Corpay, Inc.(CPAY) - 2019 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION This section provides the company's unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations Financial Statements This section presents the unaudited consolidated financial statements for the three and nine months ended September 30, 2019, along with detailed notes on accounting policies, acquisitions, debt, and legal contingencies Consolidated Balance Sheet Highlights (Unaudited) | (In Thousands) | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total current assets | $4,440,007 | $3,875,986 | | Total assets | $11,914,194 | $11,202,477 | | Total current liabilities | $3,978,937 | $4,495,213 | | Total liabilities | $8,013,884 | $7,862,297 | | Total stockholders' equity | $3,900,310 | $3,340,180 | Consolidated Statements of Income Highlights (Unaudited) | (In Thousands, Except Per Share) | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2019 | | :--- | :--- | :--- | | Revenues, net | $681,048 | $1,949,967 | | Operating income | $329,141 | $910,634 | | Net income | $225,805 | $659,563 | | Diluted earnings per share | $2.49 | $7.33 | Consolidated Statements of Cash Flows Highlights (Unaudited) | (In Thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $791,135 | $555,380 | | Net cash used in investing activities | ($383,541) | ($71,303) | | Net cash used in financing activities | ($260,470) | ($356,332) | Summary of Significant Accounting Policies The company's revenue, primarily from payment solutions, is recognized under ASC 606, with new lease and derivative accounting standards adopted in 2019 - Approximately 80% of total consolidated revenues are from contracts with customers under ASC 606, with the remainder from late fees, finance charges, and foreign currency contracts[43] Revenues by Product (Three Months Ended Sep 30) | Product | 2019 Revenue (Million) | % of Total | 2018 Revenue (Million) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Fuel | $296 | 44% | $283 | 46% | | Corporate Payments | $138 | 20% | $105 | 17% | | Tolls | $89 | 13% | $76 | 12% | | Lodging | $56 | 8% | $48 | 8% | | Gift | $48 | 7% | $57 | 9% | | Other | $53 | 8% | $50 | 8% | | Total | $681 | 100% | $620 | 100% | Revenues by Geography (Three Months Ended Sep 30) | Geography | 2019 Revenue (Million) | % of Total | 2018 Revenue (Million) | % of Total | | :--- | :--- | :--- | :--- | :--- | | United States | $414 | 61% | $391 | 63% | | Brazil | $106 | 16% | $92 | 15% | | United Kingdom | $68 | 10% | $63 | 10% | | Other | $93 | 14% | $73 | 12% | | Total | $681 | 100% | $620 | 100% | - The company adopted ASU 2016-02, "Leases" (Topic 842), on January 1, 2019, requiring recognition of a right-of-use asset and a lease liability on the balance sheet[51] Leases Adoption of ASC 842 on January 1, 2019, led to the recognition of right-of-use assets and operating lease liabilities, primarily for office space and data centers - At September 30, 2019, the company reported a right-of-use (ROU) asset of $81.2 million, short-term operating lease liabilities of $15.4 million, and long-term lease liabilities of $79.6 million[63] Maturities of Lease Liabilities (as of Sep 30, 2019) | Year | Amount (in thousands) | | :--- | :--- | | 2020 | $18,404 | | 2021 | $17,687 | | 2022 | $13,971 | | 2023 | $12,866 | | 2024 | $11,927 | | Thereafter | $40,645 | | Total lease payments | $115,500 | | Less imputed interest | ($20,556) | | Present value of lease liabilities | $94,944 | Acquisitions In 2019, the company expanded its corporate payments business through the acquisition of NvoicePay for $208 million and two smaller acquisitions totaling $104 million - On April 1, 2019, the Company acquired NvoicePay for approximately $208 million[96] - The NvoicePay acquisition resulted in the preliminary recognition of $169.0 million in goodwill and $44.8 million in intangible assets, including customer relationships and proprietary technology[97][99] - Two other smaller acquisitions were completed in 2019 for an aggregate price of approximately $104 million, one for a U.K.