1,702,865 | ||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||||||||||||||||
| Merchant commissions | 113,133 | 104,345 | 108,257 | 96,254 | 68,143 | — | — | 113,133 | 104,345 | 108,257 | ||||||||||||||||||||||||||||||
| Processing | 429,613 | 355,414 | 331,073 | 173,337 | 134,030 | 530,669 | 487,695 | 429,613 | 355,414 | 331,073 | ||||||||||||||||||||||||||||||
| Selling | 170,717 | 131,443 | 109,075 | 75,527 | 57,346 | 204,806 | 182,593 | 170,717 | 131,443 | 109,075 | ||||||||||||||||||||||||||||||
| General and administrative | 387,694 | 283,625 | 297,715 | 205,963 | 142,283 | 407,210 | 389,172 | 387,694 | 283,625 | 297,715 | ||||||||||||||||||||||||||||||
| Depreciation and amortization | 264,560 | 203,256 | 193,453 | 112,361 | 72,737 | 274,210 | 274,609 | 264,560 | 203,256 | 193,453 | ||||||||||||||||||||||||||||||
| Other operating, net | 61 | (690 | ) | (4,242 | ) | (29,501 | ) | — | ||||||||||||||||||||||||||||||||
| Other operating expense (income), net | 523 | 8,725 | 61 | (690 | ) | (4,242 | ) | |||||||||||||||||||||||||||||||||
| Operating income | 883,760 | 754,153 | 667,534 | 565,449 | 420,632 | 1,231,430 | 1,090,698 | 883,760 | 754,153 | 667,534 | ||||||||||||||||||||||||||||||
| Investment loss | 53,164 | 36,356 | 57,668 | 8,586 | — | |||||||||||||||||||||||||||||||||||
| Other (income) expense, net | (173,436 | ) | 2,982 | 2,523 | (700 | ) | 602 | |||||||||||||||||||||||||||||||||
| Investment loss, net | 3,470 | 7,147 | 53,164 | 36,356 | 57,668 | |||||||||||||||||||||||||||||||||||
| Other expense (income), net | 93 | (152,166 | ) | (173,436 | ) | 2,982 | 2,523 | |||||||||||||||||||||||||||||||||
| Interest expense, net | 107,146 | 71,896 | 71,339 | 28,856 | 16,461 | 150,048 | 138,494 | 107,146 | 71,896 | 71,339 | ||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | 3,296 | — | — | 15,764 | — | — | 2,098 | 3,296 | — | — | ||||||||||||||||||||||||||||||
| Total other (income) expense | (9,830 | ) | 111,234 | 131,530 | 52,506 | 17,063 | ||||||||||||||||||||||||||||||||||
| Total other expense (income) | 153,611 | (4,427 | ) | (9,830 | ) | 111,234 | 131,530 | |||||||||||||||||||||||||||||||||
| Income before income taxes | 893,590 | 642,919 | 536,004 | 512,943 | 403,569 | 1,077,819 | 1,095,125 | 893,590 | 642,919 | 536,004 | ||||||||||||||||||||||||||||||
| Provision for income taxes | 153,390 | 190,534 | 173,573 | 144,236 | 119,068 | 182,746 | 283,642 | 153,390 | 190,534 | 173,573 | ||||||||||||||||||||||||||||||
| Net income | $ | 740,200 | $ | 452,385 | $ | 362,431 | $ | 368,707 | $ | 284,501 | $ | 895,073 | $ | 811,483 | $ | 740,200 | $ | 452,385 | $ | 362,431 | ||||||||||||||||||||
| Earnings per share: | ||||||||||||||||||||||||||||||||||||||||
| Basic earnings per share | $ | 8.12 | $ | 4.89 | $ | 3.94 | $ | 4.37 | $ | 3.48 | $ | 10.36 | $ | 9.14 | $ | 8.12 | $ | 4.89 | $ | 3.94 | ||||||||||||||||||||
| Diluted earnings per share | $ | 7.91 | $ | 4.75 | $ | 3.85 | $ | 4.24 | $ | 3.36 | $ | 9.94 | $ | 8.81 | $ | 7.91 | $ | 4.75 | $ | 3.85 | ||||||||||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||||||||||||||||
| Basic shares | 91,129 | 92,597 | 92,023 | 84,317 | 81,793 | 86,401 | 88,750 | 91,129 | 92,597 | 92,023 | ||||||||||||||||||||||||||||||
| Diluted shares | 93,594 | 95,213 | 94,139 | 86,982 | 84,655 | 90,070 | 92,151 | 93,594 | 95,213 | 94,139 | ||||||||||||||||||||||||||||||
| As of December 31, | As of December 31, | |||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2017 | 2016 | 2015 | 2014 | 2013 | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||
| Consolidated balance sheet data: | ||||||||||||||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 913,595 | $ | 475,018 | $ | 447,152 | $ | 477,069 | $ | 338,105 | $ | 1,271,494 | $ | 1,031,145 | $ | 913,595 | $ | 475,018 | $ | 447,152 | ||||||||||||||||||||
| Restricted cash(1) | 217,275 | 168,752 | 167,492 | 135,144 | 48,244 | |||||||||||||||||||||||||||||||||||
Restricted cash3 | 403,743 | 333,748 | 217,275 | 168,752 | 167,492 | |||||||||||||||||||||||||||||||||||
| Total assets | 11,318,359 | 9,626,732 | 7,889,806 | 8,524,701 | 3,908,717 | 12,248,541 | 11,202,477 | 11,318,359 | 9,626,732 | 7,889,806 | ||||||||||||||||||||||||||||||
| Total debt | 4,518,616 | 3,858,233 | 2,935,000 | 3,593,717 | 1,486,378 | 5,036,785 | 4,819,047 | 4,518,616 | 3,858,233 | 2,935,000 | ||||||||||||||||||||||||||||||
| Total stockholders’ equity | 3,676,522 | 3,084,038 | 2,830,047 | 2,618,562 | 1,223,502 | 3,711,616 | 3,340,180 | 3,676,522 | 3,084,038 | 2,830,047 | ||||||||||||||||||||||||||||||
1Reflects the impact of the Company's adoption of ASU 2016-02 "Leases", on January 1, 2019, using a modified retrospective transition method. Under this method, financial results reported in periods prior to 2019 are unchanged. |
2 Reflects 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. |
3 Restricted cash represents customer deposits repayable, |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences include, but are not limited to, those identified below and those described in Item 1A “Risk Factors” appearing elsewhere in this report. All foreign currency amounts that have been converted into U.S. dollars in this discussion are based on the exchange rate as reported by Oanda for the applicable periods.
The following discussion and analysis of our financial condition and results of operations generally discusses 2019 and 2018 items and year-over-year comparisons between 2019 and 2018. A detailed discussion of 2017 items and year-over-year comparisons between 2018 and 2017 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018.
General Business
FLEETCOR is a leading global providerbusiness payment solutions company that simplifies the way businesses manage and pay their expenses. The FLEETCOR portfolio of commercial payment solutions. Webrands help businessescompanies automate, secure, digitize and control payments on behalf of all sizes control, simplifytheir employees and secure payment of various domestic and cross-border payables using specialized payment products.suppliers. We serve businesses, partners, merchants and partnersconsumer and payment networks in North America, Latin America, Europe, and Australasia.Asia Pacific. FLEETCOR’s predecessor company was organized in the United States in 1986, and FLEETCOR had its initial public offering in 2010 (NYSE: FLT).
FLEETCOR has two reportable segments, North America and International. We report these two segments as they align with our senior executive organizational structure, reflect how we organize and manage our employees around the world, manage operating performance, contemplate the differing regulatory environments in North America versus other geographies, and help us isolate the impact of foreign exchange fluctuations on our financial results.
Our payment solutions provide our customers with a payment method designed to be superior to and more robust and effective than what they use currently, whether they use a competitor’s product or another alternative method such as cash or check. Our solutions are comprised of payment products, networks and associated services.
Each category is unique in its focus, customer base and target markets, but they also share a number of characteristics: customers are primarily businesses, have recurring revenue models, have specialized networks which create barriers to entry, have high EBITDA margins, and have similar selling systems. Our products are used in 56more than 100 countries around the world, with our primary geographies being the U.S., Brazil and the United Kingdom,U.K., which combined accounted for approximately 90%87% of our revenue in 2017.2019.
FLEETCOR’s payment products generally function like a charge card, prepaid card, one-time use virtual card, and electronic RFID (radio-frequency identification), etc. While the actual payment mechanisms vary from category to category, they are structured to afford control and reporting to the end customer.
FLEETCOR uses both proprietary and third-party networks to deliver ourits payment solutions. FLEETCOR owns and operates proprietary networks with well-established brands throughout the world, bringing incremental sales and loyalty to affiliated merchants. Third-party networks are used to broaden payment product acceptance and use. In 2017, we processed approximately 3 billion transactions within these networks, of which approximately 1.4 billion were related to our Gift product line.
FLEETCOR capitalizes on its products’ specialization with sales and marketing efforts by deploying product-dedicated sales forces to target specific customer segments. We market our products directly through multiple sales channels, including field sales, telesales and digital marketing, and indirectly through our partners, which include major oil companies, leasing companies, petroleum marketers, value-added resellers (VARs) and referral partners.
We believe that our size and scale, product breadth and specialization, geographic reach, proprietary networks, robust distribution capabilities and advanced technology contribute to our industry leading position.
Executive Overview
We operate in two segments, which we refer to as our North America and International segments. Our revenue is generally reported net of the wholesale cost for underlying products and services.services purchased through our payment products. In this report, we refer to this net revenue as “revenue". See “Results of Operations” for additional segment information.
Revenues, net, by Segment. For the years ended December 31, 2017, 20162019 and 2015,2018, our North America and International segments generated the following revenue:revenue (in millions):
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2019 | 2018 | ||||||||||||||||||||||||||||||||
| (in millions) | Revenues, net | % of total revenues, net | 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 | $ | 1,429 | 63.5 | % | $ | 1,279 | 69.8 | % | $ | 1,232 | 72.3 | % | $ | 1,709 | 64.5 | % | $ | 1,571 | 64.6 | % | ||||||||||||||||
| International | 821 | 36.5 | % | 552 | 30.2 | % | 471 | 27.7 | % | 940 | 35.5 | % | 862 | 35.4 | % | |||||||||||||||||||||
| $ | 2,250 | 100.0 | % | $ | 1,832 | 100.0 | % | $ | 1,703 | 100.0 | % | $ | 2,649 | 100.0 | % | $ | 2,433 | 100.0 | % | |||||||||||||||||
Revenues, net, Net Income and Net Income Per Diluted Share. Set forth below are revenues, net, net income and net income per diluted share for the years ended December 31, 2017, 20162019 and 2015.
2018 (in millions, except per share amounts).
| Year ended December 31, | Year ended December 31, | ||||||||||||||||||||
| (in millions, except per share amounts) | 2017 | 2016 | 2015 | ||||||||||||||||||
| 2019 | 2018 | ||||||||||||||||||||
| Revenues, net | $ | 2,250 | $ | 1,832 | $ | 1,703 | $ | 2,649 | $ | 2,433 | |||||||||||
| Net income | $ | 740 | $ | 452 | $ | 362 | $ | 895 | $ | 811 | |||||||||||
| Net income per diluted share | $ | 7.91 | $ | 4.75 | $ | 3.85 | $ | 9.94 | $ | 8.81 | |||||||||||
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2016 | 2015 | 2019 | 2018 | |||||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||||
| Adjusted revenues | $ | 2,136 | $ | 1,727 | $ | 1,595 | |||||||||||||||
| Adjusted net income | $ | 799 | $ | 659 | $ | 593 | $ | 1,062.1 | $ | 969.8 | |||||||||||
| Adjusted net income per diluted share | $ | 8.54 | $ | 6.92 | $ | 6.30 | $ | 11.79 | $ | 10.53 | |||||||||||
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.” We use adjusted revenues asMeasures” for more information and a basis to evaluate our revenues, netreconciliation of the commissions that are paidnon-GAAP financial measure to merchants that participatethe most directly comparable financial measure calculated 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 a more effective way to evaluate our revenue performance on a consistent basis.accordance with GAAP. We use adjusted net income and adjusted net income per diluted share to eliminate the effect of items that we do not consider indicative of our core operating performance on a consistent basis.
Sources of Revenue
Fuel represents approximately 44% of our proprietaryrevenues. Our fuel cards and products help businesses monitor and control fuel spend across multiple fuel networks, or those participatingproviding online analytical reporting to help customers managing the efficiency of their vehicles and drivers, while offering potential discounts off of the retail price of fuel. We generate revenue in the third-party networks we utilize.
amounts, or a combination thereof. Our programs also include other fees and charges associated with late payments and based on customer credit risk.
| i) Cost Plus Mark-up: | ii) Percentage Discount: | iii) Fixed Fee: | ||||||||||||||
| Wholesale Cost | $ | 2.86 | Retail Price | $ | 3.00 | Retail Price | $ | 3.00 | ||||||||
| Mark-up | 0.05 | Discount (3%) | (0.09 | ) | Fixed Fee | (0.09 | ) | |||||||||
| Price Paid to Merchant | $ | 2.91 | Price Paid to Merchant | $ | 2.91 | Price Paid to Merchant | $ | 2.91 | ||||||||
Tolls represents approximately 13% of our revenues. Our toll product is primarily delivered via an RFID sticker affixed to the windshield of a customer vehicle in Brazil. This RFID enables customers to utilize toll roads, toll parking lots, pay for gas at partner stations and pay for drive-through food, via automated access and payment upon scan while remaining in the vehicle. In our toll product, the relevant measure of volume is average monthly tags active during the period. We primarily earn revenue tiedfrom fixed fees for access to fuel-price spreads.the network and ancillary services provided. We also earn interchange on certain services provided.
Lodging represents approximately 8% of our revenues. Our lodging products provide customers with a proprietary network of hotels with discounted room rates, centralized billing and robust reporting to help customers manage and control costs. In all other cases,our lodging products, we refer todefine a transaction as a hotel room night purchased by a customer. In our lodging products, we primarily earn revenue from the difference between the amount charged to the customer and the amount paid to the merchanthotel for a given transactiontransaction. Our products may also charge fees for access to the network and ancillary services provided.
Gift represents approximately 7% of our revenues. We provide fully integrated gift card product management and processing services via plastic and digital gift cards to our customers. We primarily earn revenue from the processing of gift card transactions sold by our customers to end users, as interchange revenue.well as from the sale of the plastic cards. Our products may also charge fixed fees for ancillary services provided.
The following table provides revenue per transactionkey performance metric by segment informationproduct category for the years ended December 31, 2017, 20162019 and 2015. Revenue per transactions by segment is affected by the mix of products and acquisitions, which may result in revenue per transaction by product providing more meaningful data for analysis.
