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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and related notes appearing elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. See “Special Cautionary Notice Regarding Forward-Looking Statements”. All foreign currency amounts that have been converted into U.S. dollars in this discussion are based on the exchange rate as reported by OANDA for the applicable periods.
This management’s discussion and analysis should also be read in conjunction with the management’s discussion and analysis and consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended
December 31, 2015
.
General Business
FleetCor is a leading independent global provider of fuel cards, commercial payment and data solutions, stored value solutions, and workforce payment products and services to businesses, retailers, commercial fleets, major oil companies, petroleum marketers and government entities in countries throughout North America, South America, Europe, Australia and New Zealand. Our payment programs enable our customers to better manage and control their commercial payments, card programs, and employee spending and provide card-accepting merchants with a high volume customer base that can increase their sales and customer loyalty. We also provide a suite of fleet related and workforce payment solution products, including a mobile telematics service, fleet maintenance management and employee benefit and transportation related payments. In 2015, we processed approximately 1.9 billion transactions on our proprietary networks and third-party networks (which includes approximately 1.3 billion transactions related to our Stored Value Solutions ("SVS") product, acquired with Comdata). We believe that our size and scale, geographic reach, advanced technology and our expansive suite of products, services, brands and proprietary networks contribute to our leading industry position.
We provide our payment products and services in a variety of combinations to create customized payment solutions for our customers and partners. We collectively refer to our suite of product offerings as workforce productivity enhancement products for commercial businesses. We sell a range of customized fleet and lodging payment programs directly and indirectly to our customers through partners, such as major oil companies, leasing companies and petroleum marketers. We refer to these major oil companies, leasing companies, petroleum marketers, value-added resellers (VARs) and other referral partners with whom we have strategic relationships as our “partners”. We provide our customers with various card products that typically function like a charge card to purchase fuel, lodging, food, toll, transportation and related products and services at participating locations.
We support our products with specialized issuing, processing and information services that enable us to manage card accounts, facilitate the routing, authorization, clearing and settlement of transactions, and provide value-added functionality and data, including customizable card-level controls and productivity analysis tools. In order to deliver our payment programs and services and process transactions, we own and operate proprietary “closed-loop” networks through which we electronically connect to merchants and capture, analyze and report customized information in North America and internationally. We also use third-party networks to deliver our payment programs and services in order to broaden our card acceptance and use. To support our payment products, we also provide a range of services, such as issuing and processing, as well as specialized information services that provide our customers with value-added functionality and data. Our customers can use this data to track important business productivity metrics, combat fraud and employee misuse, streamline expense administration and lower overall workforce and fleet operating costs. Depending on our customer’s and partner’s needs, we provide these services in a variety of outsourced solutions ranging from a comprehensive “end-to-end” solution (encompassing issuing, processing and network services) to limited back office processing services.
Executive Overview
Segments
We operate in two segments, which we refer to as our North America and International segments. Our revenue is reported net of the wholesale cost for underlying products and services. In this report, we refer to this net revenue as “revenue.” See “Results of Operations” for additional segment information.
For the
three and nine
months ended
September 30, 2016
and
2015
, our North America and International segments generated the following revenue:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2016
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2015
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2016
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2015
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(dollars in millions)
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Revenues, net
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% of
total
revenues, net
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Revenues, net
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% of
total
revenues, net
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Revenues, net
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% of
total
revenues, net
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Revenues, net
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% of
total
revenues, net
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North America
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$
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345.9
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71.4
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%
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$
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334.9
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74.2
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%
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$
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950.5
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72.2
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%
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$
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918.4
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72.2
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%
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International
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138.6
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28.6
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%
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116.6
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25.8
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%
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366.1
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27.8
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%
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353.9
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27.8
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%
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$
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484.4
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100.0
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%
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$
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451.5
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100.0
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%
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$
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1,316.6
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100.0
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%
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$
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1,272.3
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100.0
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%
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Revenues, net, Net Income and Net Income Per Diluted Share.
Set forth below are revenues, net, net income and net income per diluted share for the
three and nine
months ended
September 30, 2016
and
2015
.
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Three Months Ended September 30,
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Nine Months Ended September 30,
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(in thousands, except per share amounts)
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2016
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2015
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2016
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2015
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Revenues, net
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$
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484,426
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$
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451,493
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$
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1,316,593
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$
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1,272,264
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Net income
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$
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129,618
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$
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116,770
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$
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356,961
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$
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309,601
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Net income per diluted share
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$
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1.36
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$
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1.24
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$
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3.75
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$
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3.29
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Sources of Revenue
Transactions.
In both of our segments, we derive revenue from transactions. As illustrated in the diagram below, a transaction is defined as a purchase by a customer. Our customers include holders of our card products and those of our partners, for whom we manage card programs, members of our proprietary networks who are provided access to our products and services and commercial businesses to whom we provide workforce payment productivity solutions. Revenue from transactions is derived from our merchant and network relationships, as well as our customers and partners. Through our merchant and network relationships we primarily offer fuel cards, corporate cards, virtual cards, purchasing cards, T&E cards, gift cards, stored value payroll cards, vehicle maintenance, food, fuel, toll and transportation cards and vouchers and lodging services to our customers.
The following diagram illustrates a typical card transaction flow, but may also be applied to our vehicle maintenance, lodging and food, fuel, toll and transportation card and voucher products, substituting transactions for gallons. This representative model may not include all of our businesses.
Illustrative Transaction Flow
From our customers and partners, we derive revenue from a variety of program fees, including transaction fees, card fees, network fees and charges, which can be fixed fees, cost plus a mark-up or based on a percentage discount from retail prices. Our programs include other fees and charges associated with late payments and based on customer credit risk.
From our merchant and network relationships, we derive revenue mostly from the difference between the price charged to a customer for a transaction and the price paid to the merchant or network for the same transaction, as well as network fees and charges in certain businesses. As illustrated in the table below, the price paid to a merchant or network may be calculated as (i) the merchant’s wholesale cost of the product plus a markup; (ii) the transaction purchase price less a percentage discount; or (iii) the transaction purchase price less a fixed fee per unit.
The following table presents an illustrative revenue model for transactions with the merchant, which is primarily applicable to fuel based product transactions, but may also be applied to our vehicle maintenance, lodging and food, fuel, toll and transportation card and voucher products, substituting transactions for gallons. This representative model may not include all of our businesses.
