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FLT > SEC Filings for FLT > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for FLEETCOR TECHNOLOGIES INC

Form 10-Q for FLEETCOR TECHNOLOGIES INC


8-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences include, but are not limited to, those identified below and those described in Part I, Item 1A "Risk Factors" appearing in our Annual Report on Form 10-K for the year ended December 31, 2012. All foreign currency amounts that have been converted into U.S. dollars in this discussion are based on the exchange rate as reported by Oanda for the applicable periods.

This management's discussion and analysis should also be read in conjunction with the management's discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012.

Overview

FleetCor is a leading independent global provider of fuel cards and workforce payment products and services to businesses, commercial fleets, major oil companies, petroleum marketers and government entities in countries throughout North America, Latin America, Europe, Australia and New Zealand. Our payment programs enable our customers to better manage and control employee spending and provide card-accepting merchants with a high volume customer base that can increase their sales and customer loyalty. In 2012, we processed approximately 304 million transactions on our proprietary networks and third-party networks. We believe that our size and scale, geographic reach, advanced technology and our expansive suite of products, services, brands and proprietary networks contribute to our leading industry position.

We provide our payment products and services in a variety of combinations to create customized payment solutions for our customers and partners. We sell these products and services directly and indirectly through partners with whom we have strategic relationships, such as major oil companies and petroleum marketers. We refer to these major oil companies and petroleum marketers as our "partners." We provide our customers with various card products that typically function like a charge card to purchase fuel, lodging, food, toll road fees and related products and services at participating locations. Our payment programs enable businesses to better manage and control employee spending and provide card-accepting merchants with a high volume customer base that can increase their sales and customer loyalty.

In order to deliver our payment programs and services and process transactions, we own and operate proprietary "closed-loop" networks through which we electronically connect to merchants and capture, analyze and report customized information. We also use third-party networks to deliver our payment programs and services in order to broaden our card acceptance and use. To support our payment products, we also provide a range of services, such as issuing and processing, as well as specialized information services that provide our customers with value-added functionality and data. Our customers can use this data to track important business productivity metrics, combat fraud and employee misuse, streamline expense administration and lower overall fleet operating costs.

Our segments, sources of revenue and expenses

Segments

We operate in two segments, which we refer to as our North America and International segments. The results from our Russian business acquired during the second quarter of 2012, CTF Technologies, Inc. acquired during the third quarter of 2012, our Australian Fleet Card business acquired during the first quarter of 2013, New Zealand CardLink acquired during the second quarter of 2013 and Brazilian VB business acquired during the third quarter of 2013 are reported in our International segment. Our revenue is reported net of the wholesale cost for underlying products and services. In this report, we refer to this net revenue as "revenue." For the three and nine months ended September 30, 2013 and 2012, our North America and International segments generated the following revenue:

                                Three months ended September 30,                      Nine months ended September 30,
                                2013                       2012                       2013                       2012
                                       % of                       % of                       % of                       % of
                                      total                      total                      total                      total
(dollars in millions)   Revenue      revenue       Revenue      revenue       Revenue      revenue       Revenue      revenue
North America           $  115.3         51.2 %    $  101.5         54.3 %    $  335.4         52.4 %    $  291.6         57.8 %
International              109.9         48.8 %        85.4         45.7 %       304.3         47.6 %       213.3         42.2 %

                        $  225.2        100.0 %    $  186.9        100.0 %    $  639.7        100.0 %    $  504.9        100.0 %


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Sources of Revenue

Transactions In both of our segments, we derive revenue from transactions and the related revenue per transaction. As illustrated in the diagram below, a transaction is defined as a purchase by a customer. Our customers include holders of our cards and payment products and those of our partners, for whom we manage card programs. Revenue from transactions is derived from our merchant and network relationships, as well as our customers and partners. Through our merchant and network relationships we primarily offer fuel, vehicle maintenance, products, food or lodging services to our customers. We also earn revenue from our customers and partners through program fees and charges, which can be fixed fees, cost plus a mark-up or based on a percentage discount from retail prices. The following diagram illustrates a typical transaction flow.