| Year ended December 31, | ||||||||||||
| (Unaudited) | 2017 | 2016 | 2015 | |||||||||
| Transactions (in millions) | ||||||||||||
| North America | 1,842.4 | 1,714.6 | 1,667.5 | |||||||||
| International | 1,114.5 | 507.8 | 183.9 | |||||||||
| Total transactions | 2,956.9 | 2,222.4 | 1,851.4 | |||||||||
| Revenue per transaction | ||||||||||||
| North America | $ | 0.78 | $ | 0.75 | $ | 0.74 | ||||||
| International | $ | 0.74 | $ | 1.09 | $ | 2.56 | ||||||
| Consolidated revenue per transaction | $ | 0.76 | $ | 0.82 | $ | 0.92 | ||||||
| Consolidated adjusted revenue per transaction | $ | 0.72 | $ | 0.78 | $ | 0.86 | ||||||
| As Reported | Pro Forma and Macro Adjusted2 | ||||||||||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||
| (Unaudited) | 2017 | 2016 | Change | % Change | 20173 | 20164 | Change | % Change | |||||||||||||||||||||||
Fuel Cards6 | |||||||||||||||||||||||||||||||
Transactions5 | 466 | 434 | 32 | 7 | % | 466 | 444 | 23 | 5 | % | |||||||||||||||||||||
| Revenues, net per transaction | $ | 2.35 | $ | 2.30 | $ | 0.05 | 2 | % | $ | 2.29 | $ | 2.25 | $ | 0.04 | 2 | % | |||||||||||||||
Revenues, net5 | $ | 1,096 | $ | 997 | $ | 99 | 10 | % | $ | 1,066 | $ | 998 | $ | 68 | 7 | % | |||||||||||||||
| Corporate Payments | |||||||||||||||||||||||||||||||
| Transactions | 42 | 39 | 3 | 7 | % | 42 | 39 | 3 | 6 | % | |||||||||||||||||||||
| Revenues, net per transaction | $ | 6.30 | $ | 4.64 | $ | 1.66 | 36 | % | $ | 6.26 | $ | 5.80 | $ | 0.46 | 8 | % | |||||||||||||||
| Revenues, net | $ | 262 | $ | 180 | $ | 82 | 46 | % | $ | 260 | $ | 226 | $ | 34 | 15 | % | |||||||||||||||
| Tolls | |||||||||||||||||||||||||||||||
| Transactions | 916 | 327 | 589 | 180 | % | 916 | 894 | 22 | 2 | % | |||||||||||||||||||||
| Revenues, net per transaction | $ | 0.36 | $ | 0.31 | $ | 0.04 | 13 | % | $ | 0.33 | $ | 0.29 | $ | 0.04 | 14 | % | |||||||||||||||
| Revenues, net | $ | 327 | $ | 103 | $ | 224 | 218 | % | $ | 302 | $ | 257 | $ | 45 | 18 | % | |||||||||||||||
| Lodging | |||||||||||||||||||||||||||||||
| Transactions | 17 | 13 | 4 | 30 | % | 17 | 14 | 3 | 22 | % | |||||||||||||||||||||
| Revenues, net per transaction | $ | 7.45 | $ | 7.58 | $ | (0.13 | ) | (2 | )% | $ | 7.45 | $ | 7.68 | (0.23 | ) | (3 | )% | ||||||||||||||
| Revenues, net | $ | 127 | $ | 101 | $ | 26 | 26 | % | $ | 127 | 105 | $ | 22 | 21 | % | ||||||||||||||||
| Gift | |||||||||||||||||||||||||||||||
| Transactions | 1,439 | 1,327 | 111 | 8 | % | 1,439 | 1,327 | 111 | 8 | % | |||||||||||||||||||||
| Revenues, net per transaction | $ | 0.13 | $0.14 | $0.00 | (3 | )% | $ | 0.13 | $ | 0.14 | $ | (0.01 | ) | (7 | )% | ||||||||||||||||
| Revenues, net | $ | 194 | $185 | $9 | 5 | % | $ | 194 | $ | 185 | $ | 9 | 5 | % | |||||||||||||||||
Other1 | |||||||||||||||||||||||||||||||
Transactions5 | 77 | 82 | (5 | ) | (6 | )% | 77 | 82 | (4 | ) | (5 | )% | |||||||||||||||||||
| Revenues, net per transaction | $ | 3.15 | $ | 3.23 | $ | (0.08 | ) | (2 | )% | $ | 3.14 | $ | 2.99 | $ | 0.15 | 5 | % | ||||||||||||||
Revenues, net5 | $ | 244 | $ | 266 | $ | (23 | ) | (8 | )% | $ | 243 | $ | 244 | $ | (1 | ) | — | % | |||||||||||||
| FLEETCOR CONSOLIDATED REVENUES | |||||||||||||||||||||||||||||||
‑Transactions5 | 2,957 | 2,222 | 735 | 33 | % | 2,957 | 2,799 | 158 | 6 | % | |||||||||||||||||||||
| ‑Revenues, net per transaction | $ | 0.76 | $ | 0.82 | $ | (0.06 | ) | (7 | )% | $ | 0.74 | $ | 0.73 | $ | 0.02 | 2 | % | ||||||||||||||
| ‑ Revenues, net | $ | 2,250 | $ | 1,832 | $ | 418 | 23 | % | $ | 2,193 | $ | 2,015 | $ | 178 | 9 | % | |||||||||||||||
| As Reported | Pro Forma and Macro Adjusted | |||||||||||||||||||||||||||||
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||
| 2019 | 2018 | Change | % Change | 2019 | 2018 | Change | % Change | |||||||||||||||||||||||
FUEL | ||||||||||||||||||||||||||||||
'- Revenues, net1 | $ | 1,173 | $ | 1,126 | $ | 47 | 4 | % | $ | 1,180 | $ | 1,079 | $ | 100 | 9 | % | ||||||||||||||
'- Transactions1 | 502 | 512 | (10 | ) | (2 | )% | 499 | 494 | 6 | 1 | % | |||||||||||||||||||
'- Revenues, net per transaction | $ | 2.33 | $ | 2.19 | $ | 0.14 | 6 | % | $ | 2.36 | $ | 2.19 | $ | 0.17 | 8 | % | ||||||||||||||
| CORPORATE PAYMENTS | ||||||||||||||||||||||||||||||
'- Revenues, net | $ | 516 | $ | 416 | $ | 100 | 24 | % | $ | 521 | $ | 433 | $ | 88 | 20 | % | ||||||||||||||
'- Transactions | 56 | 49 | 6 | 13 | % | 56 | 50 | 6 | 12 | % | ||||||||||||||||||||
'- Revenues, net per transaction | $ | 9.25 | $ | 8.42 | $ | 0.83 | 10 | % | $ | 9.33 | $ | 8.68 | $ | 0.65 | 7 | % | ||||||||||||||
'- Spend volume | $ | 73,437 | $ | 55,744 | $ | 17,693 | 32 | % | $ | 74,366 | $ | 56,736 | $ | 17,630 | 31 | % | ||||||||||||||
'- Revenues, net per spend $ | 1 | % | 1 | % | — | % | — | % | 1 | % | 1 | % | (0.1 | )% | (8 | )% | ||||||||||||||
| TOLLS | ||||||||||||||||||||||||||||||
'- Revenues, net1 | $ | 357 | $ | 333 | $ | 25 | 7 | % | $ | 387 | $ | 333 | $ | 55 | 16 | % | ||||||||||||||
| - Tags (average monthly) | 5.1 | 4.7 | 0.4 | 8 | % | 5.1 | 4.7 | 0.4 | 8 | % | ||||||||||||||||||||
'- Revenues, net per tag** | $ | 17.55 | $ | 17.59 | $ | (0.04 | ) | — | % | $ | 19.04 | $ | 17.59 | $ | 1.45 | 8 | % | |||||||||||||
| LODGING | ||||||||||||||||||||||||||||||
'- Revenues, net | $ | 213 | $ | 176 | $ | 37 | 21 | % | $ | 213 | $ | 189 | $ | 24 | 13 | % | ||||||||||||||
'- Room nights | 19 | 19 | — | — | % | 19 | 21 | (2 | ) | (11 | )% | |||||||||||||||||||
'- Revenues, net per room night | $ | 11.15 | $ | 9.14 | $ | 2.01 | 22 | % | $ | 11.15 | $ | 8.80 | $ | 2.35 | 27 | % | ||||||||||||||
| GIFT | ||||||||||||||||||||||||||||||
'- Revenues, net | $ | 180 | $ | 187 | $ | (6 | ) | (3 | )% | $ | 180 | $ | 193 | $ | (13 | ) | (7 | )% | ||||||||||||
'- Transactions | 1,274 | 1,384 | (110 | ) | (8 | )% | 1,274 | 1,385 | (111 | ) | (8 | )% | ||||||||||||||||||
'- Revenues, net per transaction | $ | 0.14 | $ | 0.13 | $ | 0.01 | 7 | % | $ | 0.14 | $ | 0.14 | $ | — | — | % | ||||||||||||||
OTHER2 | ||||||||||||||||||||||||||||||
'- Revenues, net1 | $ | 210 | $ | 197 | $ | 12 | 6 | % | $ | 219 | $ | 201 | $ | 19 | 9 | % | ||||||||||||||
'- Transactions1 | 56 | 50 | 6 | 13 | % | 56 | 55 | 1 | 2 | % | ||||||||||||||||||||
'- Revenues, net per transaction | $ | 3.75 | $ | 3.99 | $ | (0.24 | ) | (6 | )% | $ | 3.92 | $ | 3.66 | $ | 0.26 | 7 | % | |||||||||||||
| FLEETCOR CONSOLIDATED REVENUES | ||||||||||||||||||||||||||||||
'- Revenues, net | $ | 2,649 | $ | 2,434 | $ | 215 | 9 | % | $ | 2,700 | $ | 2,428 | $ | 272 | 11 | % | ||||||||||||||
1 Reflects certain reclassifications of revenue in 2018 between product categories as the Company realigned its Brazil business into product lines, resulting in refinement of revenue classified as fuel versus tolls and the eCash/OnRoad product being fuel versus other. |
2 Other includes telematics, maintenance, food, and transportation related businesses. |
| *Columns may not calculate due to rounding. |
Revenue per relevant key performance indicator ("KPI"), which may include transaction, spend volume, monthly tags, room nights, etc...) is derived from the various revenue types as discussed above and can vary based on geography, the relevant merchant relationship, the payment product utilized and the types of products or services purchased, the mix of which would be influenced by our acquisitions, organic growth in our business, and the overall macroeconomic environment, including fluctuations in foreign currency exchange rates, fuel prices and spreads.fuel spread margins. Revenue per transactionKPI per customer changesmay change as the level of services we provide to a customer increases or decreases, as macroeconomic factors change and as adjustments are made to merchant and customer rates. See “Results of Operations” for further discussion of transaction volumes and revenue per transaction.
Sources of ExpenseExpenses
We incur expenses in the following categories:
| • | Merchant commissions—In certain of our card programs, we incur merchant commissions expense when we pay merchants with whom we have direct, contractual relationships for specific transactions where a customer purchases products or services from the merchant. In the card programs where it is paid, merchant commissions equal the |
| • | Processing—Our processing expense consists of expenses related to processing transactions, servicing our customers and merchants, bad debt expense and cost of goods sold related to our hardware sales in certain businesses. Effective with the adoption of ASC 606 on January 1, 2018, certain third party processing expenses are netted with consolidated revenues, where the network is considered to be our customer. |
| • | Selling—Our selling expenses consist primarily of wages, benefits, sales commissions (other than merchant commissions) and related expenses for our sales, marketing and account management personnel and activities. |
| • | General and administrative—Our general and administrative expenses include compensation and related expenses (including stock-based compensation) for our executives, finance and accounting, information technology, human resources, legal and other administrative personnel. Also included are facilities expenses, third-party professional services fees, travel and entertainment expenses, and other corporate-level expenses. |
| • | Depreciation and amortization—Our depreciation expenses include depreciation of property and equipment, consisting of computer hardware and software (including proprietary software development amortization expense), card-reading equipment, furniture, fixtures, vehicles and buildings and leasehold improvements related to office space. Our amortization expenses include amortization of intangible assets related to customer and vendor relationships, trade names and trademarks, software and non-compete agreements. We are amortizing intangible assets related to business acquisitions and certain private label contracts associated with the purchase of accounts receivable. |
| • | Other operating expense, net—Our other operating, net includes other operating expenses and income items that do not relate to our core operations or that occur infrequently. |
| • | Investment loss, net—Our investment results primarily relate to impairment charges related to our investments and unrealized gains and losses related to a minority investment in a marketable security. |
| • | Other expense (income), net—Our other expense (income), net includes proceeds/costs from the sale of assets, foreign currency transaction gains or losses and other miscellaneous operating costs and revenue. |
| • | Interest expense, net—Our interest expense, net includes interest expense on our outstanding debt, interest income on our cash balances and interest on our interest rate swaps. |
| • | Provision for income taxes—Our provision for income taxes consists primarily of corporate income taxes related to profits resulting from the sale of our products and services on a global basis. |
Factors and Trends Impacting our Business
We believe that the following factors and trends are important in understanding our financial performance:
| • | Global economic conditions—Our results of operations are materially affected by conditions in the economy generally, both in North America and internationally. Factors affected by the economy include our transaction volumes, the credit risk of our customers and changes in tax laws across the globe. These factors affected our businesses in both our North America and International segments. |
| • | Foreign currency changes—Our results of operations are significantly impacted by changes in foreign currency rates; namely, by movements of the Australian dollar, Brazilian real, British pound, Canadian dollar, Czech koruna, Euro, Mexican peso, New Zealand dollar and Russian ruble, relative to the U.S. dollar. Approximately 60%, and 61% of our revenue in 2019 and 2018, respectively, was derived in U.S. dollars and was not affected by foreign currency exchange rates. See “Results of Operations” for information related to foreign currency impact on our total revenue, net. |
| • | Fuel prices—Our fleet customers use our products and services primarily in connection with the purchase of fuel. Accordingly, our revenue is affected by fuel prices, which are subject to significant volatility. A change in retail fuel prices could cause a decrease or increase in our revenue from several sources, including fees paid to us based on a percentage of each customer’s total purchase. Changes in the absolute price of fuel may also impact unpaid account balances and the late fees and charges based on these amounts. We believe approximately 13% and 14% of revenues, net were directly impacted by changes in fuel price in 2019 and 2018, respectively. |
| • | Fuel-price spread volatility—A portion of our revenue involves transactions where we derive revenue from fuel-price spreads, which is the difference between the price charged to a fleet customer for a transaction and the price paid to the merchant for the same transaction. In these transactions, the price paid to the merchant is based on the wholesale cost of fuel. The merchant’s wholesale cost of fuel is dependent on several factors including, among others, the factors described above affecting fuel prices. The fuel price that we charge to our customer is dependent on several factors including, among others, the fuel price paid to the merchant, posted retail fuel prices and competitive fuel prices. We experience fuel-price spread contraction when the merchant’s wholesale cost of fuel increases at a faster rate than the fuel price we charge to our customers, or the fuel price we charge to our customers decreases at a faster rate than the merchant’s wholesale cost of fuel. The inverse of these situations produces fuel-price spread expansion. We believe approximately 5% of revenues, net were directly impacted by fuel-price spreads in each of 2019 and 2018, respectively. |
| • | Acquisitions—Since 2002, we have completed over 80 acquisitions of companies and commercial account portfolios. Acquisitions have been an important part of our growth strategy, and it is our intention to continue to seek opportunities to increase our customer base and diversify our service offering through further strategic acquisitions. The impact of acquisitions has, and may continue to have, a significant impact on our results of operations and may make it difficult to compare our results between periods. |
| • | Interest rates—Our results of operations are affected by interest rates. We are exposed to market risk to changes in interest rates on our cash investments and debt. On January 22, 2019, we entered into three interest rate swap cash flow contracts (the "swap contracts"). The objective of these swap contracts is to reduce the variability of cash flows in the previously unhedged interest payments associated with $2.0 billion of variable rate debt, the sole source of which is due to changes in the LIBOR benchmark interest rate. For each of these swap contracts, we will pay a fixed monthly rate and receive one month LIBOR. |
| • | Expenses— Over the long term, we expect that our general and administrative expense will decrease as a percentage of revenue as our revenue increases. To support our expected revenue growth, we plan to continue to incur additional sales and marketing expense by investing in our direct marketing, third-party agents, internet marketing, telemarketing and field sales force. |
| • | Taxes— We pay taxes in various taxing jurisdictions, including the U.S., most U.S. states and many non-U.S. jurisdictions. The tax rates in certain non-U.S. taxing jurisdictions are different than the U.S. tax rate. Consequently, as our earnings fluctuate between taxing jurisdictions, our effective tax rate fluctuates. |
Acquisitions and Investments
During 2017,2019, the Company completed acquisitions with an aggregate purchase price of $720.8approximately $416 million.
On April 1, 2019, we completed the acquisition of NvoicePay, a provider of full accounts payable automation for business in the U.S. The aggregate purchase price of this acquisition was approximately $208 million, net of cash acquired.
On April 1, 2019, we completed the acquisition of r2c, a fleet maintenance, compliance and workshop management software provider in the U.K.
On July 8, 2019, we completed the acquisition of SOLE Financial, a payroll card provider in the U.S.
On October 1, 2019, we completed the acquisition of Travelliance, an airline lodging provider in the U.S. The aggregate purchase price of this acquisition was approximately $110 million, net of cash acquired.
During 2018, we completed an acquisition with an aggregate purchase price of $21.2 million, net of cash acquired of $96.2 million.$11.0 million and made deferred payments of $3.8 million related to acquisitions occurring in prior years. During 2017, the Company2018, we made investments in other businesses of $39$17.0 million and payments on a seller note of $1.6 million.
We report our results from our U.S. acquisitions in cash, net2019 in our North American segment from the dates 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 clientsacquisition. We report our results from our U.K. acquisition in making international payments. The purpose of this acquisition is to further expand our corporate payments footprint.
acquisition. We report our results from Cambridge and CLS acquiredour Canadian acquisition in the third and fourth quarters of 2017, respectively,2018 in our North America segment from the date of acquisition. The results of operations from the fuel card business in Russia acquired in the third quarter of 2017, are included within our International segment from the date of acquisition. The results of operations from the fuel card portfolio acquired in the U.S. are included within our North America segment, from the date of acquisition. The results of operations of STP, the fuel card portfolio in the United Kingdom, the additional Shell markets, the Travelcard business in the Netherlands and the small business in Brazil are included within our International segment, from the date of acquisition.
As part of our planthe Company's plans to exit the telematics business, on July 27, 2017, we sold NexTraq, a U.S. fleet telematics business,our investment in Masternaut to Michelin Group for $316.5 million. We recorded a pre-tax gain on the disposal of NexTraq of $175.0 million during the thirdsecond quarter of 2017, which is net of transaction closing costs.2019. We recorded tax on the gain of disposal of $65.8 million. The gain on the disposal is included in other (income) expense, net in the accompanying Consolidated Statements of Income. NexTraq had historically been included inimpaired our North America segment.
Results of Operations
Year ended December 31, 20172019 compared to the year ended December 31, 20162018
The following table sets forth selected consolidated statement of income and selected operational data for the years ended December 31, 20172019 and 20162018 (in millions, except percentages)*.