Illustrative Revenue Model for Fuel Purchases
(unit of one gallon)
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Illustrative Revenue
Model
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Merchant Payment Methods
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Retail Price
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$
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3.00
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i) Cost Plus Mark-up:
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ii) Percentage Discount:
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iii) Fixed Fee:
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Wholesale Cost
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(2.86
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)
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Wholesale Cost
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$
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2.86
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Retail Price
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$
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3.00
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Retail Price
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$
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3.00
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Mark-up
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0.05
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Discount (3%)
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(0.09
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)
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Fixed Fee
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(0.09
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)
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FleetCor Revenue
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$
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0.14
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Merchant Commission
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$
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(0.05
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)
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Price Paid to Merchant
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$
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2.91
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Price Paid to Merchant
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$
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2.91
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Price Paid to Merchant
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$
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2.91
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Price Paid to Merchant
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$
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2.91
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Set forth below are our sources of revenue for the
three and nine
months ended
September 30, 2016
and
2015
, expressed as a percentage of consolidated revenues:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2016
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2015
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2016
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2015
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Revenue from customers and partners
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57.0
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%
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53.3
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%
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55.3
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%
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52.5
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%
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Revenue from merchants and networks
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43.0
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%
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46.7
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%
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44.7
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%
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47.5
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%
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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Revenue directly tied to fuel-price spreads
1
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11.2
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%
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13.0
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%
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11.2
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%
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12.4
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%
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Revenue directly influenced by the absolute price of fuel
1
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14.0
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%
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15.3
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%
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14.3
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%
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15.5
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%
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Revenue from program fees, late fees, interest and other
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74.8
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%
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71.7
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%
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74.5
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%
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72.1
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%
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100.0
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%
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100.0
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%
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100.0
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%
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100.0
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%
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1
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Although we cannot precisely calculate the absolute impact of fuel price spreads and the absolute price of fuel on our consolidated revenues, we believe these percentages approximate their relative impacts.
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Revenue per transaction.
Set forth below is revenue per transaction information for the
three and nine
months ended
September 30, 2016
and
2015
:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2016
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2015
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2016
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2015
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Transactions (in millions)
2
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North America
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371.2
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371.5
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1,217.3
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1,145.3
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International
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127.4
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45.6
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233.3
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138.0
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Total transactions
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498.6
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417.1
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1,450.6
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1,283.3
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Revenue per transaction
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North America
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$
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0.93
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$
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0.90
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$
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0.78
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$
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0.80
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International
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1.09
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2.56
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1.57
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2.56
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Consolidated revenue per transaction
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0.97
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1.08
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0.91
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0.99
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Consolidated adjusted revenue per transaction
3
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0.92
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1.01
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0.85
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0.93
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2
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SVS, Stored Value Solutions, is our global provider of gift card and stored value solutions, which is part of the Comdata business acquired in November 2014, and has a low revenue per transaction product. Transactions in the three month periods ended
September 30, 2016
and
2015
include approximately
270 million
and
274 million
transactions, respectively, and approximately
924
million and
872
million transactions in the
nine
months ended
September 30, 2016
and
2015
, respectively.
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3
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Adjusted revenues is a non-GAAP financial measure defined as revenues, net less merchant commissions. We believe this measure is a more effective way to evaluate our revenue performance. 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. Adjusted revenues is a supplemental non-GAAP financial measure of operating performance. See the heading entitled “Management’s Use of Non-GAAP Financial Measures.”
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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, including fluctuations in foreign currency exchange rates. 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. See “Results of Operations” for further discussion of transaction volumes and revenue per transaction.
For the three months ended
September 30, 2016
, transaction volumes increased
19.5%
to
498.6 million
transactions from
417.1 million
transactions in the comparable period of
2015
. For the
nine
months ended
September 30, 2016
, transaction volumes increased
13.0%
to
1,450.6 million
transactions from
1,283.3 million
transactions in the comparable period of
2015
. Excluding the impact of the SVS business, North American segment transactions increased approximately 5% in the three months ended
September 30, 2016
as compared to 2015 and grew by approximately 7% in the
nine
months ended
September 30, 2016
over the comparable period in
2015
, primarily due to growth in our MasterCard and corporate payments businesses. Transaction volumes in our international segment increased by
179.4%
and
69.0%
in the
three and nine
months ended
September 30, 2016
, respectively, over the comparable periods in
2015
, primarily due to the acquisition of STP and Travelcard during the third quarter of 2016, the addition of new Shell fuel card markets in 2015 and 2016 and additional transactions from a small acquisition in Brazil in the first quarter of
2016
.
Sources of Expenses
We incur expenses in the following categories:
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•
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Merchant commissions
—In certain of our card programs, we incur merchant commissions expense when we reimburse 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 difference between the price paid by us to the merchant and the merchant’s wholesale cost of the underlying products or services.
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•
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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.
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•
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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.
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•
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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.
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•
|
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.
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•
|
Other operating, net
—Our other operating, net includes other operating expenses and income items unusual to the period and presented separately.
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|
•
|
Equity method investment loss (income)
—Our equity method investment results relate to our minority interest in Masternaut, a provider of telematics solutions to commercial fleets in Europe, which we account for using the equity method.
|
|
|
•
|
Other expense (income), net
—Our other expense (income), net includes foreign currency transaction gains or losses, proceeds/costs from the sale of assets and other miscellaneous operating costs and revenue.
|
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|
•
|
Interest expense, net
—Our interest expense, net includes interest income on our cash balances and interest expense on our outstanding debt and on our Securitization Facility. We have historically invested our cash primarily in short-term money market funds.
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•
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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 in the United States and internationally. Our worldwide effective tax rate is lower than the U.S. statutory rate of
35%
, due primarily to lower rates in foreign jurisdictions and foreign-sourced non-taxable income.
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Adjusted Revenues, Adjusted Net Income and Adjusted Net Income Per Diluted Share.
Set forth below are adjusted revenues, adjusted net income and adjusted net income per diluted share for the
three and nine
months ended
September 30, 2016
and
2015
.