Illustrative Transaction Flow

[[Image Removed: LOGO]]

From our merchant and network relationships, we mostly derive revenue from the difference between the price charged to a customer for a transaction and the price paid to the merchant or network for the same transaction. As illustrated in the table below, the price paid to a merchant or network may be calculated as
(i) the merchant's wholesale cost of fuel 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 for the underlying products and services is considered a "merchant commission" and is recognized as an expense. Approximately 45.6% and 49.2% of our revenue was derived from our merchant and network relationships during the three months ended September 30, 2013 and 2012, respectively. Approximately 47.7% and 53.8% of our revenue was derived from our merchant and network relationships during the nine months ended September 30, 2013 and 2012, respectively.

The following table presents an illustrative revenue model for transactions with the merchant, which is primarily applicable to fuel based product transactions, but may also be applied to our vehicle maintenance, lodging and food products, substituting transactions for gallons. This representative model may not include all of our businesses.

Illustrative Revenue Model for Fuel Purchases

                              (unit of one gallon)



Illustrative Revenue Model                                                          Merchant Payment Methods
Retail Price                 $  3.00      i) Cost Plus Mark-up:               ii) Percentage Discount:                iii) Fixed Fee:
Wholesale Cost                 (2.86 )    Wholesale Cost           $ 2.86     Retail Price               $  3.00      Retail Price             $  3.00

                                          Mark-up                    0.05     Discount (3%)                (0.09 )    Fixed Fee                  (0.09 )

FleetCor Revenue             $  0.14

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

Price Paid to Merchant       $  2.91

From our customers and partners, we derive revenue from a variety of program fees such as transaction fees, card fees, network fees and report fees. Our payment programs include other fees and charges associated with late payments and based on customer credit risk. Approximately 54.4% and 50.8% of our revenue was derived from customer and partner program fees and charges during the three months ended September 30, 2013 and 2012, respectively. Approximately 52.3% and 46.2% of our revenue was derived from customer and partner program fees and charges during the nine months ended September 30, 2013 and 2012, respectively.


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Key operating metrics

Transaction volume and revenue per transaction Set forth below is revenue per transaction information for the three and nine months ended September 30, 2013 and 2012:

                                          Three months ended September 30,                 Nine months ended September 30,
                                           2013                     2012                    2013                      2012
Transactions (in millions)
North America                                    43.3                     41.2                   122.7                     117.2
International                                    41.0                     38.1                   114.7                     108.2

Total transactions                               84.3                     79.3                   237.4                     225.4

Revenue per transaction
North America                         $          2.66          $          2.46        $           2.73          $           2.49
International                                    2.68                     2.24                    2.65                      1.97
Consolidated revenue per
transaction                                      2.67                     2.36                    2.69                      2.24
Adjusted revenue per transaction
Consolidated adjusted revenue
per transaction                       $          2.47          $          2.20        $           2.48          $           2.06

Revenue per transaction is derived from the various revenue types as discussed above and can vary based on geography, the relevant merchant relationship, the payment product utilized and the types of products or services purchased, the mix of which would be influenced by our acquisitions, organic growth in our business and the overall macroeconomic environment. When we talk about the macroeconomic environment, we are referring to the impact of market spread margins, fuel prices, foreign exchange rates and the economy in general can have on our business. Revenue per transaction per customer changes as the level of services we provide to a customer increases or decreases, as macroeconomic factors change and as adjustments are made to merchant and customer rates.

Revenue per transaction has been positively impacted by our acquisitions in 2012 and 2013, which each have higher revenue per transaction products in comparison to our other businesses, as well as organic growth in certain of our businesses.

Total transactions increased from 79.3 million in the three months ended September 30, 2012 to 84.3 million in the comparable period in 2013, an increase of 5.0 million transactions or 6.4%.Total transactions increased from 225.4 million in the nine months ended September 30, 2012 to 237.4 million in the comparable period in 2013, an increase of 12.1 million transactions or 5.4%. We experienced an increase in transactions in our North American and International segments due to organic growth in certain of our payment programs and the impact of acquisitions completed in 2012 and 2013.