Year ended December 31, 2017 | % of total revenue | Year ended December 31, 2016 | % of total revenue | Increase (decrease) | % Change | ||||||||||||||||
| Revenues, net: | |||||||||||||||||||||
| North America | $ | 1,428.7 | 63.5 | % | $ | 1,279.1 | 69.8 | % | $ | 149.6 | 11.7 | % | |||||||||
| International | 820.8 | 36.5 | % | 552.4 | 30.2 | % | 268.4 | 48.6 | % | ||||||||||||
| Total revenues, net | 2,249.5 | 100.0 | % | 1,831.5 | 100.0 | % | 418.0 | 22.8 | % | ||||||||||||
| Consolidated operating expenses: | |||||||||||||||||||||
| Merchant commissions | 113.1 | 5.0 | % | 104.3 | 5.7 | % | 8.8 | 8.4 | % | ||||||||||||
| Processing | 429.6 | 19.1 | % | 355.4 | 19.4 | % | 74.2 | 20.9 | % | ||||||||||||
| Selling | 170.7 | 7.6 | % | 131.4 | 7.2 | % | 39.3 | 29.9 | % | ||||||||||||
| General and administrative | 387.7 | 17.2 | % | 283.6 | 15.5 | % | 104.1 | 36.7 | % | ||||||||||||
| Depreciation and amortization | 264.6 | 11.8 | % | 203.3 | 11.1 | % | 61.3 | 30.2 | % | ||||||||||||
| Other operating, net | 0.1 | — | % | (0.7 | ) | — | % | (0.8 | ) | (108.8 | )% | ||||||||||
| Operating income | 883.8 | 39.3 | % | 754.2 | 41.2 | % | 129.6 | 17.2 | % | ||||||||||||
| Investment loss | 53.2 | 2.4 | % | 36.4 | 2.0 | % | 16.8 | 46.2 | % | ||||||||||||
| Other (income) expense, net | (173.4 | ) | (7.7 | )% | 3.0 | 0.2 | % | (176.4 | ) | NM | |||||||||||
| Interest expense, net | 107.1 | 4.8 | % | 71.9 | 3.9 | % | 35.3 | 49.0 | % | ||||||||||||
| Loss on extinguishment of debt | 3.3 | 0.1 | % | — | — | % | 3.3 | — | % | ||||||||||||
| Provision for income taxes | 153.4 | 6.8 | % | 190.5 | 10.4 | % | (37.1 | ) | (19.5 | )% | |||||||||||
| Net income | $ | 740.2 | 32.9 | % | $ | 452.4 | 24.7 | % | $ | 287.8 | 63.6 | % | |||||||||
| Operating income for segments: | |||||||||||||||||||||
| North America | $ | 541.6 | $ | 506.4 | $ | 35.2 | 6.9 | % | |||||||||||||
| International | 342.2 | 247.7 | 94.4 | 38.1 | % | ||||||||||||||||
| Operating income | $ | 883.8 | $ | 754.2 | $ | 129.6 | 17.2 | % | |||||||||||||
| Operating margin for segments: | |||||||||||||||||||||
| North America | 37.9 | % | 39.6 | % | (1.7 | )% | |||||||||||||||
| International | 41.7 | % | 44.8 | % | (3.2 | )% | |||||||||||||||
| Total | 39.3 | % | 41.2 | % | (1.9 | )% | |||||||||||||||
Year ended December 31, 2019 | % of total revenue | Year ended December 31, 20181 | % of total revenue | Increase (decrease) | % Change | ||||||||||||||||
| Revenues, net: | |||||||||||||||||||||
| North America | $ | 1,708.5 | 64.5 | % | $ | 1,571.5 | 64.6 | % | $ | 137.1 | 8.7 | % | |||||||||
| International | 940.3 | 35.5 | % | 862.0 | 35.4 | % | 78.3 | 9.1 | % | ||||||||||||
| Total revenues, net | 2,648.8 | 100.0 | % | 2,433.5 | 100.0 | % | 215.4 | 8.8 | % | ||||||||||||
| Consolidated operating expenses: | |||||||||||||||||||||
| Processing | 530.7 | 20.0 | % | 487.7 | 20.0 | % | 43.0 | 8.8 | % | ||||||||||||
| Selling | 204.8 | 7.7 | % | 182.6 | 7.5 | % | 22.2 | 12.2 | % | ||||||||||||
| General and administrative | 407.2 | 15.4 | % | 389.2 | 16.0 | % | 18.0 | 4.6 | % | ||||||||||||
| Depreciation and amortization | 274.2 | 10.4 | % | 274.6 | 11.3 | % | (0.4 | ) | (0.1 | )% | |||||||||||
| Other operating expense, net | 0.5 | — | % | 8.7 | (0.4 | )% | (8.2 | ) | (94.0 | )% | |||||||||||
| Operating income | 1,231.4 | 46.5 | % | 1,090.7 | 44.8 | % | 140.7 | 12.9 | % | ||||||||||||
| Investment loss, net | 3.5 | 0.1 | % | 7.1 | 0.3 | % | (3.7 | ) | (51.4 | )% | |||||||||||
| Other expense (income), net | 0.1 | — | % | (152.2 | ) | (6.3 | )% | (152.3 | ) | (100.1 | )% | ||||||||||
| Interest expense, net | 150.0 | 5.7 | % | 138.5 | 5.7 | % | 11.6 | 8.3 | % | ||||||||||||
| Loss on extinguishment of debt | — | — | % | 2.1 | 0.1 | % | (2.1 | ) | (100.0 | )% | |||||||||||
| Provision for income taxes | 182.7 | 6.9 | % | 283.6 | 11.7 | % | (100.9 | ) | (35.6 | )% | |||||||||||
| Net income | $ | 895.1 | 33.8 | % | $ | 811.5 | 33.3 | % | $ | 83.6 | 10.3 | % | |||||||||
| Operating income for segments: | |||||||||||||||||||||
| North America | $ | 755.9 | $ | 673.9 | $ | 82.0 | 12.2 | % | |||||||||||||
| International | 475.6 | 416.8 | 58.7 | 14.1 | % | ||||||||||||||||
| Operating income | $ | 1,231.4 | $ | 1,090.7 | $ | 140.7 | 12.9 | % | |||||||||||||
| Operating margin for segments: | |||||||||||||||||||||
| North America | 44.2 | % | 42.9 | % | 1.4 | % | |||||||||||||||
| International | 50.6 | % | 48.4 | % | 2.2 | % | |||||||||||||||
| Total | 46.5 | % | 44.8 | % | 1.7 | % | |||||||||||||||
*ColumnsThe sum of the columns and rows may not calculate due to rounding.
Revenues
Our consolidated revenuetotal revenues, net increased from $1,831.5$2,433.5 million in 20162018 to $2,249.5$2,648.8 million in 2017,2019, an increase of $418.0$215.4 million, or 22.8%8.8%. The increase in our consolidated revenue was primarily due to:
Organic growth of approximately 9%11% on a constant fuel price, fuel spread margin, foreign currency and pro forma basis, driven by increases in both volume and revenue per transaction in certain of our payment programs.
The impact of acquisitions completed during 2019 contributed approximately $40 million in additional revenue.
Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a favorablenegative impact on our consolidated revenue for 20172019 over 20162018 of approximately $33$59 million. We believe the favorable impact of higher fuel prices and fuel spread margins, primarily in the U.S.,Foreign exchange rates had a favorablean unfavorable impact on consolidated revenues in 2017 over in 2016 of approximately $30 million. Additionally, changes in foreign exchange
North America segment revenues. North America revenues, net increased from $1,279.1$1,571.5 million in 20162018 to $1,428.7$1,708.5 million in 2017,2019, an increase of $149.6$137.1 million, or 11.7%8.7%. The increase in our North America segment revenue was primarily due to:
Organic growth of approximately 8%9%, on a constant fuel price, fuel spread margin and pro forma basis, driven by increases in both volume and revenue per transaction in certain of our payment programs.
The impact of our acquisitions during 2019 contributed approximately $37 million in additional revenue.
Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a positivenegative impact on our North America segment revenue in 20172019 over in 20162018 of approximately $26$5 million, primarily due to lower fuel prices of approximately $7 million and the unfavorable impact of foreign exchange rates in Canada of $4 million, partially offset by the favorable impact of changes in fuel prices and slightly higher fuel spread margins.margins of approximately $6 million.
International segment revenue. revenues. International segment revenues, net increased from $552.4$862.0 million in 20162018 to $820.8$940.3 million in 2017,2019, an increase of $268.4$78.3 million, or 48.6%9.1%. The increase in our International segment revenue was primarily due to:
Organic growth of approximately 11%15% on a constant macroeconomic and pro forma basis, driven by increases in both volume and revenue per transaction in certain of our payment programs.
The impact of an acquisition in 2019 contributed approximately $3 million in additional revenue.
Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a positivenegative impact on our International segment revenue for 20172019 over 20162018 of approximately $7 million, primarily due to favorable changes$54 million. Changes in foreign exchange rates in Brazil, as well ashad an unfavorable impact on consolidated revenues of approximately $57 million, partially offset by the favorable impact of changes in fuel prices.prices of approximately $3 million.
Revenues by geography and product and source. category. Set forth below are further breakdowns of revenue by geography and product and sourcecategory for the years ended December 31, 20172019 and 20162018 (in millions), which we believe is useful in understanding the results of our business..
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||||||||
| (Unaudited) | 2017 | 2016 | 2019 | 2018 | ||||||||||||||||||||||||||
| Revenue by Geography* | 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 | $ | 1,401 | 62 | % | $ | 1,279 | 70 | % | $ | 1,595 | 60 | % | $ | 1,482 | 61 | % | ||||||||||||||
| Brazil | 428 | 16 | % | 400 | 18 | % | ||||||||||||||||||||||||
| United Kingdom | 237 | 11 | 229 | 13 | 275 | 10 | % | 258 | 11 | % | ||||||||||||||||||||
| Brazil | 395 | 18 | 168 | 9 | ||||||||||||||||||||||||||
| Other | 218 | 10 | 156 | 8 | 350 | 13 | % | 294 | 12 | % | ||||||||||||||||||||
| Consolidated revenues, net | $ | 2,250 | 100 | % | $ | 1,832 | 100 | % | $ | 2,649 | 100 | % | $ | 2,433 | 100 | % | ||||||||||||||
*Columns may not calculate due to rounding.
| Year Ended December 31, | |||||||||||||||
| (Unaudited) | 2019 | 2018 | |||||||||||||
Revenue, net by Product Category*1 | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | |||||||||||
| Fuel | $ | 1,173 | 44 | % | $ | 1,126 | 46 | % | |||||||
| Corporate Payments | 516 | 19 | % | 416 | 17 | % | |||||||||
| Tolls | 357 | 13 | % | 333 | 14 | % | |||||||||
| Lodging | 213 | 8 | % | 176 | 7 | % | |||||||||
| Gift | 180 | 7 | % | 187 | 8 | % | |||||||||
| Other | 210 | 8 | % | 197 | 8 | % | |||||||||
| Consolidated revenues, net | $ | 2,649 | 100 | % | $ | 2,433 | 100 | % | |||||||
| Year Ended December 31, | |||||||||||||||
| (Unaudited) | 2017 | 2016 | |||||||||||||
| Revenue by Product Category* | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | |||||||||||
Fuel cards1 | $ | 1,096 | 49 | % | $ | 997 | 54 | % | |||||||
| Corporate payments | 262 | 12 | 180 | 10 | |||||||||||
| Tolls | 327 | 15 | 103 | 6 | |||||||||||
| Lodging | 127 | 6 | 101 | 5 | |||||||||||
| Gift | 194 | 9 | 185 | 10 | |||||||||||
Other1 | 244 | 11 | 266 | 15 | |||||||||||
| Consolidated revenues, net | $ | 2,250 | 100.0 | % | $ | 1,832 | 100 | % | |||||||
*Columns may not calculate due to rounding.
Year Ended December 31,8 | |||||||||||||||
| (Unaudited) | 2017 | 2016 | |||||||||||||
| Major Sources of Revenue* | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | |||||||||||
| Customer | |||||||||||||||
Processing and program revenue1 | $ | 1,093 | 49 | % | $ | 809 | 44 | % | |||||||
Late fees and finance charges2 | 141 | 6 | 118 | 6 | |||||||||||
Miscellaneous fees3 | 129 | 6 | 129 | 7 | |||||||||||
| 1,363 | 61 | 1,057 | 58 | ||||||||||||
| Merchant | |||||||||||||||
Discount revenue (Fuel)4 | 303 | 13 | 260 | 14 | |||||||||||
Discount revenue (Nonfuel)5 | 175 | 8 | 157 | 9 | |||||||||||
Tied to fuel-price spreads6 | 220 | 10 | 194 | 11 | |||||||||||
Program revenue7 | 189 | 8 | 164 | 9 | |||||||||||
| Consolidated revenues, net | $ | 2,250 | 100 | % | $ | 1,832 | 100 | % | |||||||
1 Reflects certain reclassifications in 2018 between product categories as the Company realigned its Brazil business into product lines, resulting in refinement of revenue classified as fuel versus tolls and the eCash/OnRoad product being fuel versus other. |
Consolidated operating expenses
Processing. Processing expenses increased from $355.4$487.7 million in 20162018 to $429.6$530.7 million in 2017,2019, an increase of $74.2$43.0 million or 20.9%8.8%. Increases in processing expenses were primarily due to expenses related to acquisitions completed in 2016 and 20172019 of approximately $62$19 million, as well asorganic growth in certain lines of business and incremental bad debt of approximately $10 million, partially offset by the favorable impact of changesfluctuations in foreign exchange rates partially offset by the impact of negotiated lower vendor processing costs. The increase in bad debt was primarily due to bad debt inherent in the acquired STP business. These increases were partially offset by the impact of disposition of the NexTraq business of approximately $6$10 million.
Selling. Selling expenses increased from $131.4$182.6 million in 20162018 to $170.7$204.8 million in 2017,2019, an increase of $39.3$22.2 million or 29.9%12.2%. Increases in spending wereselling expenses are primarily due to ongoing expenses related to acquisitions completed in 2016 and 20172019 of approximately $26$8 million and additional spending in certain lines of business. These increases were partially offset by the favorable impact of disposition of the NexTraq businessfluctuations in foreign exchange rates of approximately $2$4 million.
General and administrative. General and administrative expense increased from $283.6$389.2 million in 20162018 to $387.7$407.2 million in 2017,2019, an increase of $104.1$18.0 million or 36.7%4.6%. The increase was primarily due to ongoing expenses related to acquisitions completed in 2016 and 20172019 of approximately $42 million, increased stock based compensation expense of approximately $30$19 million and increasesadditional spending in other professional and legal fees totaling approximately $22 million.certain lines of business. These increases were partially offset by the favorable impact of disposition of the NexTraq businessfluctuations in foreign exchange rates of approximately $2$8 million and a decrease in stock based compensation expense of approximately $3 million.
Depreciation and amortization. Depreciation and amortization increaseddecreased from $203.3$274.6 million in 20162018 to $264.6$274.2 million in 2017, an increase2019, a decrease of $61.3$0.4 million or 30.2%0.1%. The increasedecrease was primarily due to amortizationthe favorable impact of intangible assetsforeign exchange rates of approximately $8 million, offset by ongoing expenses related to acquisitions completed in 2016 and 20172019 of approximately $47$10 million.
Other operating, net. Other operating, net decreased from $8.7 million and increased capital spending. These increases were partially offset by the impact in 2018 to $0.5 million in 2019, a decrease of disposition$8.2 million, or 94.0% primarily as a result of the NexTraq businessa write-off of approximately $4 million.capitalized software costs in 2018.
Investment loss. Investment losses increased from $36.4loss of $3.5 million in 20162019 relates to $53.2an impairment charge to our telematics investment, as compared to an investment loss of $7.1 million in 2017. We regularly evaluate the carrying value2018. In 2019, we recorded an impairment of our Masternaut investment and during the third quarter of 2017, we determined that the fair value of our 44%approximately $16 million, which was then was sold in 2019 at an amount approximating carrying value. This loss was partially offset by an approximate $13 million gain related to a minority investment in Masternaut had declined as a result of our loss of significant influence due to the amendment of the Masternaut investment agreement, executed September 30, 2017, and the operating results of Masternaut. As a result, we determined that the carrying value of our investment exceeded its fair value, and concluded that this decline in value was other than temporary. We recorded a $44.6 million impairment loss in the Masternaut investment that includes adjustment for $31.4 million of currency translation losses previously recognized in accumulated other comprehensive income.marketable security.
Other (income) expense (income), net. Other income,expense, net was $173.4$0.1 million in 2017,2019, compared to other expense,income, net of $3.0$152.2 million in 2016.2018. The increasegain in 2018 was due primarily to the pre-tax gain on the sale of our NexTraq businessthe Chevron customer portfolio of $175 million in 2017.approximately $152.8 million.
Interest expense, net. Interest expense increased from $71.9$138.5 million in 20162018 to $107.1$150.0 million in 2017,2019, an increase of $35.3$11.6 million or 49.0%8.3%. The increase in interest expense is primarily due to the impact of additional borrowings to repurchase our common stock and to finance the acquisitions completed in 2016 and 2017, share buybacks and2019, as well as increases in LIBOR. The following table sets forth the average interest rates paid on borrowings under our Credit Facility, excluding the related unused credit facility fees.fees and swaps.
| (Unaudited) | 2017 | 2016 | 2019 | 2018 | ||||||||
| Term loan A | 2.79 | % | 2.05 | % | 3.70 | % | 3.52 | % | ||||
| Term loan B | 3.28 | % | 3.75 | % | 4.23 | % | 3.98 | % | ||||
| Domestic Revolver A | 2.88 | % | 2.07 | % | 3.96 | % | 3.51 | % | ||||
| Foreign Revolver B | 2.05 | % | 1.84 | % | ||||||||
| Foreign Revolver B swing line | 2.01 | % | 1.84 | % | ||||||||
| Revolver B GBP Borrowings | 2.18 | % | 2.61 | % | ||||||||
| Revolving C | — | % | 4.00 | % | ||||||||
| Foreign swing line | 2.13 | % | 2.11 | % | ||||||||
The average unused credit facility fee for Domestic Revolver Athe revolving credit facilities was 0.35%0.29% and 0.31% in 20172019 and 2016,2018, respectively. On January 22, 2019, we entered into three interest rate swap contracts. The objective of these interest rate swap contracts is to reduce the variability of cash flows in the previously unhedged interest payments associated with $2 billion of variable rate debt, tied to the one month LIBOR benchmark interest rate. During 2019, as a result of these swaps, we incurred additional interest expense of approximately $5.8 million or 0.32% over the average LIBOR rates on $2 billion of borrowings.