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|
Three Months Ended September 30,
|
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Nine Months Ended September 30,
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(in thousands, except per share amounts)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Adjusted revenues
|
|
$
|
456,212
|
|
|
$
|
419,767
|
|
|
$
|
1,237,838
|
|
|
$
|
1,191,487
|
|
Adjusted net income
|
|
$
|
183,310
|
|
|
$
|
157,570
|
|
|
$
|
478,679
|
|
|
$
|
432,424
|
|
Adjusted net income per diluted share
|
|
$
|
1.92
|
|
|
$
|
1.67
|
|
|
$
|
5.03
|
|
|
$
|
4.60
|
|
Adjusted revenues, adjusted net income and adjusted net income per diluted share are supplemental non-GAAP financial measures of operating performance. We use adjusted revenues as a basis to evaluate our revenues, net of the commissions that are paid to merchants that participate in certain of our card programs. The commissions paid to merchants can vary when market spreads fluctuate in much the same way as revenues are impacted when market spreads fluctuate. Thus, we believe this is a more effective way to evaluate our revenue performance on a consistent basis. We use adjusted net income and adjusted net income per diluted share to eliminate the effect of items that we do not consider indicative of our core operating performance on a consistent basis. 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:
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|
•
|
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. See “Sources of Revenue” above for further information related to the absolute price of fuel.
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|
|
•
|
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
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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. See “Sources of Revenue” above for further information related to fuel-price spreads.
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|
•
|
Acquisitions
—Since 2002, we have completed over 70 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.
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|
|
•
|
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.
|
|
|
•
|
Global economic environment
—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 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
72%
of our revenue in both the
nine
months ended
September 30, 2016
and
2015
, 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.
|
|
|
•
|
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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Acquisitions and Investments
2016 Acquisitions
During the
nine
months ended
September 30, 2016
, we completed acquisitions with an aggregate purchase price of
$1.33 billion
, net of cash acquired of
$51.4 million
, which includes deferred payments made during the period related to prior acquisitions of
$5.3 million
.
STP
On August 31, 2016, we acquired all of the outstanding stock of STP for approximately
$1.25 billion
, net of cash acquired of
$40.3 million
. STP is an electronic toll payments company in Brazil and provides cardless fuel payments at a number of Shell sites throughout Brazil. The purpose of this acquisition was to enter the toll market in the Brazil. We financed the acquisition using a combination of existing cash and borrowings under our existing credit facility.
Other
During the
nine
months ended
September 30, 2016
, we also acquired a fuel card portfolio in the U.S., a fuel card portfolio in the United Kingdom, additional Shell markets related to our fuel card products in Europe, a travel card portfolio in the Netherlands and a small business in Brazil totally approximately
$76.7 million
, net of cash acquired of
$11.1 million
.
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 travel card portfolio in the Netherlands and the small business in Brazil are included within our International segment, from the date of acquisition.
Equity Method Investment
During the
nine
months ended
September 30, 2016
, we made additional investments of
$7.9 million
related to our equity method investment at Masternaut Group Holdings Limited ("Masternaut"). Additionally, during the
nine
months ended
September 30, 2016
, we recorded an approximately $9.3 million non-recurring gain recorded within operating results related to its investment at Masternaut.
Results of Operations
Three months ended
September 30, 2016
compared to the three months ended
September 30, 2015
The following table sets forth selected consolidated statement of income data for the three months ended
September 30, 2016
and
2015
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
% of total
revenue
|
|
Three Months Ended September 30, 2015
|
|
% of total
revenue
|
|
Increase
(decrease)
|
|
% Change
|
Revenues, net:
|
|
|
|
|
|
|
North America
|
|
$
|
345,868
|
|
|
71.4
|
%
|
|
$
|
334,944
|
|
|
74.2
|
%
|
|
$
|
10,924
|
|
|
3.3
|
%
|
International
|
|
138,558
|
|
|
28.6
|
%
|
|
116,549
|
|
|
25.8
|
%
|
|
22,009
|
|
|
18.9
|
%
|
Total revenues, net
|
|
484,426
|
|
|
100.0
|
%
|
|
451,493
|
|
|
100.0
|
%
|
|
32,933
|
|
|
7.3
|
%
|
Consolidated operating expenses:
|
|
|
|
|
|
|
Merchant commissions
|
|
28,214
|
|
|
5.8
|
%
|
|
31,726
|
|
|
7.0
|
%
|
|
(3,512
|
)
|
|
(11.1
|
)%
|
Processing
|
|
96,233
|
|
|
19.9
|
%
|
|
90,959
|
|
|
20.1
|
%
|
|
5,274
|
|
|
5.8
|
%
|
Selling
|
|
34,180
|
|
|
7.1
|
%
|
|
27,383
|
|
|
6.1
|
%
|
|
6,797
|
|
|
24.8
|
%
|
General and administrative
|
|
77,904
|
|
|
16.1
|
%
|
|
66,142
|
|
|
14.6
|
%
|
|
11,762
|
|
|
17.8
|
%
|
Depreciation and amortization
|
|
57,084
|
|
|
11.8
|
%
|
|
48,526
|
|
|
10.7
|
%
|
|
8,558
|
|
|
17.6
|
%
|
Other operating, net
|
|
(244
|
)
|
|
(0.1
|
)%
|
|
(1,703
|
)
|
|
(0.4
|
)%
|
|
1,459
|
|
|
85.7
|
%
|
Operating income
|
|
191,055
|
|
|
39.4
|
%
|
|
188,460
|
|
|
41.7
|
%
|
|
2,595
|
|
|
1.4
|
%
|
Equity method investment loss (income)
|
|
2,744
|
|
|
0.6
|
%
|
|
6,108
|
|
|
1.4
|
%
|
|
(3,364
|
)
|
|
(55.1
|
)%
|
Other expense, net
|
|
293
|
|
|
0.1
|
%
|
|
(168
|
)
|
|
—
|
%
|
|
461
|
|
|
(274.4
|
)%
|
Interest expense, net
|
|
17,814
|
|
|
3.7
|
%
|
|
17,163
|
|
|
3.8
|
%
|
|
651
|
|
|
3.8
|
%
|
Provision for income taxes
|
|
40,586
|
|
|
8.4
|
%
|
|
48,587
|
|
|
10.8
|
%
|
|
(8,001
|
)
|
|
(16.5
|
)%
|
Net income
|
|
$
|
129,618
|
|
|
26.8
|
%
|
|
$
|
116,770
|
|
|
25.9
|
%
|
|
$
|
12,848
|
|
|
11.0
|
%
|
Operating income for segments:
|
|
|
|
|
|
|
North America
|
|
$
|
135,760
|
|
|
|
|
$
|
132,428
|
|
|
|
|
$
|
3,332
|
|
|
2.5
|
%
|
International
|
|
55,295
|
|
|
|
|
56,032
|
|
|
|
|
(737
|
)
|
|
(1.3
|
)%
|
Operating income
|
|
$
|
191,055
|
|
|
|
|
$
|
188,460
|
|
|
|
|
$
|
2,595
|
|
|
1.4
|
%
|
Operating margin for segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
39.3
|
%
|
|
|
|
39.5
|
%
|
|
|
|
(0.2
|
)%
|
|
|
International
|
|
39.9
|
%
|
|
|
|
48.1
|
%
|
|
|
|
(8.2
|
)%
|
|
|
Total
|
|
39.4
|
%
|
|
|
|
41.7
|
%
|
|
|
|
(2.3
|
)%
|
|
|
The sum of the columns and rows may not calculate due to rounding.