Sources of Revenue Set forth below is information on our sources of revenue for the three and nine months ended September 30, 2013 and 2012 expressed as a percentage of consolidated revenues:

                                                              Three months ended September 30,              Nine months ended September 30,
                                                                2013                     2012                2013                     2012
Revenue from customers and partners                                  54.4 %                   50.8 %              52.3 %                   46.2 %
Revenue from merchants and networks                                  45.6 %                   49.2 %              47.7 %                   53.8 %
Revenue tied to fuel-price spreads                                   14.8 %                   14.0 %              16.5 %                   17.6 %
Revenue influenced by the absolute price of fuel                     20.0 %                   21.7 %              20.1 %                   20.8 %
Revenue from program fees, late fees, interest and other             65.2 %                   64.3 %              63.4 %                   61.6 %

Adjusted Revenues, EBITDA, Adjusted Net Income and Adjusted Net Income Per Diluted Share. Set forth below are adjusted revenues, EBITDA, adjusted net income and diluted adjusted net income per share for the three and nine months ended September 30, 2013 and 2012.

                                        Three Months Ended September 30,             Nine months Ended September 30,
(in thousands, except per share
amounts)                                   2013                   2012                 2013                   2012
Adjusted revenues                    $        208,206       $        174,002     $        589,310       $        463,943
EBITDA                               $        129,315       $         99,425     $        363,161       $        268,677
Adjusted net income                  $         91,359       $         71,595     $        250,600       $        185,278
Adjusted net income per diluted
share                                $           1.08       $           0.83     $           2.97       $           2.16

We use adjusted revenues as a basis to evaluate our revenues, net of the commissions that are paid to merchants to participate in 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. We use EBITDA, calculated as earnings before interest, taxes, depreciation and amortization to eliminate the impact of certain non-core items during the period. We use adjusted net income and adjusted net income per diluted share to eliminate the


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effect of items that we do not consider indicative of our core operating performance on a consistent basis. Adjusted revenues, EBITDA, 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."

Factors and trends impacting our business

We believe that the following factors and trends are important in understanding our financial performance:

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. We believe that approximately 20.0% and 21.7% of our consolidated revenue during the three months ended September 30, 2013 and 2012, respectively, and 20.1% and 20.8% of our consolidated revenue during the nine months ended September 30, 2013 and 2012, respectively, 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.

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. Approximately 14.8% and 14.0% of our consolidated revenue during the three months ended September 30, 2013 and 2012, respectively, and 16.5% and 17.6% of our consolidated revenue during the nine months ended September 30, 2013 and 2012, respectively, was derived from transactions where our revenue is tied to fuel-price spreads.

Acquisitions-Since 2002, we have completed over 60 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 changes in interest rates on our cash investments and debt.

Global economic downturn-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 and the credit risk of our customers. These factors affected our businesses in both our North American and International segments.

Foreign currency changes - Our results of operations are impacted by changes in foreign currency rates; namely, by movements of the British pound, Czech koruna, Russian ruble, Canadian dollar, Euro, Brazilian real, Mexican peso, Australian dollar and New Zealand dollar relative to the U.S. dollar. Approximately 51.1% and 54.2% of our revenue during the three months ended September 30, 2013 and 2012, respectively, and 52.4% and 57.7% of our revenue during the nine months ended September 30, 2013 and 2012, respectively, was derived in U.S. dollars and was not affected by foreign currency exchange rates.

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.


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Results of Operations

Throughout this discussion, calculations of changes may not equal the totals presented due to rounding.

Three months ended September 30, 2013 compared to the three months ended September 30, 2012

The following table sets forth selected consolidated statement of income data for the three months ended September 30, 2013 and 2012 (in thousands).