Loss on extinguishment of debt. Loss on extinguishment of debt of $3.3$2.1 million in 2018 relates to ourthe write-off of debt issuance costs associated with the refinancing of our existing credit facility during the thirdfourth quarter of 2017.2018.
Provision for income taxes. The provision for income taxes decreased from $190.5$283.6 million in 20162018 to $153.4$182.7 million in 2017,2019, a decrease of $37.1$100.9 million or 19.5%, primarily driven35.6%. Our effective tax rate decreased to 17.0% for 2019 from 25.9% for 2018. Included in the 2019 tax rate was the reversal of a valuation allowance and remeasurement of the related deferred tax asset, due to the capital loss realized upon the sale of our investment in Masternaut that was carried back to 2017 when the U.S. federal tax rate was 35%. Our tax rate was also impacted by the impactimpairment charge to our investment in Masternaut in the first quarter of the enactment of the Tax Act, partially offset by the increase2019. Excluding these discreet items, our tax rate for 2019 would have been approximately 23.0%.
We pay taxes in pretax book income for 2017 as compared to 2016. On December 22, 2017,different taxing jurisdictions, including the U.S. government enacted, most U.S. states and many non-U.S. jurisdictions. The tax legislation referred to as the Tax Act. The Tax Act makes broad and complex changes torates in certain non-U.S. taxing jurisdictions are different than the U.S. tax code, including, but not limited to reducing the U.S. federal corporaterate. Consequently, as our earnings fluctuate between taxing jurisdictions, our effective tax rate from 35% to 21% and requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. The transition tax can be paid over eight years.fluctuates.
Net income. For the reasons discussed above, our net income increased from $452.4$811.5 million in 20162018 to $740.2$895.1 million in 2017,2019, an increase of $287.8$83.6 million or 63.6%, primarily due to the impact of the enactment of the Tax Act on earnings of approximately $127.5 million and the gain on the disposition of NexTraq of $109.2 million, partially offset by incremental amortization expense, stock based compensation expense, impairment of our investment in Masternaut and legal fees during 2017.10.3%.
Operating income and operating margin
Consolidated operating income. Operating income increased from $754.2$1,090.7 million in 20162018 to $883.8$1,231.4 million in 2017,2019, an increase of $129.6$140.7 million or 17.2%12.9%. Consolidated operating margin was 41.2%44.8% in 20162018 and 39.3%46.5% in 2017.2019. The increase in operating income was driven primarily due to acquisitions completedby organic growth. Included in 2016 and 2017, organic growth, as well as2019, was the positivenegative impact of the macroeconomic environment of approximately $25$29 million, as previously discussed. These increases were partially offsetdriven primarily by higher operating expenses relatedunfavorable movements in foreign exchange rates. Operating income in 2019 was also negatively affected by approximately $26 million due to acquisitions completed in 2016 and 2017 of approximately $178 million, additional stock based compensation of approximately $30 million, higher professional and legal fees totaling approximately $22 million and the disposition of the NexTraq business in July 2017 of approximately $8 million. The decrease in operating margin is driven by the items discussed above.Chevron portfolio.
For the purpose of segment operating results, we calculate segment operating income by subtracting segment operating expenses from segment revenue. Segment operating margin is calculated by dividing segment operating income by segment revenue.
North America segment operating income. North America operating income increased from $506.4$673.9 million in 20162018 to $541.6$755.9 million in 2017,2019, an increase of $35.2$82.0 million, or 6.9%12.2%. North America operating margin was 39.6%42.9% in 20162018 and 37.9%44.2% in 2017.2019. The increase in operating income was due primarily to organic growth andgrowth. Included in 2019, was the positivenegative impact of the macroeconomic environment of approximately $24$4 million. Operating income in 2019 was also negatively affected by approximately $26 million driven primarily by higher fuel prices. These increases were partially offset by additional stock based compensation of approximately $21 million, higher operating expenses relateddue to acquisitions completed in 2017 of approximately $50 million, higher professional and legal fees totaling approximately $22 million and the disposition of the NexTraq business in July 2017 of approximately $8 million. The decrease in operating margin is driven by the items discussed above.Chevron portfolio.
International segment operating income. International operating income increased from $247.7$416.8 million in 20162018 to $342.2$475.6 million in 2017,2019, an increase of $94.4$58.7 million, or 38.1%14.1%. International operating margin was 44.8%48.4% in 20162018 and 41.7%50.6% in 2017.2019. The increase in operating income was due primarily to the impact of acquisitions completed in 2016 and 2017 and organic growth and the slightly positive impact of the macroeconomic environment. These increases were partially offset by higher operating expenses related to acquisitions completed in 2016 and 2017 of approximately $128 million and additional stock based compensation of approximately $9 million. The decrease in operating margin is driven by the items discussed above.
Year ended December 31, 2016 | % of total revenue | Year ended December 31, 2015 | % of total revenue | Increase (decrease) | % Change | ||||||||||||||||
| North America | $ | 1,279.1 | 69.8 | % | $ | 1,232.0 | 72.3 | % | $ | 47.1 | 3.8 | % | |||||||||
| International | 552.4 | 30.2 | % | 470.9 | 27.7 | % | 81.5 | 17.3 | % | ||||||||||||
| Total revenues, net | 1,831.5 | 100.0 | % | 1,702.9 | 100.0 | % | 128.7 | 7.6 | % | ||||||||||||
| Consolidated operating expenses: | |||||||||||||||||||||
| Merchant commissions | 104.3 | 5.7 | % | 108.3 | 6.4 | % | (3.9 | ) | (3.6 | )% | |||||||||||
| Processing | 355.4 | 19.4 | % | 331.1 | 19.4 | % | 24.3 | 7.4 | % | ||||||||||||
| Selling | 131.4 | 7.2 | % | 109.1 | 6.4 | % | 22.4 | 20.5 | % | ||||||||||||
| General and administrative | 283.6 | 15.5 | % | 297.7 | 17.5 | % | (14.1 | ) | (4.7 | )% | |||||||||||
| Depreciation and amortization | 203.3 | 11.1 | % | 193.5 | 11.4 | % | 9.8 | 5.1 | % | ||||||||||||
| Other operating, net | (0.7 | ) | — | % | (4.2 | ) | 0.2 | % | (3.6 | ) | (83.7 | )% | |||||||||
| Operating income | 754.2 | 41.2 | % | 667.5 | 39.2 | % | 86.6 | 13.0 | % | ||||||||||||
| Investment loss | 36.4 | 2.0 | % | 57.7 | 3.4 | % | (21.3 | ) | (37.0 | )% | |||||||||||
| Other expense, net | 3.0 | 0.2 | % | 2.5 | 0.1 | % | 0.5 | 18.2 | % | ||||||||||||
| Interest expense, net | 71.9 | 3.9 | % | 71.3 | 4.2 | % | 0.6 | 0.8 | % | ||||||||||||
| Provision for income taxes | 190.5 | 10.4 | % | 173.6 | 10.2 | % | 17.0 | 9.8 | % | ||||||||||||
| Net income | $ | 452.4 | 24.7 | % | $ | 362.4 | 21.3 | % | $ | 90.0 | 24.8 | % | |||||||||
| Operating income for segments: | |||||||||||||||||||||
| North America | $ | 506.4 | $ | 442.0 | $ | 64.4 | 14.6 | % | |||||||||||||
| International | 247.7 | 225.5 | 22.3 | 9.9 | % | ||||||||||||||||
| Operating income | $ | 754.2 | $ | 667.5 | $ | 86.6 | 13.0 | % | |||||||||||||
| Operating margin for segments: | |||||||||||||||||||||
| North America | 39.6 | % | 35.9 | % | 3.7 | % | |||||||||||||||
| International | 44.8 | % | 47.9 | % | (3.0 | )% | |||||||||||||||
| Total | 41.2 | % | 39.2 | % | 2.0 | % | |||||||||||||||
| Year Ended December 31, | ||||||||||||||
| (Unaudited) | 2016 | 2015 | ||||||||||||
| Revenue by Geography* | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | ||||||||||
| United States | $ | 1,279 | 70 | % | $ | 1,232 | 72 | % | ||||||
| United Kingdom | 229 | 13 | 248 | 15 | % | |||||||||
| Brazil | 168 | 9 | 85 | 5 | % | |||||||||
| Other | 156 | 8 | 138 | 8 | % | |||||||||
| Consolidated revenues, net | $ | 1,832 | 100 | % | $ | 1,703 | 100 | % | ||||||
| Year Ended December 31, | ||||||||||||||
| (Unaudited) | 2016 | 2015 | ||||||||||||
| Revenue by Product Category* | Revenues, net | % of total revenues, net | Revenues, net | % of total revenues, net | ||||||||||
Fuel cards1 | $ | 997 | 54 | % | $ | 992 | 58 | % | ||||||
| Corporate payments | 180 | 10 | 162 | 10 | % | |||||||||
| Tolls | 103 | 6 | 9 | 1 | % | |||||||||
| Lodging | 101 | 5 | 92 | 5 | % | |||||||||
| Gift | 185 | 10 | 170 | 10 | % | |||||||||
Other1 | 266 | 15 | 278 | 16 | % | |||||||||
| Consolidated revenues, net | $ | 1,832 | 100 | % | $ | 1,703 | 100 | % | ||||||
| (Unaudited) | 2016 | 2015 | ||||
| Term loan A | 2.05 | % | 1.94 | % | ||
| Term loan B | 3.75 | % | 3.75 | % | ||
| Domestic Revolver A | 2.07 | % | 1.95 | % | ||
| Foreign Revolver B | 1.84 | % | 2.36 | % | ||
| Foreign Revolver B swing line | 1.84 | % | 2.29 | % | ||
Liquidity and capital resourcesCapital Resources
Our principal liquidity requirements are to service and repay our indebtedness, make acquisitions of businesses and commercial account portfolios, repurchase shares of our common stock and meet working capital, tax and capital expenditure needs.
Sources of liquidity. At December 31, 2017,2019, our cash balances totaled $1,130.9$1,675.2 million, with approximately $217.3$403.7 million restricted. Restricted cash represents customer deposits in the Czech Republic and in our Comdata business in the U.S., as well as collateral received from customers for cross-currency transactions in our Cambridge business, which are restricted from use other than to repay customer deposits, as well as secure and settle cross-currency transactions.
We utilize an accounts receivable Securitization Facility (defined below) to finance a majority of our domestic fuel card receivables, to lower our cost of borrowing and more efficiently use capital. We generate and record accounts receivable when a customer makes a purchase from a merchant using one of our card products and generally pay merchants before collecting the receivable. As a result, we utilize the Securitization Facility as a source of liquidity to provide the cash flow required to fund merchant payments while we collect customer balances. These balances are primarily composed of charge balances, which are typically billed to the customer on a weekly, semimonthly or monthly basis, and are generally required to be paid within 14 days of billing. We also consider the undrawn amounts under our Securitization Facility and Credit Facility (defined below) as funds available for working capital purposes and acquisitions. At December 31, 2017,2019, we had no additional liquidity under our Securitization Facility. At December 31, 2017,2019, we had approximately $615$638 million available under our Credit Facility.
Based on our current forecasts and anticipated market conditions, we believe that our current cash balances, our available borrowing capacity and our ability to generate cash from operations, will be sufficient to fund our liquidity needs for at least the next twelve months. However, we regularly evaluate our cash requirements for current operations, commitments, capital requirements and acquisitions, and we may elect to raise additional funds for these purposes in the future, either through the issuance of debt or equity securities. We may not be able to obtain additional financing on terms favorable to us, if at all.
Cash flows
The following table summarizes our cash flows for the years ended December 31, 2017, 20162019 and 2015.2018.
| Year ended December 31, | Year ended December 31, | ||||||||||||||||||||
| (in millions) | 2017 | 2016 | 2015 | 2019 | 2018 | ||||||||||||||||
| Net cash provided by operating activities | $ | 675.7 | $ | 705.9 | $ | 754.6 | $ | 1,162.1 | $ | 903.4 | |||||||||||
| Net cash used in investing activities | (497.8 | ) | (1,389.6 | ) | (99.4 | ) | (523.7 | ) | (26.3 | ) | |||||||||||
| Net cash provided by (used in) financing activities | 251.9 | 754.0 | (648.1 | ) | |||||||||||||||||
| Net cash used in financing activities | (310.2 | ) | (577.8 | ) | |||||||||||||||||
Operating activities. Net cash provided by operating activities decreasedincreased from $705.9$903.4 million in 20162018 to $675.7$1,162.1 million in 2017. Operating2019. The increase in operating cash flows were primarily affected by higher net income, the gain on the sale of our NexTraq business in 2017 (treated as an investing activity) and deferred income taxes resulting from enactment of the Tax Act. Also included in cash flows from operating activities were unfavorable working capital adjustments primarily due to the timing of cash receipts and payments in 2017 over the comparable period in 2016.
Investing activities. Net cash used in investing activities decreased from $1.4 billion in 2016 to $497.8 million in 2017. This decrease was primarily due to reduction in cash outlay for acquisitions and the proceeds received from the sale of our NexTraq business during the third quarter of 2017.
Net cash used in investing activities increased from $99.4$26.3 million in 20152018 to $1,389.6$523.7 million in 2016.2019. This increase was primarily due to the increase in cash paid for our STP and Travelcard acquisitions completed in 2016.2019, partially offset by the proceeds received from the sale of Chevron in 2018.
Financing activities. Net cash provided byused in financing activities decreased from $754.0$577.8 million in 20162018 to $251.9$310.2 million in 2017.2019. The decreasedecreased use of cash is primarily due to additional repaymentsincremental borrowings on our Credit FacilityTerm A Loan in the amount of $599.8$700 million, in 2017 over 2016, and increased spending to repurchaseas well as fewer repurchases of our common stock of $214.7$264 million in 2019 over 2018. These reductions in cash usage were partially offset by an increase in borrowings of $243 million on our Securitization Facility and an increase in borrowings of $55.5 million on our Credit Facility.
$875 million.
Capital spending summary
Our capital expenditures increaseddecreased from $59.0$81.4 million in 20162018 to $70.1$75.2 million in 2017, an increase2019, a decrease of $11$6 million or 18.8%7.6%. This increase is primarily due to increased spending on strategic projects, including continued investment in our operating systems, as well as incremental spending related to acquisitions in 2016 and 2017.
Credit Facility
FLEETCOR Technologies Operating Company, LLC, and certain of our domestic and foreign owned subsidiaries, as designated co-borrowers (the “Borrowers”), are parties to a $4.33$4.86 billion Credit Agreement (the "Credit Agreement"), with Bank of America, N.A., as administrative agent, swing line lender and local currency issuer, and a syndicate of financial institutions (the “Lenders”), which has been amended multiple times. The Credit Agreement provides for senior secured credit facilities (collectively, the "Credit Facility") 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$3.225 billion and a term loan B facility in the amount of $350.0 million as of December 31, 2017.2019. 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 borrowings in U.S. Dollars, Euros. British Pounds, Japanese Yen or other currency as agreed in advance, and a sublimit for swing line loans, and multi-currency borrowings and (c) a revolving C facility in the amount of $35 million for multi-currencywith 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 loan A, term loan B, revolver A or revolver B debt and an unlimited amount when the leverage ratio on a proforma basis is less than 3.00 to 1.00. Proceeds from the Credit Facility may be used for working capital purposes, acquisitions, and other general corporate purposes.
On January 20, 2017,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 secondfifth amendment to the Credit Agreement, which established a new term B loan. Interest onmodified the term A loan and revolver pricing grid and extended the maturity date of the term loan A and revolving credit facilities to December 19, 2023. The maturity date for the term loan B is August 2, 2024. On August 2, 2019, we entered into the sixth amendment to the Credit Agreement, which included an incremental term loan facility accrues based onA in the Eurocurrency Rate oramount of $700 million and changes to the Base Rate at 2.25%consolidated leverage ratio definition and negative covenant related to indebtedness. On November 14, 2019, we entered into the seventh amendment to the Credit Agreement, to lower the margin for Eurocurrency Loans and at 1.25% for Base Rate Loans. term loan B from 2.00% to 1.75%.
Interest on amounts outstanding under the Credit Agreement (other than the term B loan)loan B) 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 loan facility accrues based on the Eurocurrency Rate plus 1.75% for Eurocurrency Loans and at the Base Rate plus 0.75% for Base Rate Loans. In addition, the Company pays a quarterly commitment fee at a rate per annum ranging from 0.20%0.25% to 0.40%0.35% of the daily unused portion of the credit facility.
At December 31, 2017,2019, the interest rate on the term loan A loanwas 3.05% and the domestic revolving A facility was 3.32%, the interest rate on the foreignborrowings under revolving BA facility was 2.25%3.03%, the interest rate on the revolving B facility foreign swing line of creditGBP Borrowings was 2.22%1.96%, the interest rate on the term loan B was 3.55% and the interest rate on the term B loanforeign swing line was 3.57%1.93%. The unused credit facility fee was 0.35%0.25% for all revolving facilities at December 31, 2017.
The term loans are payable in quarterly installments and are due on the last business day of each March, June, September, and December with the final principal payment due on the respective maturity date. Borrowings on the revolving line of credit are repayable at ourthe option of one, two, three or ninesix 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 tentwenty business days after such loan is made.
The Credit FacilityAgreement contains representations, warranties and events of default, as well as certain affirmative and negative covenants, customary for financings of this nature. These covenants include limitations on the ability to pay dividends and make other restricted payments under certain circumstances and compliance with certain financial ratios.Asratios. As of December 31, 2017,2019, we were in compliance with each of the covenants under the Credit Facility.Agreement.