Revenues and revenue per transaction
Our consolidated revenues increased from
$451.5 million
in the three months ended
September 30, 2015
to
$484.4 million
in the three months ended
September 30, 2016
, an increase of
$32.9 million
, or
7.3%
. The increase in our consolidated revenue was primarily due to:
|
|
•
|
The impact of acquisitions during the three months ended September 30, 2016 which contributed approximately $25 million in additional revenue.
|
|
|
•
|
Organic growth in certain of our payment programs driven by increases in both volume and revenue.
|
|
|
•
|
Partially offsetting this growth was the negative impact of the macroeconomic environment. Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a negative impact on our consolidated segment revenue for the three months ended
September 30, 2016
over the comparable period in
2015
by
|
approximately
$28 million
. We believe the impact of lower fuel prices, primarily in the U.S., and lower fuel spread margins, had an unfavorable impact on consolidated revenues of approximately
$18 million
. Additionally, changes in foreign exchange rates had an unfavorable impact on consolidated revenues of approximately
$10 million
due to unfavorable fluctuations in rates in most geographies in the three months ended
September 30, 2016
compared to
2015
.
Consolidated revenue per transaction decreased from
$1.08
in the three months ended
September 30, 2015
to
$0.97
in the three months ended
September 30, 2016
, a decrease of
$0.11
, or
10.2%
. This decrease was due primarily to the unfavorable impact of the macroeconomic environment, the mix impact of acquisitions (STP, Travelcard and a small acquisition in Brazil), which have transactions at much lower revenue per transaction than the historical average, and the impact of SVS, partially offset by organic growth. Excluding these items, revenue per transaction increased approximately 3% to $2.88 in the
third
quarter of
2016
compared to $2.78 in
2015
.
Revenue per transaction can vary based on the geography, the relevant merchant and customer relationship, the payment product utilized, and the types of products or services purchased. The revenue mix was influenced by our acquisitions, organic growth in the business, and fluctuations in the macroeconomic environment, including fuel prices, fuel spread margins and foreign exchange rates.
North America segment revenues and revenue per transaction
North America revenues increased from $
334.9 million
in the three months ended
September 30, 2015
to
$345.9 million
in the three months ended
September 30, 2016
, an increase of
$10.9 million
, or
3.3%
. The increase in our North America segment revenue was primarily due to:
|
|
•
|
Organic growth in certain of our payment programs driven by increases in both volume and revenue.
|
|
|
•
|
Partially offsetting the organic growth was the negative impact of macroeconomic environment. Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a negative impact on our North America segment revenue in three months ended
September 30, 2016
over the comparable period in
2015
of approximately
$18 million
, primarily due to the impact of lower fuel prices and lower fuel spread margins.
|
North America segment revenue per transaction increased from
$0.90
in the
September 30, 2015
to
$0.93
in the three months ended
September 30, 2016
, an increase of
$0.03
, or
3.4%
. When discussing revenue per transaction in the North America segment, we typically exclude the impact of the SVS business, which had approximately
270 million
and
274 million
transactions in the
third
quarter of
2016
and
2015
, respectively. Revenue per transaction in our North America segment for the
third
quarter of
2016
, excluding SVS, decreased 2% to $2.83 from $2.89 in the
third
quarter of
2015
, due primarily to the impact of lower fuel prices during the quarter and lower fuel spread margins over the comparable period in 2015. Excluding the negative impact of the macroeconomic environment of approximately
$18 million
and SVS, revenue per transaction increased approximately 4% to $3.00 in the
third
quarter of
2016
compared to $2.89 in
2015
.
International segment revenues and revenue per transaction
International segment revenues increased from
$116.5 million
in the three months ended
September 30, 2015
to
$138.6 million
in the three months ended
September 30, 2016
, an increase of
$22.0 million
, or
18.9%
. The increase in our International segment revenue was primarily due to:
|
|
•
|
The impact of acquisitions during the three months ended September 30, 2016 which contributed approximately $25 million in additional revenue.
|
|
|
•
|
Organic growth in certain of our payment programs driven by increases in both volume and revenue.
|
|
|
•
|
Partially offsetting this growth was the negative impact of the macroeconomic environment. Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a negative impact on our International segment revenue for the three months ended
September 30, 2016
over the comparable period in
2015
of approximately
$10 million
, primarily due to unfavorable fluctuations in foreign exchange rates in most geographies where we do business and slightly lower fuel prices.
|
International segment revenue per transaction decreased from
$2.56
in the three months ended
September 30, 2015
to
$1.09
in the three months ended
September 30, 2016
, a decrease of
$1.47
per transaction, or
57.5%
. This decrease was due primarily to the unfavorable impact of foreign exchange rates across most geographies and the mix impact of acquisitions (STP, Travelcard and a small acquisition in Brazil), which have transactions at much lower revenue per transaction than the historical average, partially offset by organic growth. Excluding these items, our International revenue per transaction increased approximately 2% to $2.61 in the
third
quarter of
2016
compared to $2.56 in
2015
.
Consolidated operating expenses
Merchant commissions.
Merchant commissions decreased from
$31.7 million
in the three months ended
September 30, 2015
to
$28.2 million
in the three months ended
September 30, 2016
, a decrease of
$3.5 million
, or
11.1%
. This decrease was due primarily to the fluctuation of the margin between the wholesale cost and retail price of fuel, which impacted merchant commissions in certain card programs, as well as the impact of fluctuations in foreign exchange rates.
Processing.
Processing expenses increased from
$91.0 million
in the three months ended
September 30, 2015
to
$96.2 million
in the three months ended
September 30, 2016
, an increase of
$5.3 million
, or
5.8%
. Increases in processing expenses were primarily due to ongoing expenses related to acquisitions completed in 2016, partially offset by the impact of fluctuations in foreign exchange rates.
Selling.
Selling expenses increased from
$27.4 million
in the three months ended
September 30, 2015
to
$34.2 million
in the three months ended
September 30, 2016
, an increase of
$6.8 million
, or
24.8%
. Increases in spending were primarily due to ongoing expenses related to acquisitions completed in 2016 and Comdata, partially offset by the impact of fluctuations in foreign exchange rates.