                                    Three months ended        % of total         Three months ended        % of total         Increase
                                    September 30, 2013         revenue           September 30, 2012         revenue          (decrease)        % Change
Revenues, net:
North America                      $            115,266              51.2 %     $            101,495              54.3 %    $     13,771            13.6 %
International                                   109,884              48.8 %                   85,437              45.7 %          24,447            28.6 %

Total revenues, net                             225,150             100.0 %                  186,932             100.0 %          38,218            20.4 %
Consolidated operating expenses:
Merchant commissions                             16,944               7.5 %                   12,930               6.9 %           4,014            31.0 %
Processing                                       33,473              14.9 %                   30,568              16.4 %           2,905             9.5 %
Selling                                          13,859               6.2 %                   12,790               6.8 %           1,069             8.4 %
General and administrative                       31,559              14.0 %                   31,219              16.7 %             340             1.1 %
Depreciation and amortization                    18,060               8.0 %                   13,591               7.3 %           4,469            32.9 %

Operating income                                111,255              49.4 %                   85,834              45.9 %          25,421            29.6 %

Other income, net                                  (156 )            (0.1 )%                      (3 )             0.0 %            (153 )            NM
Interest expense, net                             3,756               1.7 %                    3,246               1.7 %             510            15.7 %
Provision for income taxes                       29,035              12.9 %                   22,943              12.3 %           6,092            26.6 %

Net income                         $             78,620              34.9 %     $             59,648              31.9 %    $     18,972            31.8 %

Operating income for segments:
North America                      $             59,093                         $             49,273                        $      9,820            19.9 %
International                                    52,162                                       36,561                              15,601            42.7 %

Operating income                   $            111,255                         $             85,834                        $     25,421            29.6 %

Operating margin for segments:
North America                                      51.3 %                                       48.5 %                               2.8 %
International                                      47.5 %                                       42.8 %                               4.7 %
Total                                              49.4 %                                       45.9 %                               3.5 %

NM = Not Meaningful

Revenues and revenue per transaction

Our consolidated revenues increased from $186.9 million in the three months ended September 30, 2012 to $225.2 million in the three months ended September 30, 2013, an increase of $38.2 million, or 20.4%. The increase in our consolidated revenue was primarily due to:

organic growth in certain of our payment programs driven primarily by increases in both volume and revenue per transaction; and

the full period impact of acquisitions completed in 2012 as well as acquisitions completed in 2013, which contributed approximately $18 million in additional revenue in the three months ended September 30, 2013 over the comparable period in 2012.

Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a slightly positive impact on our consolidated revenue for the three months ended September 30, 2013 over the comparable period in 2012. The macroeconomic environment was primarily impacted by slightly higher fuel spread margins offset by slightly lower fuel prices and the unfavorable impact of changes in foreign exchange rates in the three months ended September 30, 2013 over the comparable period in 2012. Changes in foreign exchange rates were mixed and had a slightly unfavorable impact on our business of approximately $2.3 million due primarily to unfavorable fluctuations in the Brazilian Real and British Pound, during the three months ended September 30, 2013 over the comparable period in 2012.

Consolidated revenue per transaction increased from $2.36 in the three months ended September 30, 2012 to $2.67 in the three months ended September 30, 2013, an increase of $0.31 or 13.2%. This increase is primarily due to organic growth in certain of our payment programs and the full period impact of acquisitions completed in 2012, as well as acquisitions completed in 2013, the majority of which have higher revenue per transaction products in comparison to our other businesses.


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North America segment revenues and revenue per transaction

North America revenues increased from $101.5 million in the three months ended September 30, 2012 to $115.3 million in the three months ended September 30, 2013, an increase of $13.8 million, or 13.6%. The increase in our North America segment revenue was primarily due to:

organic growth in certain of our payment programs driven primarily by increases in both volume and revenue per transaction; and

the impact of an acquisition completed in 2013, which contributed approximately $3 million in additional revenue in the three months ended September 30, 2013 over the comparable period in 2012.

Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a slightly positive impact on our North American segment revenue for the three months ended September 30, 2013 over the comparable period in 2012, primarily due to the impact of higher fuel spread margins, partially offset by the impact of slightly lower fuel prices.

North America segment revenue per transaction increased from $2.46 in the three months ended September 30, 2012 to $2.66 in the three months ended September 30, 2013, an increase of $0.20 or 8.1%. North America revenue per transaction was impacted by the reasons discussed above.

International segment revenues and revenue per transaction

International segment revenues increased from $85.4 million in the three months ended September 30, 2012 to $109.9 million in the three months ended September 30, 2013, an increase of $24.5 million, or 28.6%. The increase in our International segment revenue was primarily due to:

organic growth in certain of our payment programs driven primarily by increases in both volume and revenue per transaction; and

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