Our Credit Agreement contains a number of negative covenants restricting, among other things, limitations on liens (with exceptions for our Securitization Facility) and investments, incurrence or guarantees of indebtedness, mergers, acquisitions, dissolutions, liquidations and consolidations, dispositions, dividends and other restricted payments and prepayments of other indebtedness. In particular, we are not permitted to make any restricted payments (which includes any dividend or other distribution) except that the we may declare and make dividend payments or other distributions to our stockholders so long as (i) on a pro forma basis both before and after the distribution the consolidated leverage ratio is not greater than 3.25:1.00 and we are in compliance with the financial covenants and (ii) no default or event of default shall exist or result therefrom. The
Credit Agreement also contains customary events of default. The Credit Agreement includes financial covenants where the Company is required to maintain a consolidated leverage ratio to consolidated EBITDA of less than (i) 4.00 to 1.00 as of the end of any fiscal quarter provided that in connection with any Material Acquisition the leverage ratio may be increased to 4.25 to 1.00 for the quarter in which the Material Acquisition is consummated and the next three fiscal quarters; and a consolidated interest coverage ratio of no morehigher than 4.00 to 1.0.
The obligations of the Borrowers under the Credit Agreement are secured by substantially all of the assets of FLEETCOR and its domestic subsidiaries, pursuant to a security agreement and includes a pledge of (i) 100% of the issued and outstanding equity interests owned by us of each Domestic Subsidiary and (2) 66% of the voting shares of the first-tier foreign subsidiaries, but excluding real property, personal property located outside of the U.S., accounts receivables and related assets subject to the Securitization Facility and certain investments required under money transmitter laws to be held free and clear of liens.
At December 31, 2017,2019, we had $2.7$3.1 billion in borrowings outstanding on term loan A, loan, excluding the related debt discount, $349.1$342.1 million in borrowings outstanding on term loan B, loan, excluding the related debt discount, $635$325 million in borrowings outstanding on the domestic revolving A facility, $28.3$225.5 million in borrowings outstanding on the foreign revolving B facility and $6.9$52.0 million in borrowings outstanding on the foreign swing lineline. We have unamortized debt issuance costs of $6.7 million related to the revolving B facility. The Company hascredit facility as of December 31, 2019. We have unamortized debt discounts of $6.0$7.4 million related to the term loan A facility and $0.7$0.5 million related to the term B facility and deferred financing costs of $5.1$1.8 million related to the term A facility and deferred financing costs of $1.2 million related to the term B facility at December 31, 2017. In August 2017, the Company expensed $3.3 million and capitalized $10.6 million of debt issuance costs associated with the refinancing of its Credit Facility.2019. The effective interest rate incurred on term loans was 2.69% and 2.57%4.00% during 2017 and 2016, respectively,2019 related to the discount on debt.
During 2017,2019, we made principal payments of $423.2$138.5 million on the term loans $930.0and $2,292.3 million on the domestic revolving A facility, $101.7facilities, and $101.5 million on the foreign revolving A facility and $52.7 million on the foreign swing line revolving B facility.
Cash Flow Hedges
On January 22, 2019, we entered into three interest rate swap cash flow contracts with U.S. dollar notional amounts of $1 billion with a fixed rate of 2.56%, $500 million with a fixed rate of 2.56%, and $500 million with a fixed rate of 2.55%. The purpose of these contracts is to eliminate the variability of cash flows in interest payments associated with $2 billion of our variable rate debt outstanding under our Credit Agreement, the sole source of which is due to changes in the 1-month LIBOR benchmark interest rate. These derivative instruments qualify as hedging instruments and are designated as cash flow hedges of interest rate risk. The effective date of the hedges is January 31, 2019 and the maturity dates are January 31, 2022, January 31, 2023 and December 19, 2023, respectively.
Securitization Facility
We are a party to a $1.2 billion receivables purchase agreement among FleetCor Funding LLC, as seller, PNC Bank, National Association as administrator, and various purchaser agents, conduit purchasers and related committed purchasers parties thereto, which was amended and restated for the Fifthfifth time as of November 14, 2014. We refer to this arrangement as the Securitization Facility. There have been several amendments to the Securitization Facility.Facility, with the latest on April 22, 2019. The current purchase limit under the Securitization Facility is $950 million and the Securitization Facility expires on November 14, 2020. The Securitization Facility2020 and contains certain customary financial covenants.
There is a program fee equal to one month LIBOR plus 0.90% or the Commercial Paper Rate plus 0.80% as of December 31, 20172019 and one month LIBOR or the Commercial Paper Rate2018. The program fee was 1.80% plus 0.90%0.88% as of December 31, 2016. The program fee was 1.55%2019 and 2.52% plus 0.86%0.89% as of December 31, 2017 and 0.85% plus 0.90% as of December 31, 2016.2018. The unused facility fee is payable at a rate of 0.40% as of December 31, 20172019 and 2016.2018. The Company has unamortized debt issuance costs of $0.7 million related to the Securitization Facility as of December 31, 2019 recorded within other assets in the consolidated balance sheet.
Under a related purchase and sale agreement, dated as of December 20, 2004, and most recentlylast amended on November 14, 2014 to include Comdata as an originator, between FLEETCOR Funding LLC, as purchaser, and certain of our subsidiaries, as originators, the receivables generated by the originators are deemed to be sold to FLEETCOR Funding LLC immediately and without further action upon creation of such receivables. At the request of FLEETCOR Funding LLC, as seller, undivided percentage ownership interests in the receivables are ratably purchased by the purchasers in amounts not to exceed their respective commitments under the facility. Collections on receivables are required to be made pursuant to a written credit and collection policy and may be reinvested in other receivables, may be held in trust for the purchasers, or may be distributed. Fees are paid to each purchaser agent for the benefit of the purchasers and liquidity providers in the related purchaser group in accordance with the Securitization Facility and certain fee letter agreements.
The Securitization Facility provides for certain termination events, which includes nonpayment, upon the occurrence of which the administrator may declare the facility termination date to have occurred, may exercise certain enforcement rights with respect to the receivables, and may appoint a successor servicer, among other things.
We were in compliance with all financial and non-financial covenant requirements related to our Securitization Facility as of December 31, 2017.2019.
Other Liabilities
In connection with our acquisition of certain businesses, we owe final payments of $29.3$14.2 million, of which $3.6$13.7 million is payable in the next twelve months and $25.7$0.5 million in periods beyond a year.
Stock Repurchase Program
Any stock repurchases may be made at times and in such amounts as deemed appropriate. The timing and amount of stock repurchases, if any, will depend on a variety of factors including the stock price, market conditions, corporate and regulatory requirements, and any additional constraints related to material inside information we may possess. Any repurchases have been and are expected to be funded by a combination of available cash flow from the business, working capital and debt.
On August 3, 2017,December 14, 2018, as part of the Program, we entered an Accelerated Share Repurchaseaccelerated share repurchase ("ASR") agreement ("2018 ASR Agreement") with a third-party financial institution to repurchase $250$220 million of our common stock. Pursuant to the 2018 ASR Agreement, we delivered $250$220 million in cash and received 1,491,6471,057,035 shares based on a stock price of $142.46$176.91 on August 7, 2017.December 14, 2018. The 2018 ASR Agreement was completed on September 7, 2017,January 29, 2019, at which time the we received 263,012117,751 additional shares based on a final weighted average per share purchase price during the repurchase period of $142.48.$187.27.
On December 18, 2019, we entered into another ASR Agreement ("2019 ASR Agreement") with a third-party financial institution to repurchase $500 million of our common stock. Pursuant to the 2019 ASR Agreement, the Company delivered $500 million in cash and received 1,431,989 shares based on a stock price of $285.70 on December 18, 2019. The 2019 ASR Agreement was completed February 20, 2020, at which time we received 175,340 additional shares based on a final weighted average per share purchase price during the repurchase period of $306.81.
We accounted for the 2018 ASR Agreement and the 2019 ASR Agreement as two separate transactions: (i) as shares of reacquired common stock for the shares delivered to usthe Company upon effectiveness of theeach ASR Agreementagreement and (ii) as a forward contract indexed to ourthe 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.
Critical accounting policiesAccounting Policies and estimatesEstimates
In applying the accounting policies that we use to prepare our consolidated financial statements, we necessarily make accounting estimates that affect our reported amounts of assets, liabilities, revenue and expenses. Some of these estimates require us to make assumptions about matters that are highly uncertain at the time we make the accounting estimates. We base these assumptions and the resulting estimates on historical information and other factors that we believe to be reasonable under the circumstances, and we evaluate these assumptions and estimates on an ongoing basis. In many instances, however, we reasonably could have used different accounting estimates and, in other instances, changes in our accounting estimates could occur from period to period, with the result in each case being a material change in the financial statement presentation of our financial condition or results of operations. We refer to estimates of this type as critical accounting estimates. Our significant accounting policies are summarized in the consolidated financial statements contained elsewhere in this report. The critical accounting estimates that we discuss below are those that we believe are most important to an understanding of our consolidated financial statements.
See Footnote 2 to the Consolidated Financial Statements, Summary of Significant Accounting Policies.
Revenue recognition and presentation. Revenue is derived fromWe provide payment solutions to our business, merchant, consumer and payment network relationships,customers. Our payment solutions are primarily focused on specific commercial spend categories, including fuel, lodging, tolls, and general corporate payments, as well as from customersgift card solutions (stored value cards and partners.e-cards). We recognize revenue on fees generated throughprovide products that help businesses of all sizes control, simplify and secure payment of various domestic and cross-border payables using specialized payment products. We also provide other payment solutions for fleet maintenance, employee benefits and long haul transportation-related services.
Payment Services
Our primary performance obligation for the majority of our payment solution products (fuel, lodging, corporate payments, among others) is to stand-ready to provide authorization and processing services primarily("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 commercial fleets, commercial businesses, major oil companies, petroleum marketersthe customer. As a result, the Company allocates and leasing companiesrecognizes 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.
We record revenue for our payment services net of (i) the wholesale cost of the underlying products and servicesservices; (ii) assessments and other fees charged by the credit and debit payment networks (along with any rebates provided by them); (iii) customer rebates and other discounts; and (iv) taxes assessed (e.g. VAT and VAT-like taxes) by a government, imposed concurrent with, a revenue producing transaction.
The majority of the transaction price we receive for fulfilling the Payment Services performance obligation are comprised of one or a combination of the following: 1) interchange fees earned from the payment networks; 2) discount fees earned from merchants; 3) fees calculated based on the following: (i) we are not the primary obligor in the arrangement and we are not responsible for fulfillment and the acceptabilitya number of transactions processed; 4) fees calculated based upon a percentage of the product; (ii) we have no inventory risk, do not bear the risk of product loss and do not make any changes to the product or have any involvement in the product specifications; (iii) we do not have significant latitude with respect to establishing the pricetransaction value for the product and (iv) the amount we earn for ourunderlying goods or services is fixed, within a limited range. We recognize revenue from merchant and network relationships, processing and other arrangements when persuasive evidence of an arrangement exists, the services have been provided to the customer, the sales price is fixed or determinable and collectability is reasonably assured, as more fully described below.
We deriverecognize revenue from our merchant and network relationships based on the difference between the price charged to a customer for a transaction and the price paid to the merchant or network for the same transaction. Our revenue consists of margin on sales and fees for technical support, processing, communications and reporting. The price paid to a merchant or network may be calculated as (i) the merchant’s wholesale cost of the product plus a markup; (ii) the transaction purchase price less a percentage discount; or (iii) the transaction purchase price less a fixed fee per unit. The difference between the price we pay to a merchant and the merchant’s wholesale cost forwhen the underlying productstransactions are complete and services isour performance obligations are satisfied. Transactions are considered a merchant commission and is recognized as expense whencomplete depending upon the fuel purchase transaction is executed. We have entered into agreements with major oil companies, petroleum marketers and leasing companies, among others, that specify that a transaction is deemed to be capturedrelated payment solution but generally when we have authorized the transaction, validated that the transaction has no errors and have accepted and posted the data to our records.
Gift Card Products and Services
Our Gift product line delivers both stored value cards and card-based services primarily in the form of program fees includinggift cards to retailers. These activities each represent performance obligations that are separate and distinct. Revenue for stored valued cards are recognized (gross of the underlying cost of the related card, recorded within processing expense within the Consolidated Statements of Income) at the point in time when control passes to our customer, which is generally upon shipment.
Card-based services consist of transaction fees,processing and reporting of gift card fees, network fees, service fees, report fees and other transaction-based fees, which typically are calculatedtransactions where we recognize revenue based on measures such as percentagean output measure of dollar volume processed, numberelapsed time for an unknown or unspecified quantity of transactions processed, or some combination thereof. Such services are provided through proprietary networks or throughtransactions. As a result, we allocate and recognize variable consideration over the useestimated period of third-party networks. Transaction fees and other transaction-based fees generated from our proprietary networks and third-party networks are recognized attime over which the time the transactionperformance obligation is captured. Card fees, network fees and program fees are recognized as we fulfill our contractual service obligations. In addition, we recognizesatisfied.
Other
We account for revenue from late fees and finance charges, in jurisdictions where permitted under local regulations, primarily in the U.S. and Canada.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. The Company ceasesassessed and services are provided. We cease billing and accruing for late fees and finance charges approximately 30-4030 - 40 days after the customer’s balance becomes delinquent.
We also chargewrite foreign currency forward and option contracts for our customers transaction fees to loadfacilitate future payments in foreign currencies, and recognize revenue in accordance with authoritative fair value onto prepaid fuel, food, toll and transportation vouchers and cards. We recognize fee revenue upon providing the activated fuel, food, toll and transportation vouchers and prepaid cards to the customer. Revenue is recognized on lodging and transportation management services when the lodging stay or transportation service is provided. derivative accounting (ASC 815, "Derivatives").
Revenue is also derived from the sale of equipment and cards in certain of our businesses, which is recognized at the time the device is sold and control has passed to the risks and rewards of ownership have passed.customer. This revenue is recognized gross of the cost of sales related to the equipment in revenues, net"revenues, net" within the Consolidated Statements of Income. The related cost of sales for the equipment is recorded within processing expenses"processing expenses" in the Consolidated Statements of Income.
Revenues from contracts with customers, within the scope of Topic 606, represents approximately 75% of total consolidated revenues, net, the year ended December 31, 2019.
Contract Liabilities
Deferred revenue contract liabilities for customers subject to ASC 606 were $71.8 million and $30.6 million as of December 31, 2019 and 2018, respectively. We expect to recognize substantially all of these amounts in revenues within approximately 12 months. Revenue recognized for the year ended December 31, 2019, that was included in the deferred revenue contract liability as of January 1, 2019, was approximately $27.5 million.
Costs to Obtain or Fulfill a Contract
With the adoption of ASC 606, we began capitalizing the incremental costs of obtaining a contract with a customer if we expect to recover those costs. The incremental costs of obtaining a contract are those that we incur to obtain a contract with a customer that we would not have incurred if the contract had not been obtained (for example, a sales commission).
Costs incurred to fulfill a contract are capitalized if those costs meet all of the following criteria:
| a. | The costs relate directly to a contract or to an anticipated contract that we can specifically identify. |
| b. | The costs generate or enhance resources of ours that will be used in satisfying (or in continuing to satisfy) performance obligations in the future. |
| c. | The costs are expected to be recovered. |
In order to determine the appropriate amortization period for contract costs, we considered a combination of factors, including customer attrition rates, estimated terms of customer relationships, the useful lives of technology used by us to provide products and services to our customers, whether further contract renewals are expected and if there is any incremental commission to be paid on a contract renewal. Contract acquisition and fulfillment costs are amortized using the straight-line method over the expected period of benefit (ranging from five to ten years). Costs to obtain a contract with an expected period of benefit of one year or less are recognized as an expense when incurred. The amortization of contract acquisition costs associated with sales commissions that qualify for capitalization will be recorded as selling expense in our Consolidated Statements of Income. The amortization of contract acquisition costs associated with cash payments for client incentives is included as a reduction of revenues in the Company’s Consolidated Statements of Income. Amortization of capitalized contract costs recorded in selling expense was $14.3 million and $12.0 million for the years ended December 31, 2019 and 2018, respectively.
Costs to obtain or fulfill a contract are classified as contract cost assets within "prepaid expenses and other current assets" and "other assets" in our Consolidated Balance Sheets. We have capitalized costs to obtain a contract of $14.8 million and $12.7 million within "prepaid expenses" and $39.7 million and $34.5 million within "other assets" in our Consolidated Balance Sheets, for the year ended December 31, 2019 and 2018, respectively.
We have recorded $96.8$76.4 million, $83.9 million and $96.9 million of expenses related to sales of equipment within the processing expenses line of the Consolidated Statements of Income in 2017. Sales commissions paidfor the years ended December 31, 2019, 2018 and 2017, respectively.
Practical Expedients
ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to personnel are expensedunsatisfied performance obligations; however, as incurred.allowed by ASC 606, we elected to exclude this disclosure for any contracts with an original duration of one year or less and any variable consideration that meets specified criteria. As described above, our most significant performance obligations consist of variable consideration under a stand-ready series of distinct days of service. Such variable consideration meets the specified criteria for the disclosure exclusion; therefore, the majority of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied is variable consideration that is not required for this disclosure. The aggregate fixed consideration portion of customer contracts with an initial contract duration greater than one year is not material.
We deliver both stored value cardselected to exclude all sales taxes and card-based services primarily inother similar taxes from the form of gift cards. For multiple-deliverable customer contracts, stored value cards and card-based services are separated into two units of accounting. Stored valued cards are generally recognized upon shipment to the customer. Card-based services are recognized when the card services are rendered.