General and administrative.
General and administrative expenses increased from
$66.1 million
in the three months ended
September 30, 2015
to
$77.9 million
in the three months ended
September 30, 2016
, an increase of
11.8 million
, or
17.8%
. The increase was primarily due to ongoing expenses related to acquisitions completed in 2016, incremental acquisition related expenses of approximately $3 million and an increase in stock based compensation expense of approximately $3 million, partially offset by the impact of fluctuations in foreign exchange rates.
Depreciation and amortization.
Depreciation and amortization increased from
$48.5 million
in the three months ended
September 30, 2015
to
$57.1 million
in the three months ended
September 30, 2016
, an increase of
$8.6 million
, or
17.6%
. The increase was primarily due to ongoing expenses related to acquisitions completed in 2016, which resulted in an increase of approximately $7.6 million related to the amortization of acquired intangible assets, as well as depreciation of acquired fixed assets, partially offset by decreases due to the impact of fluctuations in foreign exchange rates.
Equity method investment loss (income).
Equity method investment loss decreased to
$2.7 million
in the three months ended
September 30, 2016
, compared to
$6.1 million
in the three months ended
September 30, 2015
. Included in 2015, were higher costs incurred to restructure the operations of the business.
Interest expense, net.
Interest expense increased from
$17.2 million
in the three months ended
September 30, 2015
to
$17.8 million
in the three months ended
September 30, 2016
, an increase of
$0.7 million
, or
3.8%
. The increase in interest expense is primarily due to the impact of additional borrowings for the acquisitions of STP and Travelcard during the third quarter of 2016. The following table sets forth the average interest rates paid on borrowings under our Credit Facility, excluding the relevant unused credit facility fees.
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2016
|
|
2015
|
Term loan A
|
|
1.99
|
%
|
|
1.94
|
%
|
Term loan B
|
|
3.75
|
%
|
|
3.75
|
%
|
Domestic Revolver A
|
|
2.08
|
%
|
|
1.94
|
%
|
Foreign Revolver A
|
|
1.77
|
%
|
|
—
|
%
|
Foreign swing line
|
|
1.73
|
%
|
|
2.23
|
%
|
The average unused credit facility fee for Domestic Revolver A was
0.30%
and
0.35%
in the three month period ending
September 30, 2016
and
2015
, respectively.
Provision for income taxes.
The provision for income taxes decreased from
$48.6 million
in the three months ended
September 30, 2015
to
$40.6 million
in the three months ended
September 30, 2016
, a decrease of
$8.0 million
, or
16.5%
. We provide for income taxes during interim periods based on an estimate of our effective tax rate for the year. Discrete items and changes in the estimate of the annual tax rate are recorded in the period they occur. Our effective tax rate decreased from
29.4%
for three months ended
September 30, 2015
to
23.9%
for the three months ended
September 30, 2016
. The decrease in the provision for income taxes and in the effective tax rate was due primarily to the early adoption of new guidance on accounting for stock-based payments to employees. In addition, the U.K. corporate income tax rate was reduced from 18% to 17% beginning on April 1, 2020. The rate reduction was enacted on September 15, 2016. The total effect of tax rate changes on deferred tax balances is recorded as a component of the income tax provision related to continuing operations for the period in which the law is enacted.
We pay taxes in many different 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 lower than the U.S. tax rate. Consequently, as our earnings fluctuate between taxing jurisdictions, our effective tax rate fluctuates.
Net income.
For the reasons discussed above, our net income increased from
$116.8 million
in the three months ended
September 30, 2015
to
$129.6 million
in the three months ended
September 30, 2016
, an increase of
$12.8 million
, or
11.0%
.
Operating income and operating margin
Consolidated operating income.
Operating income increased from
$188.5 million
in the three months ended
September 30, 2015
to
$191.1 million
in the three months ended
September 30, 2016
, an increase of
$2.6 million
, or
1.4%
. Our operating margin was
41.7%
and
39.4%
for the three months ended
September 30, 2015
and
2016
, respectively. The increase in operating income was primarily due to acquisitions completed in 2016 and organic growth in the business, partially offset by the negative impact of the macroeconomic environment of approximately $23 million, driven by lower fuel prices and spreads, as well as unfavorable fluctuations in foreign exchange rates.
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
$132.4 million
in the three months ended
September 30, 2015
to
$135.8 million
in the three months ended
September 30, 2016
, an increase of
$3.3 million
, or
2.5%
. North America operating margin was
39.5%
and
39.3%
for the three months ended
September 30, 2015
and
2016
, respectively. The increase in operating income was due primarily to organic growth in the business, partially offset by the negative impact of the macroeconomic environment of approximately $15 million, driven by lower fuel prices and spreads.
International segment operating income.
International operating income decreased from
$56.0 million
in the three months ended
September 30, 2015
to
$55.3 million
in the three months ended
September 30, 2016
, a decrease of
$0.7 million
, or
1.3%
. International operating margin was
48.1%
and
39.9%
for the three months ended
September 30, 2015
and
2016
, respectively. The decrease in operating income was due primarily to the negative impact of the macroeconomic environment of approximately $8 million, driven by unfavorable fluctuations in foreign exchange rates, which was partially offset by the impact of acquisitions completed in 2016 and organic growth in the business.