-based maintenance software platform and another for a U.S. payroll card provider[99] Goodwill and Other Intangible Assets Goodwill increased to $4.71 billion due to new acquisitions, while net other intangible assets, mainly customer relationships, totaled $2.32 billion Goodwill Changes by Segment (Nine Months Ended Sep 30, 2019) | Segment (in thousands) | Dec 31, 2018 | Acquisitions | Foreign Currency | Sep 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | North America | $3,087,875 | $215,743 | $2,022 | $3,308,554 | | International | $1,454,199 | $19,531 | ($74,901) | $1,398,829 | | Total | $4,542,074 | $235,274 | ($72,879) | $4,707,383 | - Total net other intangible assets were $2.32 billion as of September 30, 2019, with customer/vendor relationships ($1.75 billion) and indefinite-lived trade names ($483 million) as the largest components[102] Debt Total debt decreased to $4.47 billion, primarily composed of term loans and a securitization facility, with a $700 million incremental Term Loan A added in August 2019 Debt Composition (in thousands) | Instrument | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Term Loan A note payable, net | $3,120,455 | $2,515,519 | | Term Loan B note payable, net | $341,706 | $344,180 | | Revolving line of credit | $0 | $1,035,446 | | Securitization Facility | $992,000 | $886,000 | | Total | $4,472,694 | $4,819,047 | - On August 2, 2019, the company amended its Credit Agreement, which included an incremental Term Loan A of $700 million, bringing the total credit facility to $1.285 billion revolving, $3.225 billion term loan A, and $350 million term loan B[105] Commitments and Contingencies The company settled a shareholder class action for $50 million (insurance covered) and faces an ongoing FTC investigation into its advertising practices - The company executed a term sheet to settle a shareholder class action lawsuit for a payment of $50 million, which is fully covered by its insurance policies[121] - In October 2017, the Federal Trade Commission (FTC) issued a Civil Investigative Demand regarding the company's advertising and marketing practices, with the company believing the claims are without merit[124] Derivative Financial Instruments and Hedging Activities The company uses foreign currency derivatives for cross-border payments and entered into $2.0 billion in interest rate swaps to hedge variable-rate debt - The company uses foreign currency derivatives to facilitate customer cross-currency payments and economically hedges net currency risks, though these are not designated as hedging instruments[39][40] - On January 22, 2019, the company entered into three interest rate swap contracts to hedge the variability of cash flows on $2.0 billion of variable-rate debt, designated as cash flow hedges[130] Outstanding Interest Rate Derivatives (as of Sep 30, 2019) | Instrument | Notional Amount (millions) | Fixed Rate | Maturity Date | | :--- | :--- | :--- | :--- | | Interest Rate Swap | $1,000 | 2.56% | 1/31/2022 | | Interest Rate Swap | $500 | 2.56% | 1/31/2023 | | Interest Rate Swap | $500 | 2.55% | 12/19/2023 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 9.9% revenue increase for Q3 2019 YoY, driven by 11% organic growth and recent acquisitions, along with liquidity and capital resources Results of Operations - Q3 2019 vs Q3 2018 Consolidated revenue grew 9.9% to $681.0 million, with net income surging 43.2% to $225.8 million, benefiting from increased operating income and lower tax provision Q3 2019 vs Q3 2018 Performance (in millions) | Metric | Q3 2019 | Q3 2018 | % Change | | :--- | :--- | :--- | :--- | | Total revenues, net | $681.0 | $619.6 | 9.9% | | Operating income | $329.1 | $281.1 | 17.1% | | Net income | $225.8 | $157.7 | 43.2% | - Revenue growth was primarily driven by organic growth of approximately 11%, with acquisitions contributing an additional $9 million, partially offset by a $7 million negative macroeconomic impact from unfavorable foreign exchange rates[170][171] - The provision for income taxes decreased by $12.9 million, primarily because the Q3 2018 provision included a $22.7 million true-up for the provisional transition tax liability from the Tax Cuts and Jobs Act of 2017[186] Results of Operations - 9M 2019 vs 9M 2018 Revenue increased 8.9% to $1.95 billion, driven by 12% organic growth, while net income rose 29.5% to $659.6 million, aided by a significant income tax benefit Nine Months 2019 vs 2018 Performance (in millions) | Metric | 9M 2019 | 9M 2018 | % Change | | :--- | :--- | :--- | :--- | | Total revenues, net | $1,950.0 | $1,790.1 | 8.9% | | Operating income | $910.6 | $806.0 | 13.0% | | Net income | $659.6 | $509.5 | 29.5% | - Revenue growth was driven by 12% organic growth, but was unfavorably impacted by approximately $52 million from foreign exchange rates[197] - The provision for income taxes decreased by $68.9 million, primarily due to a $65 million tax benefit in Q2 2019 from carrying back