As a practical expedient, we are not required to adjust the promised amount of consideration for the effects of a significant financing component if we expect, at contract inception, that the period between when we transfer a promised service or product to a customer and when the customer pays for the service or product will be one year or less. As of December 31, 2019, our U.K. businesses, we record the operating results usingcontracts with customers did not contain a 4-4-5 week accounting cycle with the fiscal year ending on the Friday on or immediately preceding December 31.significant financing component.
FLEETCOR Funding LLC (Funding), a wholly-owned bankruptcy remote subsidiary. In turn, Funding sells,transfers, without recourse, on a revolving basis, up to $950 million ofan undivided ownership interestsinterest 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,over-collateralization, in a portion of the receivables sold to the Conduit. Purchases by the Conduit are financed with the sale of highly-rated commercial paper.
We utilize proceeds from the saletransfer of our accounts receivable as an alternative to other forms of financing, to reduce our overall borrowing costs. We have agreed to continue servicing the sold receivables for the financial institution at market rates, which approximates our cost of servicing. We retain a residual interest in the accounts receivable sold as a form of credit
enhancement. The residual interest’s fair value approximates carrying value due to its short-term nature. Funding determines the level of funding achieved by the sale of trade accounts receivable, subject to a maximum amount.
Foreign receivables are not included in our receivable securitization program. At December 31, 20172019 and 2016,2018, there was $811$971 million and $591$886 million, respectively, of short-term debt outstanding under our accounts receivable Securitization Facility.
Credit risk and reserve for losses on receivables. We control credit risk by performing periodic credit evaluations of our customers. Payments from customers are generally due within 14 days or less of billing. We routinely review our accounts receivable balances and make provisions for probable doubtful accounts based primarily on the aging of those balances. Accounts receivable are deemed uncollectible from the customer once they age past 90 days and are deemed uncollectible from the customer.days. We also provide an allowance for receivables aged less than 90 days that we expect will be uncollectible based on historical collections experience including accounts that have filed for bankruptcy. At December 31, 2017,2019, approximately 96%98% of outstanding accounts receivable were current. Accounts receivable deemed uncollectible are removed from accounts receivable and the allowance for doubtful accounts when internal collection efforts have been exhausted and accounts have been turned over to a third-party collection agency. Recoveries from the third-party collection agency are not significant.
Impairment of long-lived assets, intangibles and investments. We test our long-lived assets for impairment in accordance with relevant authoritative guidance. Weregularly evaluate if impairment indicators related to ourwhether events and circumstances have occurred that indicate the carrying amount of property plant and equipment and otherfinite-life intangible assets may not be recoverable. When factors indicate that these long-lived assets are present. Theseshould be evaluated for possible impairment, indicators may include a significant decrease inwe assess the market pricepotential impairment by determining whether the carrying amount of asuch long-lived asset or asset group, a significant adverse change inassets will be recovered through the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, or a current-period operating orfuture undiscounted cash flow loss combined with a history of operating or cash flow losses or a forecast that demonstrates continuing losses associated with theflows expected from use of a long-lived asset or asset group. If impairment indicators are present, we estimate the future cash flows for the asset or asset group. The sum of the undiscounted future cash flows attributable to the asset or group of assets is compared to their carrying amount. The cash flows are estimated utilizing various projections of revenues and expenses, working capital and proceeds from asset disposals on a basis consistent with management’s intended actions.its eventual disposition. If the carrying amount exceeds the sum of the undiscounted future cash flows, we determine the assets’ fair value by discounting the future cash flows using a discount rate required for a similar investment of like risk and records an impairment charge as the difference between the fair value and the carrying value of the asset group. Generally, we perform our testingis determined not to be recoverable, a write-down to fair value is recorded. Fair values are determined based on quoted market prices or discounted cash flow analysis as applicable. We regularly evaluate whether events and circumstances have occurred that indicate the useful lives of the asset group at the business-line level, as this is the lowest level for which identifiable cash flows are available.property and equipment and finite-life intangible assets may warrant revision.
We complete an impairment test of goodwill at least annually or more frequently if facts or circumstances indicate that goodwill might be impaired. Goodwill is tested for impairment at the reporting unit level, and the impairment test consists of two steps, as well as a qualitative assessment, as appropriate.level. We have performedfirst perform a qualitative assessment of certain of our reporting units. In thisFactors considered in the qualitative assessment we individually considered the following items for each reporting unit where we determined a qualitative analysis to be appropriate: theinclude general macroeconomic conditions, including any deterioration of general conditions, limitations on accessing capital, fluctuations in foreign exchange rates and other developments in equity and credit markets; industry and market conditions, including any deteriorationcost factors, overall financial performance of our reporting units, events or changes affecting the composition or carrying amount of the net assets of our reporting units, sustained decrease in our share price, and other relevant entity-specific events. If we elect to bypass the environment wherequalitative assessment or if we determine, on the basis of qualitative factors, that the fair value of the reporting unit operates, increased competition, changes inis more likely than not less than the products/services and regulator and political developments; cost of doing business; overall financial performance, including any declining cash flows and performance in relation to planned revenues and earnings in past periods; other relevant reporting unit specific facts, such as changes in management or key personnel or pending litigation; events affecting the reporting unit, including changes in the
carrying value of net assets, likelihood of disposal and whether there were any other impairment considerations within the business; the overall performance of our share price in relation to the market and our peers; andamount, a quantitative stress test of the previously completed step 1 test from the prior year, updated with current year results, weighted-average cost of capital rates and future projections.
Based on the goodwill asset impairment analysis performed quantitatively onas of October 1, 2017,2019, we determined that the fair value of each of our reporting units iswas in excess of the carrying value. No events or changes in circumstances have occurred since the date of ourthis most recent annual impairment test that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
We also evaluate indefinite-lived intangible assets (primarily trademarks and trade names) for impairment annually. We also test for impairment if events and circumstances indicate that it is more likely than not that the fair value of an indefinite-lived
intangible asset is below its carrying amount. Estimates critical to our evaluation of indefinite-lived intangible assets for impairment include the discount rate, royalty rates used in our evaluation of trade names, projected average revenue growth and projected long-term growth rates in the determination of terminal values. An impairment charge is recorded if the carrying amount of an indefinite-lived intangible asset exceeds the estimated fair value on the measurement date.
We also regularly evaluate the carrying value of our investments, which are not carried at fair value, for other-than-temporary impairment. We estimatehave elected to measure certain investments in equity instruments 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. Investments classified as trading securities are carried at fair value of our investments using a combination of the income approach and the market approach. The income approach utilizes a discounted cash flow model incorporating management’s expectations for future revenue, operating expenses, earnings before interest, taxes, depreciation and amortization, capital expenditures and an anticipated tax rate. We discount the related cash flow forecasts using an estimated weighted-average cost of capital for each reporting unit at the date of valuation. The market approach utilizes comparative market multipleswith any unrealized gain or loss being recorded in the valuation estimate. Multiples are derived by relating the value of guideline companies, based on either the market price of publicly traded shares or the prices of companies being acquired in the marketplace, to various measures of their earnings and cash flow. Such multiples are then applied to the historical and projected earnings and cash flow of our investments in developing the valuation estimate.
Income taxes. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. We have elected to treat the Global Intangible Low Taxed Income (GILTI) inclusion as a current period expense.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. We evaluate on a quarterly basis whether it is more likely than not that our deferred tax assets will be realized in the future and conclude whether a valuation allowance must be established.
Business combinations. Business combinations completed by us have been accounted for under the acquisition method of accounting. The acquisition method requires that the acquired assets and liabilities, including contingencies, be recorded at fair value determined as of the acquisition date and changes thereafter reflected in income.date. For significant acquisitions, we obtain independent third-party valuation studies for certain of the assets acquired and liabilities assumed to assist us in determining fair value. Goodwill represents the excess of the purchase price over the fair values of the tangible and intangible assets acquired and liabilities assumed. The results of thethe acquired businesses are included in our results of operations beginning from the completion date of the applicable transaction.
Estimates of fair value are revised during an allocation period as necessary when, and if, information becomes available to further define and quantify the fair value of the assets acquired and liabilities assumed. Provisional estimates of the fair values of the assets acquired and liabilities assumed involves a number of estimates and assumptions that could differ materially from the final amounts recorded. The allocation period does not exceed one year from the date of the acquisition. To the extent additional information to refine the original allocation becomes available during the allocation period, the allocation of the purchase price is adjusted. Should information become available after the allocation period, those items are adjusted through operating results. The direct costs of the acquisition are recorded as operating expenses. Certain acquisitions include contingent consideration related to the performance of the acquired operations following the acquisition. Contingent consideration is recorded at estimated fair value at the date of the acquisition, and is remeasured each reporting period, with any changes in fair value recorded in the Consolidated Statements of Income. We estimate the fair value of the acquisition-related contingent consideration using various valuation approaches, as well as significant unobservable inputs, reflecting our assessment of the assumptions market participants would use to value these liabilities.
Stock-based compensation. We account for employee stock options and restricted stock in accordance with relevant authoritative literature. Stock options are granted with an exercise price estimated to be equal to the fair market value on the date of grant as authorized by our board of directors. Options granted have vesting provisions ranging from one to five years and vesting of the options is generally based on the passage of time or performance. Stock option grants are subject to forfeiture if employment terminates prior to vesting. We have selected the Black-Scholes option pricing model for estimating the grant date fair value of stock option awards granted.awards. We have considered the retirement and forfeiture provisions of the options and utilized our historical experience to estimate the expected life of the options. Option forfeitures are accounted for upon occurrence. We base the risk-free interest rate on the yield of a zero coupon U.S. Treasury security with a maturity equal to the expected life of the option from the date of the grant. Stock-based compensation cost is measured at the grant date based on the
value of the award and is
recognized as expense over the requisite service period based on the number of years for which the requisite service is expected to be rendered.
Awards of restricted stock and restricted stock units are independent of stock option grants and are subject to forfeiture if employment terminates prior to vesting. The vesting of shares granted is generally based on the passage of time, performance or market conditions, or a combination of these. Shares vesting based on the passage of time have vesting provisions of one to threefour years. The fair value of restricted stock where the shares vest based on the passage of time or performance is based on the grant date fair value of our stock. The fair value of restricted stock units granted with market based vesting conditions is estimated using the Monte Carlo simulation valuation model. The risk-free interest rate and volatility assumptions used within the Monte Carlo simulation valuation model are calculated consistently with those applied in the Black-Scholes options pricing model utilized in determining the fair value of the stock option awards.
For performance-based restricted stock awards and performance based stock option awards, we must also make assumptions regarding the likelihood of achieving performance goals. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.
Derivatives. With our acquisition of Cambridge in August 2017, weWe use derivatives to minimize our exposures related to changes in interest rates and facilitate cross-currency corporate payments by writing derivatives to customers, whichcustomers.
We are notexposed to the risk of changing interest rates because our borrowings are subject to variable interest rates. In order to mitigate this risk, we utilize derivative instruments. Interest rate swap contracts designated as hedging instruments.cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. We hedge a portion of our variable rate debt utilizing derivatives designated as cash flow hedges.
Changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recorded in other assets or other noncurrent liabilities and offset against accumulated other comprehensive income/loss, net of tax. Derivative fair value changes that are recorded in accumulated other comprehensive income/loss are reclassified to earnings in the same period or periods that the hedged item affects earnings, to the extent the derivative is effective in offsetting the change in cash flows attributable to the hedged risk. The portions of the change in fair value that are either considered ineffective or are excluded from the measure of effectiveness are recognized immediately within earnings.
In our cross-border payments business, the majority of Cambridge's revenue is from exchanges of currency at spot rates, which enableenables customers to make cross-currency payments. In addition, Cambridge also writeswe write foreign currency forward and option contracts for itsour customers to facilitate future payments. The duration of these derivative contracts at inception is generally less than one year. We aggregate our foreign exchange exposures arising from customer contracts, including forwards, options and spot exchanges of currency, as necessary, and hedges (economic hedge)economically hedge the resulting net currency risks by entering into offsetting contractsderivatives with established financial institution counterparties. The changes in fair value related to these contractsderivatives are recorded in revenues, net in the Consolidated Statements of Income.
We recognize all cross border payments 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.
From time to time, new accounting pronouncements are issued by the FASB or other standardsstandard 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” (Topic 842), 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 us for annual periods beginning after December 15, 2018 and interim periods therein. Early adoption is permitted. The new standard must beEffective January 1, 2019, we adopted Topic 842 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. We are 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 operating leasesapproach, as discussed further in the Consolidated Balance Sheet upon adoption.Footnote 14.
Accounting for Derivative Financial Instruments. 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 reporting periods beginning after December 15, 2018, and interim periods within
those years. EarlyWe adopted this guidance on January 1, 2019, which did not have a material impact on our results of operations, financial condition, or cash flows. The guidance did simplify the accounting for interest rate swap hedges, allowing more time for the initial hedge effectiveness documentation and a qualitative hedge effectiveness assessment at each quarter end.
In October 2018, the FASB issued ASU 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. We adopted this guidance on January 1, 2019, which did not have a material impact on our 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 Cuts and Jobs Act (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. We adopted this guidance on January 1, 2019 and elected to not reclassify any items to retained earnings.
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. We adopted this guidance on January 1, 2019, which had no impact on our results of operations, financial condition, or cash flows.
Pending Adoption of Recently Issued Accounting Standards
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.
In April 2019, the FASB issued ASU 2019-04, "Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments", which clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments. For clarifications around credit losses, the effective date will be the same as the effective date in ASU 2016-13. For entities that have adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities", ASU 2019-04 is effective the first annual reporting period beginning after the date of issuance of ASU 2019-04 and may be early adopted. The amendments in ASU 2019-04 related to ASU 2016-01 are effective for fiscal years beginning after December 15, 2019, including interim periods therein. Upon adoption of the new standard on January 1, 2020, we will recognize an allowance for credit losses based on the estimated lifetime expected credit loss related to our financial assets. We are analyzing our credit policies and updating our accounting policies and internal controls that will be impacted by the new guidance. We do not anticipate that the adoption of this new standard will have a material impact on the results of operations, financial condition, or cash flows due to the relatively fast turnover of our trade receivables accounts and limited other asset balances to which this standard applies.
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 permitted.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. The guidance should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are updating the accounting policies and internal controls that will be impacted by the new guidance. Our adoption of this ASU on January 1, 2020, is not expected to have a material impact on the results of operations, financial condition, or cash flows.
Fair Value Measurement. On August 28, 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement", which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. The guidance is effective for us for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The guidance on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other guidance should be applied retrospectively to all periods presented upon their effective date. Our adoption of this ASU on January 1, 2020, is not expected to have a material impact on the results of operations, financial condition, or cash flows.
Income Taxes. On December 18, 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which removes certain exceptions to the general principles of ASC 740 and simplifies other areas in order to simplify its application. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. We do not expect this ASU to have a material impact on the results of operations, financial condition, or cash flows.
Contractual obligationsObligations
The table below summarizes the estimated dollar amounts of payments under contractual obligations identified below as of December 31, 20172019 for the periods specified:
| Payments due by period(a) | Payments due by period(a) | |||||||||||||||||||||||||||||||||||||||
| (in millions) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||||||||
| Credit Facility | $ | 3,663.9 | $ | 805.5 | $ | 271.0 | $ | 2,256.2 | $ | 331.2 | $ | 4,023.8 | $ | 764.4 | $ | 324.2 | $ | 2,935.2 | $ | — | ||||||||||||||||||||
| Securitization Facility | 811.0 | 811.0 | — | — | — | 971.0 | 971.0 | — | — | — | ||||||||||||||||||||||||||||||
| Estimated interest payments- Credit Facility(b) | 534.1 | 119.5 | 330.8 | 77.0 | 6.8 | |||||||||||||||||||||||||||||||||||
| Estimated interest payments - Credit Facility (b) | 448.0 | 118.6 | 221.1 | 108.3 | — | |||||||||||||||||||||||||||||||||||
| Estimated interest payments- Securitization Facility(b) | 57.0 | 19.5 | 37.5 | — | — | 22.8 | 22.8 | — | — | — | ||||||||||||||||||||||||||||||
| Operating leases | 92.0 | 19.3 | 26.5 | 20.9 | 25.3 | 117.3 | 19.8 | 32.3 | 26.2 | 39.0 | ||||||||||||||||||||||||||||||
| Deferred purchase price | 29.3 | 3.6 | 25.7 | — | — | 2.7 | 2.2 | 0.5 | — | — | ||||||||||||||||||||||||||||||
| Other(c) | 18.1 | — | 13.5 | 1.4 | 3.2 | |||||||||||||||||||||||||||||||||||
| Estimated interest payments - Swaps (c) | 42.3 | 15.1 | 23.3 | 3.9 | — | |||||||||||||||||||||||||||||||||||
| Other(d) | 41.5 | 11.5 | 30.0 | — | — | |||||||||||||||||||||||||||||||||||
| Total | $ | 5,205.4 | $ | 1,778.5 | $ | 704.9 | $ | 2,355.4 | $ | 366.6 | $ | 5,669.4 | $ | 1,925.4 | $ | 631.4 | $ | 3,073.6 | $ | 39.0 | ||||||||||||||||||||
______________________
| (a) | Deferred income tax liabilities as of December 31, |
would not relate to liquidity needs. At December 31, 2019, we had approximately $42.8 million of unrecognized income tax benefits related to uncertain tax positions. We cannot reasonably estimate when all of these unrecognized income tax benefits may be settled. We do not expect reductions to unrecognized income tax benefits within the next 12 months as a result of projected resolutions of income tax uncertainties.
| (b) | We draw upon and pay down on the revolver within our Credit Agreement and our Securitization Facility borrowings outside of a normal schedule, as excess cash is available. For our variable rate debt, we have assumed the December 31, |
| (c) | For our interest rate swap cash flow contracts (the "swap contracts"), we have used the fixed interest rate on each swap less the one month LIBOR rate in effect on our term loans at December 31, 2019, to calculate the estimated interest payments, for all years presented. |
| (d) | The long-term portion of contingent consideration agreements and |
Management’s Use of Non-GAAP Financial Measures
We have included in the discussion above certain financial measures that were not prepared in accordance with GAAP. Any analysis of non-GAAP financial measures should be used only in conjunction with results presented in accordance with GAAP. Below, we define the non-GAAP financial measures, provide a reconciliation of the non-GAAP financial measure to the most directly comparable financial measure calculated in accordance with GAAP, and discuss the reasons that we believe this information is useful to management and may be useful to investors.