Nine months ended
September 30, 2016
compared to the nine months ended
September 30, 2015
The following table sets forth selected consolidated statement of income data for the
nine
months ended
September 30, 2016
and
2015
(in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2016
|
|
% of total
revenue
|
|
Nine Months Ended
September 30, 2015
|
|
% of total
revenue
|
|
Increase
(decrease)
|
|
% Change
|
Revenues, net:
|
|
|
|
|
|
|
North America
|
|
$
|
950,542
|
|
|
72.2
|
%
|
|
$
|
918,333
|
|
|
72.2
|
%
|
|
$
|
32,209
|
|
|
3.5
|
%
|
International
|
|
366,051
|
|
|
27.8
|
%
|
|
353,931
|
|
|
27.8
|
%
|
|
12,120
|
|
|
3.4
|
%
|
Total revenues, net
|
|
1,316,593
|
|
|
100.0
|
%
|
|
1,272,264
|
|
|
100.0
|
%
|
|
44,329
|
|
|
3.5
|
%
|
Consolidated operating expenses:
|
|
|
|
|
|
|
Merchant commissions
|
|
78,755
|
|
|
6.0
|
%
|
|
80,777
|
|
|
6.3
|
%
|
|
(2,022
|
)
|
|
(2.5
|
)%
|
Processing
|
|
256,738
|
|
|
19.5
|
%
|
|
246,879
|
|
|
19.4
|
%
|
|
9,859
|
|
|
4.0
|
%
|
Selling
|
|
92,680
|
|
|
7.0
|
%
|
|
81,011
|
|
|
6.4
|
%
|
|
11,669
|
|
|
14.4
|
%
|
General and administrative
|
|
209,084
|
|
|
15.9
|
%
|
|
199,252
|
|
|
15.7
|
%
|
|
9,832
|
|
|
4.9
|
%
|
Depreciation and amortization
|
|
141,848
|
|
|
10.8
|
%
|
|
145,435
|
|
|
11.4
|
%
|
|
(3,587
|
)
|
|
(2.5
|
)%
|
Other operating, net
|
|
(690
|
)
|
|
(0.1
|
)%
|
|
(2,475
|
)
|
|
(0.2
|
)%
|
|
1,785
|
|
|
72.1
|
%
|
Operating income
|
|
538,178
|
|
|
40.9
|
%
|
|
521,385
|
|
|
41.0
|
%
|
|
16,793
|
|
|
3.2
|
%
|
Equity method investment (income) loss
|
|
(2,247
|
)
|
|
(0.2
|
)%
|
|
13,926
|
|
|
1.1
|
%
|
|
(16,173
|
)
|
|
(116.1
|
)%
|
Other expense, net
|
|
1,056
|
|
|
0.1
|
%
|
|
2,345
|
|
|
0.2
|
%
|
|
(1,289
|
)
|
|
(55.0
|
)%
|
Interest expense, net
|
|
49,905
|
|
|
3.8
|
%
|
|
54,818
|
|
|
4.3
|
%
|
|
(4,913
|
)
|
|
(9.0
|
)%
|
Provision for income taxes
|
|
132,503
|
|
|
10.1
|
%
|
|
140,695
|
|
|
11.1
|
%
|
|
(8,192
|
)
|
|
(5.8
|
)%
|
Net income
|
|
$
|
356,961
|
|
|
27.1
|
%
|
|
$
|
309,601
|
|
|
24.3
|
%
|
|
$
|
47,360
|
|
|
15.3
|
%
|
Operating income for segments:
|
|
|
|
|
|
|
North America
|
|
$
|
367,221
|
|
|
|
|
$
|
351,778
|
|
|
|
|
$
|
15,443
|
|
|
4.4
|
%
|
International
|
|
170,957
|
|
|
|
|
169,607
|
|
|
|
|
1,350
|
|
|
0.8
|
%
|
Operating income
|
|
$
|
538,178
|
|
|
|
|
$
|
521,385
|
|
|
|
|
$
|
16,793
|
|
|
3.2
|
%
|
Operating margin for segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
38.6
|
%
|
|
|
|
38.3
|
%
|
|
|
|
0.3
|
%
|
|
|
International
|
|
46.7
|
%
|
|
|
|
47.9
|
%
|
|
|
|
(1.2
|
)%
|
|
|
Total
|
|
40.9
|
%
|
|
|
|
41.0
|
%
|
|
|
|
(0.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The sum of the columns and rows may not calculate due to rounding.
Revenues and revenue per transaction
Our consolidated revenues increased from
$1,272.3 million
in the
nine
months ended
September 30, 2015
to
$1,316.6 million
in the
nine
months ended
September 30, 2016
, an increase of
$44.3 million
, or
3.5%
. The increase in our consolidated revenue was primarily due to:
|
|
•
|
The impact of acquisitions during the nine months ended September 30, 2016, which contributed approximately $25 million in additional revenue.
|
|
|
•
|
Organic growth in certain of our payment programs driven by increases in both volume and revenue.
|
|
|
•
|
Partially offsetting this growth was the negative impact of the macroeconomic environment. Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a negative impact on our
|
consolidated segment revenue for the
nine
months ended
September 30, 2016
over the comparable period in
2015
of approximately
$90 million
. We believe the impact of lower fuel prices and lower fuel spread margins, primarily in the U.S., had an unfavorable impact on consolidated revenues of approximately
$58 million
. Additionally, changes in foreign exchange rates had an unfavorable impact on consolidated revenues of approximately
$32 million
due to unfavorable fluctuations in rates in most geographies in the
nine
months ended
September 30, 2016
compared to
2015
.
Consolidated revenue per transaction decreased from
$0.99
in the
nine
months ended
September 30, 2015
to
$0.91
in the
nine
months ended
September 30, 2016
, a decrease of
$0.08
, or
8.5%
. This decrease was due primarily to the unfavorable impact of the macroeconomic environment, the mix impact of acquisitions (STP, Travelcard and a small acquisition in Brazil), which have transactions at much lower revenue per transaction than the historical average, and the impact of SVS, partially offset by organic growth. Excluding these items, revenue per transaction increased approximately 4% to $2.88 in the nine months ended September 30,
2016
compared to $2.78 in
2015
.
Revenue per transaction can vary based on the geography, the relevant merchant and customer relationship, the payment product utilized, and the types of products and services purchased. The revenue mix was influenced by our acquisitions, organic growth in the business, and fluctuations in the macroeconomic environment, including fuel prices, fuel spread margins and foreign exchange rates.
North America segment revenues and revenue per transaction
North America revenues increased from
$918.3 million
in the
nine
months ended
September 30, 2015
to
$950.5 million
in the
nine
months ended
September 30, 2016
, an increase of
$32.2 million
, or
3.5%
. The increase in our North America segment revenue was primarily due to:
|
|
•
|
Organic growth in certain of our payment programs driven by increases in both volume and revenue.
|
|
|
•
|
Partially offsetting the organic growth was the negative impact of the macroeconomic environment. Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a negative impact on our North America segment revenue for the
nine
months ended
September 30, 2016
over the comparable period in
2015
by approximately
$57 million
, primarily due to the impact of lower fuel prices and lower fuel spread margins.
|
North America segment revenue per transaction decreased from
$0.80
in the
nine
months ended
September 30, 2015
to
$0.78
in the
nine
months ended
September 30, 2016
, a decrease of
$0.02
, or
2.6%
. When discussing revenue per transaction in the North America segment, we typically exclude the impact of the SVS business, which had approximately
924 million
and
872 million
transactions in the nine months ended September 30,
2016
and
2015
, respectively, at a very low revenue per transaction. Revenue per transaction in our North America segment for the nine months ended September 30,
2016
, excluding SVS, decreased 4% to $2.77 from $2.89 compared to
2015
, due primarily to the impact of lower fuel prices during the period and lower fuel spread margins over the comparable period in 2015. Excluding the negative impact of the macroeconomic environment of approximately
$57 million
and SVS, revenue per transaction increased approximately 3% to $2.97 in the
nine
months ended
September 30, 2016
compared to $2.89 in
2015
.