a capital loss on the Masternaut investment against a prior capital gain[215] Liquidity and Capital Resources The company's liquidity is supported by $791.1 million in operating cash flow, a $1.285 billion revolving credit facility, and a $1.2 billion securitization facility, with $1.47 billion in cash Cash Flow Summary (Nine Months Ended Sep 30, in millions) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $791.1 | $555.4 | | Net cash used in investing activities | ($383.5) | ($71.3) | | Net cash used in financing activities | ($260.5) | ($356.3) | - At September 30, 2019, the company had approximately $1.285 billion available under its Credit Facility and no additional liquidity under its Securitization Facility[227] - The Board of Directors most recently increased the stock repurchase program by $1 billion on October 22, 2019, leaving up to $1.5 billion available for future repurchases[248] Management's Use of Non-GAAP Financial Measures The company uses non-GAAP measures like 'Adjusted Net Income' and 'Pro forma and macro adjusted revenue' to provide insight into core operating performance by excluding non-recurring items Reconciliation of Net Income to Adjusted Net Income (in thousands) | | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net income | $225,805 | $157,694 | | Pre-tax adjustments (Stock comp, Amortization, etc.) | $68,180 | $84,134 | | Tax impact of adjustments & discrete items | ($13,395) | $4,754 | | Adjusted net income | $280,590 | $246,582 | - The company uses pro forma and macro adjusted revenue to evaluate organic growth by eliminating the impacts of the macroeconomic environment (fuel prices, FX rates) and acquisitions/dispositions[253] Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its market risk since the disclosures in its 2018 Annual Report on Form 10-K - There have been no material changes to the company's market risk since the end of 2018[266] Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes in internal control over financial reporting - The CEO and CFO concluded that as of September 30, 2019, disclosure controls and procedures were effective[267] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[268] PART II—OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and other required disclosures Legal Proceedings The company settled a shareholder class action for $50 million (insurance covered) and is under an ongoing FTC investigation regarding its advertising and marketing practices - A shareholder class action lawsuit was settled via a term sheet for a payment of $50 million, which is fully covered by the company's insurance policies[271] - The company is under investigation by the FTC regarding its advertising and marketing practices, and believes the potential claims are without merit and will not be material to its financial performance[274][275] - A separate complaint filed by Schultz Transfer Systems, Inc. regarding overcharges in the Fuelman program was settled with the individual plaintiff for $10,000 after being compelled to arbitration[273] Risk Factors No material changes to risk factors since 2018, but the company reiterates the significant financial and reputational risks from litigation and regulatory actions - The company emphasizes the risk that litigation and regulatory actions, such as the FTC investigation, could lead to significant fines, penalties, or requirements that materially and adversely affect the business[277] Unregistered Sales of Equity Securities and Use of Proceeds The stock repurchase program was increased by $1 billion, with $1.5 billion remaining available, and details of Q3 2019 share repurchases are provided - The stock repurchase program was increased by $1 billion on October 22, 2019, leaving up to $1.5 billion available for future repurchases[278] Common Stock Purchases (Q3 2019) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 2019 | 622 | $285.15 | | August 2019 | — | $— | | September 2019 | 183,626 | $300.39 | Defaults Upon Senior Securities Not applicable - Not applicable[283] Mine Safety Disclosures Not applicable - Not applicable[284] Other Information Not applicable - Not applicable[285] Exhibits This section lists the exhibits filed with the Form 10-Q, including the company's amended bylaws, amendments to its credit agreement, and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act - The exhibits include certifications from the CEO and CFO (Exhibits 31.1, 31.2, 32.1, 32.2) and the Sixth Amendment to the Credit Agreement (Exhibit 10.1)[287]