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Revenues, net | $ | 2,250 | $ | 1,832 | $ | 1,703 | ||||||
| Merchant commissions | 113 | 104 | 108 | |||||||||
| Total adjusted revenues | $ | 2,136 | $ | 1,727 | $ | 1,595 | ||||||
Pro forma and macro adjusted revenues. revenue and transactions by product. We have defineddefine the non-GAAP measure pro forma and macro adjusted revenue as revenues,revenue, net as reflected in our statement of income, adjusted forto eliminate the impact of the macroeconomic environment and the impact of acquisitions, and dispositions and other one-time items.the impact of adoption of ASC 606. The macroeconomic environment includes the impact that market fuel spread margins, fuel prices and foreign exchange rates have on our business. We use pro forma and macro adjusted revenue as a basisand transactions to evaluate the organic growth in our organic growth.
revenue and the associated transactions. Set forth below is a reconciliation of pro forma and macro adjusted revenuesrevenue and transactions to the most directly comparable GAAP
measure, revenues,revenue, net and transactions (in millions):
2 Pro forma to include acquisitions and exclude dispositions and one-time items, consistent with previous period ownership.3 2016 reflects immaterial corrections in estimated allocation of revenue by product from previously disclosed amounts.4 Adjustments related to one-time items not representative of normal business operations. 5 Other includes telematics, maintenance, food and transportation related businesses.
| Revenue | Key Performance Indicators | |||||||||||||
| Year Ended December 31,* | Year Ended December 31,* | |||||||||||||
| (Unaudited) | 2019 | 2018 | 2019 | 2018 | ||||||||||
| FUEL - TRANSACTIONS | ||||||||||||||
| Pro forma and macro adjusted | $ | 1,180 | $ | 1,079 | 499 | 494 | ||||||||
| Impact of acquisitions/dispositions | 11 | 46 | 3 | 18 | ||||||||||
| Impact of fuel prices/spread | 2 | — | — | — | ||||||||||
| Impact of foreign exchange rates | (19 | ) | — | — | — | |||||||||
| As reported | $ | 1,173 | $ | 1,126 | 502 | 512 | ||||||||
| CORPORATE PAYMENTS - TRANSACTIONS | ||||||||||||||
| Pro forma and macro adjusted | $ | 521 | $ | 433 | 56 | 50 | ||||||||
| Impact of acquisitions/dispositions | — | (17 | ) | — | — | |||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | (4 | ) | — | — | — | |||||||||
| As reported | $ | 516 | $ | 416 | 56 | 49 | ||||||||
| CORPORATE PAYMENTS - SPEND | ||||||||||||||
| Pro forma and macro adjusted | Intentionally Left Blank | 74,366 | 56,736 | |||||||||||
| Impact of acquisitions/dispositions | — | (993 | ) | |||||||||||
| Impact of fuel prices/spread | — | — | ||||||||||||
| Impact of foreign exchange rates | (930 | ) | — | |||||||||||
| As reported | 73,437 | 55,744 | ||||||||||||
| TOLLS - TAGS | ||||||||||||||
| Pro forma and macro adjusted | $ | 387 | $ | 333 | 5.1 | 4.7 | ||||||||
| Impact of acquisitions/dispositions | — | — | — | — | ||||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | (30 | ) | — | — | — | |||||||||
| As reported | $ | 357 | $ | 333 | 5.1 | 4.7 | ||||||||
| LODGING - ROOM NIGHTS | ||||||||||||||
| Pro forma and macro adjusted | $ | 213 | $ | 189 | 19 | 21 | ||||||||
| Impact of acquisitions/dispositions | — | (13 | ) | — | (2 | ) | ||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | — | — | — | — | ||||||||||
| As reported | $ | 213 | $ | 176 | 19 | 19 | ||||||||
| GIFT - TRANSACTIONS | ||||||||||||||
| Pro forma and macro adjusted | $ | 180 | $ | 193 | 1,274 | 1,385 | ||||||||
| Impact of acquisitions/dispositions | — | (7 | ) | — | (1 | ) | ||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | — | — | — | — | ||||||||||
| As reported | $ | 180 | $ | 187 | 1,274 | 1,384 | ||||||||
OTHER1 - TRANSACTIONS | ||||||||||||||
| Pro forma and macro adjusted | $ | 219 | $ | 201 | 56 | 55 | ||||||||
| Impact of acquisitions/dispositions | — | (3 | ) | — | (5 | ) | ||||||||
| Impact of fuel prices/spread | — | — | — | — | ||||||||||
| Impact of foreign exchange rates | (9 | ) | — | — | — | |||||||||
| As reported | $ | 210 | $ | 197 | 56 | 50 | ||||||||
| FLEETCOR CONSOLIDATED REVENUES | ||||||||||||||
| Pro forma and macro adjusted | $ | 2,700 | $ | 2,428 | Intentionally Left Blank | |||||||||
| Impact of acquisitions/dispositions | 11 | 6 | ||||||||||||
| Impact of fuel prices/spread | 2 | — | ||||||||||||
| Impact of foreign exchange rates | (64 | ) | — | |||||||||||
| As reported | $ | 2,649 | $ | 2,434 | ||||||||||
| Year Ended December 31,* | ||||||||
| 2017 | 2016 | |||||||
| (Unaudited) | Macro Adjusted1 | Pro forma2,3 | ||||||
| FUEL CARDS | ||||||||
| Pro forma and macro adjusted | $ | 1,068 | $ | 996 | ||||
| Impact of acquisitions/dispositions | — | (7 | ) | |||||
| Impact of fuel prices/spread | 30 | — | ||||||
| Impact of foreign exchange rates | — | — | ||||||
One-time items4 | (2 | ) | 8 | |||||
| As reported | $ | 1,096 | $ | 997 | ||||
| CORPORATE PAYMENTS | ||||||||
| Pro forma and macro adjusted | $ | 260 | $ | 226 | ||||
| Impact of acquisitions/dispositions | — | (47 | ) | |||||
| Impact of fuel prices/spread | 1 | — | ||||||
| Impact of foreign exchange rates | 1 | — | ||||||
One-time items4 | — | — | ||||||
| As reported | $ | 262 | $ | 180 | ||||
| TOLLS | ||||||||
| Pro forma and macro adjusted | $ | 302 | $ | 257 | ||||
| Impact of acquisitions/dispositions | — | (154 | ) | |||||
| Impact of fuel prices/spread | — | — | ||||||
| Impact of foreign exchange rates | 25 | — | ||||||
One-time items4 | — | — | ||||||
| As reported | $ | 327 | $ | 103 | ||||
| LODGING | ||||||||
| Pro forma and macro adjusted | $ | 127 | $ | 105 | ||||
| Impact of acquisitions/dispositions | — | (4 | ) | |||||
| Impact of fuel prices/spread | — | — | ||||||
| Impact of foreign exchange rates | — | — | ||||||
One-time items4 | — | — | ||||||
| As reported | $ | 127 | $ | 101 | ||||
| GIFT | ||||||||
| Pro forma and macro adjusted | $ | 194 | $ | 185 | ||||
| Impact of acquisitions/dispositions | — | — | ||||||
| Impact of fuel prices/spread | — | — | ||||||
| Impact of foreign exchange rates | — | — | ||||||
One-time items4 | — | — | ||||||
| As reported | $ | 194 | $ | 185 | ||||
OTHER5 | ||||||||
| Pro forma and macro adjusted | $ | 243 | $ | 244 | ||||
| Impact of acquisitions/dispositions | — | 23 | ||||||
| Impact of fuel prices/spread | — | — | ||||||
| Impact of foreign exchange rates | 1 | — | ||||||
One-time items4 | — | — | ||||||
| As reported | $ | 244 | $ | 266 | ||||
| FLEETCOR CONSOLIDATED REVENUES | ||||||||
| Pro forma and macro adjusted | $ | 2,194 | $ | 2,013 | ||||
| Impact of acquisitions/dispositions | — | (189 | ) | |||||
| Impact of fuel prices/spread | 30 | — | ||||||
| Impact of foreign exchange rates | 27 | — | ||||||
One-time items4 | (2 | ) | 8 | |||||
| As reported | $ | 2,250 | $ | 1,832 | ||||
* Columns may not calculate due to rounding.
1 Adjusted to remove the impact of changes in the macroeconomic environment to be consistent with the same period of prior year, using constant fuel prices, fuel price spreads and foreign exchange rates, as well as one-time items.
Adjusted net income and adjusted net income per diluted share. We have defined the non-GAAP measure adjusted net income as net income as reflected in our statement of income, adjusted to eliminate (a) non-cash stock-basedstock based compensation expense related to share-basedshare based compensation awards, (b) amortization of deferred financing costs, discounts and intangible assets, amortization of the premium recognized on the purchase of receivables, and our proportionate share of amortization of intangible assets at our equity method investment, and (c) aother non-recurring net gain at equity method investment, (d)items, such as the impact of the Tax Act, impairment of our equity method investment, (e) net gain onasset write-offs, restructuring costs, gains and related taxes due to disposition of assets and a business, (f) loss on extinguishment of debt, legal settlements/litigation, and (g) other non-recurring items, including the impact of the Tax Act.unauthorized access impact.
We have defined the non-GAAP measure adjusted net income per diluted share as the calculation previously noted divided by the weighted average diluted shares outstanding as reflected in our statement of income.
We use adjusted net income to eliminate the effect of items that we do not consider indicative of our core operating performance. We believe it is useful to exclude non-cash stockshare based compensation expense from adjusted net income because non-cash equity grants made at a certain price and point in time do not necessarily reflect how our business is performing at any particular time and stockshare based compensation expense is not a key measure of our core operating performance. We also believe that amortization expense can vary substantially from company to company and from period to period depending upon their financing and accounting methods, the fair value and average expected life of their acquired intangible assets, their capital structures and the method by which their assets were acquired. Therefore,acquired; therefore, we have excluded amortization expense from our adjusted net income. We also believe one-time non-recurring gains, losses, and impairment charges do not necessarily reflect how our investments and business are performing. We believe that adjusted net income and adjusted net income per diluted share are appropriate supplemental measures of financial performance and may be useful to investors to understanding our operating performance on a consistent basis. Adjusted net income and adjusted net income per diluted share are not intended to be a substitute for GAAP financial measures and should not be usedconsidered as such.an alternative to net income or cash flow from operations, as determined by U.S. GAAP, and our calculation thereof may not be comparable to that reported by other companies.
Set forth below is a reconciliation of adjusted net income and adjusted net income per diluted share to the most directly comparable GAAP measure, net income and net income per diluted share (in thousands, except per share amounts)*:
| Year Ended December 31,* | Year Ended December 31,* | |||||||||||||||||||||||
| (Unaudited) | 2017 | 20162 | 2015 | 2019 | 2018 | |||||||||||||||||||
| Net income | $ | 740,200 | $ | 452,385 | $ | 362,431 | $ | 895,073 | $ | 811,483 | ||||||||||||||
| Net income per diluted share | $ | 7.91 | $ | 4.75 | $ | 3.85 | ||||||||||||||||||
| Stock based compensation | 93,297 | 63,946 | 90,122 | 60,953 | 69,939 | |||||||||||||||||||
| Amortization of intangible assets, premium on receivables, deferred financing costs and discounts | 233,280 | 184,475 | 180,704 | 216,532 | 227,015 | |||||||||||||||||||
| Impairment of investment | 44,600 | 36,065 | 40,000 | |||||||||||||||||||||
| Net gain on disposition of business | (109,205 | ) | — | — | ||||||||||||||||||||
| Investment losses | 2,705 | 7,147 | ||||||||||||||||||||||
| Net gain on disposition of assets/business | — | (152,750 | ) | |||||||||||||||||||||
| Loss on write-off of fixed assets | 1,819 | 8,793 | ||||||||||||||||||||||
| Loss on extinguishment of debt | 3,296 | — | — | — | 2,098 | |||||||||||||||||||
| Non-recurring loss due to merger of entities | 2,028 | — | — | |||||||||||||||||||||
| Non-recurring net gain at equity method investment | — | (10,845 | ) | — | ||||||||||||||||||||
| Legal settlement | 11,000 | — | — | |||||||||||||||||||||
| Restructuring costs | 1,043 | — | — | |||||||||||||||||||||
| Legal settlements/litigation | 6,181 | 5,500 | ||||||||||||||||||||||
| Restructuring and related costs | 2,814 | 4,969 | ||||||||||||||||||||||
| Unauthorized access impact | — | 2,065 | ||||||||||||||||||||||
| Total pre-tax adjustments | 279,339 | 273,641 | 310,826 | 291,004 | 174,777 | |||||||||||||||||||
| Impact of 2017 Tax Act | (127,466 | ) | — | — | ||||||||||||||||||||
Income tax impact of pre-tax adjustments at the effective tax rate1 | (93,164 | ) | (66,850 | ) | (80,632 | ) | (61,619 | ) | (39,151 | ) | ||||||||||||||
Impact of investment sale, other discrete item and tax reform2 | (62,333 | ) | 22,731 | |||||||||||||||||||||
| Adjusted net income | $ | 798,909 | $ | 659,176 | $ | 592,625 | $ | 1,062,125 | $ | 969,840 | ||||||||||||||
| Adjusted net income per diluted share | $ | 8.54 | $ | 6.92 | $ | 6.30 | $ | 11.79 | $ | 10.53 | ||||||||||||||
| Diluted shares | 93,594 | 95,213 | 94,139 | 90,070 | 92,151 | |||||||||||||||||||
1Includes discrete tax effect of non-cash investment gain. Also excludes impact of a Section 199 tax adjustment related to a prior tax year on the 2019 effective income tax rate. |
2Represents the impact to taxes from the reversal of a valuation allowance related to the disposition of our investment in Masternaut of $64.9 million and $0.8 million in the second and fourth quarters of 2019, respectively, and impact of tax reform adjustments included in our effective tax rate of $22.7 million in the third quarter of 2018. Also, includes the impact of a discrete tax item for a Section 199 adjustment related to a prior tax year in the third quarter of 2019 results of $1.8 million. |
*Columns may not calculate due to rounding. |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign currency risk
Foreign Earnings
Our International segment exposes us to foreign currency exchange rate changes that can impact translations of foreign-denominated assets and liabilities into U.S. dollars and future earnings and cash flows from transactions denominated in different currencies. Revenue from our International segment was 36.5%35.5%, 30.2%35.4% and 27.7%36.5% of total revenue for the years ended December 31, 2017, 2016,2019, 2018, and 2015,2017, respectively. We measure foreign currency exchange risk based on changes in foreign currency exchange rates using a sensitivity analysis. The sensitivity analysis measures the potential change in earnings based on a hypothetical 10% change in currency exchange rates. Exchange rates and currency positions as of December 31, 20172019 were used to perform the sensitivity analysis. Such analysis indicated that a hypothetical 10% change in foreign currency exchange rates would have increased or decreased consolidated operating income during the year ended December 31, 20172019 by approximately $34.2$47.6 million had the U.S. dollar exchange rate increased or decreased relative to the currencies to which we had exposure. When exchange rates and currency positions as of December 31, 20162018 and 20152017 were used to perform this sensitivity analysis, the analysis indicated that a hypothetical 10% change in currency exchange rates would have increased or decreased consolidated operating income for the years ended December 31, 20162018 and 20152017 by approximately $24.8$41.7 million and $22.5$34.2 million, respectively. We have utilized International segment operating income as a proxy for foreign earnings.
Unhedged Cross-Currency Risk
With the acquisition of Cambridge in August 2017, we have additional foreign exchange risk and associated foreign exchange risk management requirements due to the nature of our international payments provider business. 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 customers to facilitate future payments. The duration of these derivative contracts at inception is generally less than one year. Cambridge aggregates its foreign exchange exposures arising from customer contracts, including the derivative contracts described above, and hedges (economic hedge) the resulting net currency risks by entering into offsetting contracts with established financial institution counterparties.
Interest rate risk
We are exposed to changes inthe risk of changing interest rates on our cash investments and on the unhedged portion of our variable rate debt. We invest our excess cash either to pay down our Securitization Facility debt or in securities that we believe are highly liquid and marketable in the short term. These investments are not held for trading or other speculative purposes. Under our $4.325 billion Credit Agreement, the Credit Agreement 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 $2.690 billion and a term loan B facility in the amount of $350.0 million asAs of December 31, 2017. The revolving credit facility consists2019, we had $4.02 billion of (a) a revolving A credit facilityvariable rate debt outstanding under our Credit Agreement. See footnote 11 of the accompanying consolidated financial statement for information about the Credit Agreement. We use derivative financial instruments to reduce our exposure related to changes in the amount of $800.0 million, with sublimits for letters of credit and swing line loans, (b) a revolving B facility in the amount of $450.0 million for swing line loans and multi-currency borrowings and, (c) a revolving C facility in the amount of $35.0 million for multi-currency borrowings in Australian Dollars or New Zealand Dollars.