International segment revenues and revenue per transaction
International segment revenues increased from
$353.9 million
in the
nine
months ended
September 30, 2015
to
$366.1 million
in the
nine
months ended
September 30, 2016
, an increase of
$12.1 million
, or
3.4%
. The increase in our International segment revenue was primarily due to:
|
|
•
|
The impact of acquisitions during the nine months ended September 30, 2016, which contributed approximately $25 million in additional revenue.
|
|
|
•
|
Organic growth in certain of our payment programs driven by increases in both volume and revenue.
|
|
|
•
|
Partially offsetting this growth was the negative impact of the macroeconomic environment. Although we cannot precisely measure the impact of the macroeconomic environment, in total we believe it had a negative impact on our International segment revenue for the
nine
months ended
September 30, 2016
over the comparable period in
2015
, of approximately
$33 million
, primarily due to unfavorable fluctuations in foreign exchange rates in most geographies where we do business and slightly lower fuel prices.
|
International segment revenue per transaction decreased from
$2.56
in the
nine
months ended
September 30, 2015
to
$1.57
in the
nine
months ended
September 30, 2016
, a decrease of
$1.00
per transaction, or
38.8%
. This decrease was due primarily to the unfavorable impact of foreign exchange rates across most geographies and the mix impact of acquisitions (STP, Travelcard and a small acquisition in Brazil), which have transactions at much lower revenue per transaction than the historical average, partially offset by organic growth. Excluding these items, our International revenue per transaction increased approximately 5% to $2.69 in the nine months ended September 30,
2016
compared to $2.56 in
2015
.
Consolidated operating expenses
Merchant commissions.
Merchant commissions decreased from
$80.8 million
in the
nine
months ended
September 30, 2015
to
$78.8 million
in the
nine
months ended
September 30, 2016
, a decrease of
$2.0 million
, or
2.5%
. This decrease was primarily to the fluctuation of the margin between the wholesale cost and retail price of fuel, which impacted merchant commissions in certain card programs, as well as the impact of fluctuations in foreign exchange rates.
Processing.
Processing expenses increased from
$246.9 million
in the
nine
months ended
September 30, 2015
to
$256.7 million
in the
nine
months ended
September 30, 2016
, an increase of
$9.9 million
, or
4.0%
. Increases in processing expenses were primarily due to ongoing expenses related to acquisitions completed in 2016, partially offset by the impact of fluctuations in foreign exchange rates.
Selling.
Selling expenses increased from
$81.0 million
in the
nine
months ended
September 30, 2015
to
$92.7 million
in the
nine
months ended
September 30, 2016
, an increase of
$11.7 million
, or
14.4%
. Increases in spending primarily due to ongoing expenses related to acquisitions completed in 2016 and Comdata, were partially offset by the impact of fluctuations in foreign exchange rates.
General and administrative.
General and administrative expenses increased from
$199.3 million
in the
nine
months ended
September 30, 2015
to
$209.1 million
in the
nine
months ended
September 30, 2016
, an increase of
$9.8 million
, or
4.9%
, The increase was primarily due to increased stock based compensation of approximately $5 million over the comparable period in 2015, ongoing expenses related to acquisitions completed in 2016 and incremental acquisition related expenses of approximately $3 million, partially offset by the impact of fluctuations in foreign exchange rates.
Depreciation and amortization.
Depreciation and amortization decreased from
$145.4 million
in the
nine
months ended
September 30, 2015
to
$141.8 million
in the
nine
months ended
September 30, 2016
, a decrease of
$3.6 million
, or
2.5%
. The decrease was primarily due to movements in and adjustments from changes in foreign exchange rates of approximately $2.9 million, partially offset by ongoing expenses related to acquisitions completed in 2016.
Equity method investment (income) loss.
Equity method investment income was
$2.2 million
in the
nine
months ended
September 30, 2016
as compared to a loss of
$13.9 million
in the
nine
months ended
September 30, 2015
. Included in 2016, was a non-recurring net recovery of purchase price of approximately $11 million and included in 2015, were higher costs incurred to restructure the operations of the business.
Interest expense, net.
Interest expense decreased from
$54.8 million
in the
nine
months ended
September 30, 2015
to
$49.9 million
in the
nine
months ended
September 30, 2016
, a decrease of
$4.9 million
, or
9.0%
. The decrease in interest expense is primarily due to the impact of delevering from the first quarter of 2015 through the
third
quarter of
2016
and overall lower interest rates, partially offset by the impact of additional borrowings for acquisitions in 2016. The following table sets forth the average interest rates paid on borrowings under our Credit Facility, excluding the relevant unused credit facility fees.
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
Term loan A
|
|
1.96
|
%
|
|
1.99
|
%
|
Term loan B
|
|
3.75
|
%
|
|
3.75
|
%
|
Domestic Revolver A
|
|
2.00
|
%
|
|
1.99
|
%
|
Foreign Revolver A
|
|
1.77
|
%
|
|
2.36
|
%
|
Foreign swing line
|
|
1.73
|
%
|
|
2.29
|
%
|
The average unused credit facility fee for Domestic Revolver A was
0.30%
and
0.36%
in the
nine
month period ending
September 30, 2016
and
2015
, respectively.
Provision for income taxes.
The provision for income taxes decreased from
$140.7 million
in the
nine
months ended
September 30, 2015
to
$132.5 million
in the
nine
months ended
September 30, 2016
, a decrease of
$8.2 million
, or
5.8%
. We provide for income taxes during interim periods based on an estimate of our effective tax rate for the year. Discrete items and changes in the estimate of the annual tax rate are recorded in the period they occur. Our effective tax rate decreased from 31.2% for
nine
months ended
September 30, 2015
to 27.1% for the
nine
months ended
September 30, 2016
. The decrease in the provision for income taxes and the effective tax rate was due to a one-time net gain recorded by our equity method investment, which favorably impacted pre-tax earnings but was not subject to U.S. income taxes, and the impact of the early adoption of the new guidance on accounting for stock-based payments to employees.