If market interest rates had increased or decreased an average of 100 basis points and assuming we had an outstanding balance on our credit facility.
facility and term loans of $2.02 billion not fixed by interest rate swap contracts at December 31, 2019, our interest expense would have changed by approximately $20.2 million. Based on the amounts and mix of our fixed and floating rate debt (exclusive of our Securitization Facility) at December 31, 2017, 20162018 and 2015,2017, if market interest rates had increased or decreased an average of 100 basis points, our interest expense would have changed by approximately $34.7 million, $27.9$37.9 million and $26.2$34.7 million, respectively. We determined these amounts by considering the impact of the hypothetical interest rates on our borrowing costs. These analyses do not consider the effects of changes in the level of overall economic activity that could exist in such an environment.
Fuel price risk
Our fleet customers use our products and services primarily in connection with the purchase of fuel. Accordingly, our revenue is affected by fuel prices, which are subject to significant volatility. A decline in retail fuel prices could cause a change in our revenue from several sources, including fees paid to us based on a percentage of each customer’s total purchase. Changes in the absolute price of fuel may also impact unpaid account balances and the late fees and charges based on these amounts. The impact of changes in fuel price is somewhat mitigated by our agreements with certain merchants, where the price paid to the merchant is equal to the lesser of the merchant’s cost plus a markup or a percentage of the transaction purchase price. We do not enter into any fuel price derivative instruments.
Fuel-price spread risk
From our merchant and network relationships, we derive revenue from the difference between the price charged to a fleet customer for a transaction and the price paid to the merchant or network for the same transaction. The price paid to a merchant or network is calculated as the merchant’s wholesale cost of fuel plus a markup. The merchant’s wholesale cost of fuel is dependent on several factors including, among others, the factors described above affecting fuel prices. The fuel price that we charge to our customer is dependent on several factors including, among others, the fuel price paid to the fuel merchant, posted retail fuel prices and competitive fuel prices. We experience fuel-price spread contraction when the merchant’s wholesale cost of fuel increases at a faster rate than the fuel price we charge to our customers, or the fuel price we charge to our customers decreases at a faster rate than the merchant’s wholesale cost of fuel. Accordingly, if fuel-price spreads contract, we may generate less revenue, which could adversely affect our operating results. The impact of volatility in fuel spreads is somewhat mitigated by our agreements with certain merchants, where the price paid to the merchant is equal to the lesser of the merchant’s cost plus a markup or a percentage of the transaction purchase price.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of FleetCorFLEETCOR Technologies, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of FleetCorFLEETCOR Technologies, Inc. and subsidiaries (the Company) as of December 31, 20172019 and 2016,2018, the related consolidated statements of income, comprehensive income, stockholders'shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017,2019, 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, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2019, 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, 20182, 2020 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.
| Valuation of Goodwill | ||
| Description of the Matter | At December 31, 2019, the Company’s goodwill was $4.8 billion. As discussed in Note 2 to the consolidated financial statements, the Company completes an impairment test of goodwill at least annually or more frequently if facts and circumstances indicate that goodwill might be impaired. Goodwill is tested for impairment at the reporting unit level and involves estimating the fair value of each identified reporting unit which is measured based upon, among other factors, a discounted cash flow analysis, as well as market multiples for comparable companies. Auditing the Company's estimate of reporting unit fair value involved a high degree of subjectivity as estimates underlying the determination of reporting unit fair value using the discounted cash flow model were based on significant assumptions that are sensitive to changes and are affected by expected future market and economic conditions. These assumptions included forecasts for Revenue, net, Earnings before Interest Taxes Depreciation and Amortization (EBITDA), and long-term growth rates as well as the discount rate, which reflected risk-based factors based on the reporting units’ geographical location and business risk. | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s goodwill impairment review process, including controls over management’s review of the significant assumptions described above. For example, we tested controls over management’s review of the reporting units’ long-term growth rates and discount rates used in the determination of the reporting units’ estimated fair values. To test the estimated fair value of the Company’s reporting units, our audit procedures included, among others, assessing the methodologies used by the Company and testing the significant assumptions discussed above, inclusive of the underlying data used by the Company in its development of these assumptions. We involved our valuation specialists to assist us with these procedures. Our valuation specialists evaluated management’s estimation of the discount rates used in the reporting unit’s fair value calculations, performed a comparison of market multiples to observable transactions, and independently recalculated the discount rates for the respective reporting units. We also compared earnings forecasts to historical results and, for certain reporting units, to current industry and economic trends, and performed sensitivity analyses of the significant assumptions to evaluate the changes in the fair value of the reporting units that would result from changes in the significant assumptions. | |
/s/ Ernst & Young LLP
We have served as the Company‘sCompany's auditor since 2002.
Atlanta, Georgia
March 1, 20182, 2020
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Par Value Amounts)
| December 31, | December 31, | |||||||||||||||
| 2017 | 2016 | 20191 | 2018 | |||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 913,595 | $ | 475,018 | $ | 1,271,494 | $ | 1,031,145 | ||||||||
| Restricted cash | 217,275 | 168,752 | 403,743 | 333,748 | ||||||||||||
| Accounts and other receivables (less allowance for doubtful accounts of $46,031 and $32,506, respectively) | 1,420,011 | 1,202,009 | ||||||||||||||
| Accounts and other receivables (less allowance for doubtful accounts of $70,890 at December 31, 2019 and $59,963 at December 31, 2018) | 1,568,961 | 1,425,815 | ||||||||||||||
| Securitized accounts receivable—restricted for securitization investors | 811,000 | 591,000 | 970,973 | 886,000 | ||||||||||||
| Prepaid expenses and other current assets | 187,820 | 90,914 | 403,400 | 199,278 | ||||||||||||
| Total current assets | 3,549,701 | 2,527,693 | 4,618,571 | 3,875,986 | ||||||||||||
| Property and equipment, net | 180,057 | 142,504 | 199,825 | 186,201 | ||||||||||||
| Goodwill | 4,715,823 | 4,195,150 | 4,833,047 | 4,542,074 | ||||||||||||
| Other intangibles, net | 2,724,957 | 2,653,233 | 2,341,882 | 2,407,910 | ||||||||||||
| Investments | 32,859 | 36,200 | 30,440 | 42,674 | ||||||||||||
| Other assets | 114,962 | 71,952 | 224,776 | 147,632 | ||||||||||||
| Total assets | $ | 11,318,359 | $ | 9,626,732 | $ | 12,248,541 | $ | 11,202,477 | ||||||||
| Liabilities and stockholders’ equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 1,437,314 | $ | 1,151,432 | $ | 1,249,586 | $ | 1,117,649 | ||||||||
| Accrued expenses | 238,472 | 238,812 | 275,511 | 261,594 | ||||||||||||
| Customer deposits | 732,171 | 530,787 | 1,007,631 | 926,685 | ||||||||||||
| Securitization facility | 811,000 | 591,000 | 970,973 | 886,000 | ||||||||||||
| Current portion of notes payable and lines of credit | 805,512 | 745,506 | 775,865 | 1,184,616 | ||||||||||||
| Other current liabilities | 71,033 | 38,781 | 183,502 | 118,669 | ||||||||||||
| Total current liabilities | 4,095,502 | 3,296,318 | 4,463,068 | 4,495,213 | ||||||||||||
| Notes payable and other obligations, less current portion | 2,902,104 | 2,521,727 | 3,289,947 | 2,748,431 | ||||||||||||
| Deferred income taxes | 518,912 | 668,580 | 519,980 | 491,946 | ||||||||||||
| Other noncurrent liabilities | 125,319 | 56,069 | 263,930 | 126,707 | ||||||||||||
| Total noncurrent liabilities | 3,546,335 | 3,246,376 | 4,073,857 | 3,367,084 | ||||||||||||
| Commitments and contingencies (Note 13) | ||||||||||||||||
| Commitments and contingencies (Note 15) | ||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Common stock, $0.001 par value; 475,000,000 shares authorized; 122,083,059 shares issued and 89,803,982 shares outstanding at December 31, 2017; and 121,259,960 shares issued and 91,836,938 shares outstanding at December 31, 2016 | 122 | 121 | ||||||||||||||
| Common stock, $0.001 par value; 475,000,000 shares authorized; 124,626,786 shares issued and 85,342,156 shares outstanding at December 31, 2019; and 123,035,859 shares issued and 85,845,344 shares outstanding at December 31, 2018 | 124 | 123 | ||||||||||||||
| Additional paid-in capital | 2,214,224 | 2,074,094 | 2,494,721 | 2,306,843 | ||||||||||||
| Retained earnings | 2,958,921 | 2,218,721 | 4,712,729 | 3,817,656 | ||||||||||||
| Accumulated other comprehensive loss | (551,857 | ) | (666,403 | ) | (972,465 | ) | (913,858 | ) | ||||||||
| Less treasury stock (32,279,077 shares at December 31, 2017; and 29,423,022 shares at December 31, 2016) | (944,888 | ) | (542,495 | ) | ||||||||||||
| Less treasury stock (39,284,630 shares and 37,190,515 shares at December 31, 2019 and 2018, respectively) | (2,523,493 | ) | (1,870,584 | ) | ||||||||||||
| Total stockholders’ equity | 3,676,522 | 3,084,038 | 3,711,616 | 3,340,180 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 11,318,359 | $ | 9,626,732 | $ | 12,248,541 | $ | 11,202,477 | ||||||||
1Reflects the impact of the Company's adoption of ASU 2016-02 "Leases", on January 1, 2019, using a modified retrospective transition method. Under this method, financial results reported in periods prior to 2019 are unchanged. Refer to footnote 14. |
| See accompanying notes. |
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 20192 | 2018 | 20171 | |||||||||||||||||||
| Revenues, net | $ | 2,249,538 | $ | 1,831,546 | $ | 1,702,865 | $ | 2,648,848 | $ | 2,433,492 | $ | 2,249,538 | ||||||||||||
| Expenses: | ||||||||||||||||||||||||
| Merchant commissions | 113,133 | 104,345 | 108,257 | — | — | 113,133 | ||||||||||||||||||
| Processing | 429,613 | 355,414 | 331,073 | 530,669 | 487,695 | 429,613 | ||||||||||||||||||
| Selling | 170,717 | 131,443 | 109,075 | 204,806 | 182,593 | 170,717 | ||||||||||||||||||
| General and administrative | 387,694 | 283,625 | 297,715 | 407,210 | 389,172 | 387,694 | ||||||||||||||||||
| Depreciation and amortization | 264,560 | 203,256 | 193,453 | 274,210 | 274,609 | 264,560 | ||||||||||||||||||
| Other operating, net | 61 | (690 | ) | (4,242 | ) | |||||||||||||||||||
| Other operating expense, net | 523 | 8,725 | 61 | |||||||||||||||||||||
| Operating income | 883,760 | 754,153 | 667,534 | 1,231,430 | 1,090,698 | 883,760 | ||||||||||||||||||
| Investment loss | 53,164 | 36,356 | 57,668 | |||||||||||||||||||||
| Other (income) expense, net | (173,436 | ) | 2,982 | 2,523 | ||||||||||||||||||||
| Investment loss, net | 3,470 | 7,147 | 53,164 | |||||||||||||||||||||
| Other expense (income), net | 93 | (152,166 | ) | (173,436 | ) | |||||||||||||||||||
| Interest expense, net | 107,146 | 71,896 | 71,339 | 150,048 | 138,494 | 107,146 | ||||||||||||||||||
| Loss on extinguishment of debt | 3,296 | — | — | — | 2,098 | 3,296 | ||||||||||||||||||
| Total other (income) expense | (9,830 | ) | 111,234 | 131,530 | ||||||||||||||||||||
| Total other expense (income) | 153,611 | (4,427 | ) | (9,830 | ) | |||||||||||||||||||
| Income before income taxes | 893,590 | 642,919 | 536,004 | 1,077,819 | 1,095,125 | 893,590 | ||||||||||||||||||
| Provision for income taxes | 153,390 | 190,534 | 173,573 | 182,746 | 283,642 | 153,390 | ||||||||||||||||||
| Net income | $ | 740,200 | $ | 452,385 | $ | 362,431 | $ | 895,073 | $ | 811,483 | $ | 740,200 | ||||||||||||
| Basic earnings per share | $ | 8.12 | $ | 4.89 | $ | 3.94 | $ | 10.36 | $ | 9.14 | $ | 8.12 | ||||||||||||
| Diluted earnings per share | $ | 7.91 | $ | 4.75 | $ | 3.85 | $ | 9.94 | $ | 8.81 | $ | 7.91 | ||||||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||
| Basic shares | 91,129 | 92,597 | 92,023 | 86,401 | 88,750 | 91,129 | ||||||||||||||||||
| Diluted shares | 93,594 | 95,213 | 94,139 | 90,070 | 92,151 | 93,594 | ||||||||||||||||||
1The Company applied the modified retrospective transition method when adopting ASC 606, therefore the Company's 2017 prior period results were not restated to reflect ASC 606. |
2Reflects the impact of the Company's adoption of ASU 2016-02 "Leases", on January 1, 2019, using a modified retrospective transition method. Under this method, financial results reported in periods prior to 2019 are unchanged. Refer to footnote 14. |
| See accompanying notes. |
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(In Thousands)
| Year Ended December 31, | ||||||||||||
| 2019 | 2018 | 2017 | ||||||||||
| Net income | $ | 895,073 | $ | 811,483 | $ | 740,200 | ||||||
| Other comprehensive (loss) income: | ||||||||||||
| Foreign currency translation (losses) gains, net of tax | (15,855 | ) | (362,001 | ) | 83,165 | |||||||
| Reclassification of foreign currency translation gain to investment, net of tax | — | — | 31,381 | |||||||||
| Net change in derivative contracts, net of tax | (42,752 | ) | — | — | ||||||||
| Total other comprehensive (loss) income | (58,607 | ) | (362,001 | ) | 114,546 | |||||||
| Total comprehensive income | $ | 836,466 | $ | 449,482 | $ | 854,746 | ||||||
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Net income | $ | 740,200 | $ | 452,385 | $ | 362,431 | ||||||
| Other comprehensive income (loss): | ||||||||||||
| Foreign currency translation gains (losses), net of tax | 83,165 | (95,592 | ) | (279,303 | ) | |||||||
| Reclassification of foreign currency translation loss to investment, net of tax | 31,381 | — | — | |||||||||
| Total other comprehensive income (loss) | 114,546 | (95,592 | ) | (279,303 | ) | |||||||
| Total comprehensive income | $ | 854,746 | $ | 356,793 | $ | 83,128 | ||||||
See accompanying notes.
FLEETCOR Technologies, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(In Thousands)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2014 | $ | 120 | $ | 1,852,442 | $ | 1,403,905 | $ | (291,508 | ) | $ | (346,397 | ) | $ | 2,618,562 | ||||||||||||||||||||||||||||||||||
| Net income | — | — | 362,431 | — | — | 362,431 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax of $0 | — | — | — | (279,303 | ) | — | (279,303 | ) | ||||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock | — | — | — | — | (8,119 | ) | (8,119 | ) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 1 | 136,475 | — | — | — | 136,476 | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2015 | 121 | 1,988,917 | 1,766,336 | (570,811 | ) | (354,516 | ) | 2,830,047 | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 452,385 | — | — | 452,385 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax of $0 | — | — | — | (95,592 | ) | — | (95,592 | ) | ||||||||||||||||||||||||||||||||||||||||
| Acquisition/return of common stock | — | — | — | — | (187,979 | ) | (187,979 | ) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | — | 85,177 | — | — | — | 85,177 | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2016 | 121 | 2,074,094 | 2,218,721 | (666,403 | ) | (542,495 | ) | 3,084,038 | $ | 121 | $ | 2,074,094 | $ | 2,218,721 | $ | (666,403 | ) | $ | (542,495 | ) | $ | 3,084,038 | ||||||||||||||||||||||||||
| Net income | — | — | 740,200 | — | — | 740,200 | — | — | 740,200 | — | — | 740,200 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax of $0 | — | — | — | 114,546 | — | 114,546 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income from currency exchange, net of tax of $0 | — | — | — | 114,546 | — | 114,546 | ||||||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock | — | — | — | — | (402,393 | ) | (402,393 | ) | — | — | — | — | (402,393 | ) | (402,393 | ) | ||||||||||||||||||||||||||||||||
Share-based compensation expense1 | — | 93,297 | — | — | — | 93,297 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 1 | 140,130 | — | — | — | 140,131 | 1 | 46,833 | — | — | — | 46,834 | ||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2017 | $ | 122 | $ | 2,214,224 | $ | 2,958,921 | $ | (551,857 | ) | $ | (944,888 | ) | $ | 3,676,522 | 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 principle | — | — | 47,252 | — | — | 47,252 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss from currency exchange, net of tax of $0 | — | — | — | (362,001 | ) | — | (362,001 | ) | ||||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock | — | (33,000 | ) | — | — | (925,696 | ) | (958,696 | ) | |||||||||||||||||||||||||||||||||||||||
Share-based compensation expense1 | — | 69,939 | — | — | — | 69,939 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 1 | 55,680 | — | — | — | 55,681 | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 123 | 2,306,843 | 3,817,656 | (913,858 | ) | (1,870,584 | ) | 3,340,180 | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | 895,073 | — | — | 895,073 | ||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (58,607 | ) | — | (58,607 | ) | ||||||||||||||||||||||||||||||||||||||||
| Acquisition of common stock | — | (42,000 | ) | — | — | (652,909 | ) | (694,909 | ) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | 60,953 | — | — | — | 60,953 | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock | 1 | 168,925 | — | — | — | 168,926 | ||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | 124 | $ | 2,494,721 | $ | 4,712,729 | $ | (972,465 | ) | $ | (2,523,493 | ) | $ | 3,711,616 | ||||||||||||||||||||||||||||||||||