We pay taxes in many different 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 lower than the U.S. tax rate. Consequently, as our earnings fluctuate between taxing jurisdictions, our effective tax rate fluctuates.
Net income.
For the reasons discussed above, our net income increased from
$309.6 million
in the
nine
months ended
September 30, 2015
to
$357.0 million
in the
nine
months ended
September 30, 2016
, an increase of
$47.4 million
, or
15.3%
.
Operating income and operating margin
Consolidated operating income.
Operating income increased from
$521.4 million
in the
nine
months ended
September 30, 2015
to
$538.2 million
in the
nine
months ended
September 30, 2016
, an increase of
$16.8 million
, or
3.2%
. Our operating margin was
41.0%
and
40.9%
for the
nine
months ended
September 30, 2015
and
2016
, respectively. The increase in operating income was primarily due to organic growth in the business and the impact of acquisitions completed in 2016, partially offset by the negative impact of the macroeconomic environment of approximately $68 million, driven by lower fuel prices and spreads, as well as unfavorable fluctuations in foreign exchange rates.
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
$351.8 million
in the
nine
months ended
September 30, 2015
to
$367.2 million
in the
nine
months ended
September 30, 2016
, an increase of
$15.4 million
, or
4.4%
. North America operating margin was
38.3%
and
38.6%
for the
nine
months ended
September 30, 2015
and
2016
, respectively. The increase in operating income was due primarily to organic growth in the business, partially offset by the negative impact of the macroeconomic environment of approximately $51 million, driven by lower fuel prices and spreads.
International segment operating income.
International operating income increased from
$169.6 million
in the
nine
months ended
September 30, 2015
to
$171.0 million
in the
nine
months ended
September 30, 2016
, an increase of
$1.4 million
, or
0.8%
. International operating margin was
47.9%
and
46.7%
for the
nine
months ended
September 30, 2015
and
2016
, respectively. The increase in operating income was due to the impact of acquisitions completed in 2016 and organic growth in the business, partially offset by the negative impact of the macroeconomic environment of approximately $18 million, driven by unfavorable fluctuations in foreign exchange rates.
Liquidity and capital 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 needs, tax and capital expenditure needs.
Sources of liquidity
At
September 30, 2016
, our cash balances totaled
$604.8 million
, with approximately
$199.3 million
restricted. Restricted cash represents customer deposits in the Czech Republic and in our Comdata business in the U.S., which we are restricted from using other than to repay customer deposits.
At
September 30, 2016
, cash and cash equivalents held in foreign subsidiaries where we have determined we are permanently reinvested is $250.2 million. All of the cash and cash equivalents held by our foreign subsidiaries, excluding restricted cash, are available for general corporate purposes. Our current intent is to permanently reinvest these funds outside of the U.S. Our current expectation for funds held in our foreign subsidiaries is to use the funds to finance foreign organic growth, to pay for potential future foreign acquisitions and to repay any foreign borrowings that may arise from time to time. We currently believe that funds generated from our U.S. operations, along with available borrowing capacity in the U.S. will be sufficient to fund our U.S. operations for the foreseeable future, and therefore do not foresee a need to repatriate cash held by our foreign subsidiaries in a taxable transaction to fund our U.S. operations. However, if at a future date or time these funds are needed for our operations in the U.S. or we otherwise believe it is in our best interests to repatriate all or a portion of such funds, we may be required to accrue and pay U.S. taxes to repatriate these funds. No assurances can be provided as to the amount or timing thereof, the tax consequences related thereto or the ultimate impact any such action may have on our results of operations or financial condition.
We utilize an accounts receivable Securitization Facility 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 charge card products and generally pay merchants within seven days of receiving the merchant billing. 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 as funds available for working capital purposes and acquisitions. At
September 30, 2016
, we had the ability to generate approximately $75 million of additional liquidity under our Securitization Facility. At
September 30, 2016
, we had approximately $438 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
nine
months ended
September 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
(in millions)
|
|
2016
|
|
2015
|
Net cash provided by operating activities
|
|
$
|
404.3
|
|
|
$
|
524.5
|
|
Net cash used in investing activities
|
|
(1,371.5
|
)
|
|
(46.5
|
)
|
Net cash provided by (used in) financing activities
|
|
976.4
|
|
|
(502.3
|
)
|
Operating activities.
Net cash provided by operating activities decreased from
$524.5 million
in the
nine
months ended
September 30, 2015
to
$404.3 million
in the
nine
months ended
September 30, 2016
. The decrease is primarily due to changes in working capital. Fluctuations in receivables and payables, which affect working capital the most significantly, are largely due to timing of month end transactions and volume. The decrease was partially offset by additional net income of $47.4 million during the
nine
months ended
September 30, 2016
over the comparable period in
2015
and a one-time nonrecurring net gain of approximately $11 million recorded by our equity method investment.
Investing activities.
Net cash used in investing activities increased from
$46.5 million
in the
nine
months ended
September 30, 2015
to
$1,371.5 million
in the
nine
months ended
September 30, 2016
. This increase is primarily due to the increase in cash paid for acquisitions completed in 2016.
Financing activities.
Net cash used in financing activities was
$502.3 million
in the
nine
months ended
September 30, 2015
compared to net cash provided by financing activities of
$976.4 million
in the
nine
months ended
September 30, 2016
. The increase in cash provided by financing activities is primarily due to an increase in net borrowings on our revolving A credit facility and our term loans of $852 million and $593 million, respectively, to fund acquisitions during the nine months ended September 30, 2016.
Capital spending summary
Our capital expenditures increased from
$29.5 million
in the
nine
months ended
September 30, 2015
to
$41.9 million
in the
nine
months ended
September 30, 2016
, an increase of $
12.4 million
, or
41.8%
. This increase is primarily due to increased spending on strategic projects, including continued investment in our GFN application.
Credit Facility
We are party to a $3.96 billion Credit Agreement (the “Credit Facility”) with a syndicate of banks, which we originally entered into on October 24, 2014. The Credit Facility provides for (a) a revolving A credit facility in the amount of $1.0 billion, with sublimits for letters of credit, swing line loans and multicurrency borrowings, (b) a revolving B facility in the amount of $35 million for loans in Australian Dollars or New Zealand Dollars, (c) a term loan A facility in the amount of $2.02 billion and (d) a term loan B facility in the amount $300 million. On August 22, 2016, we entered into the first Amendment to the existing Credit Agreement. The Amendment established an incremental term A loan in the amount of $600 million under the Credit Agreement accordion feature. The proceeds from the additional $600 million in term A loans were used to partially finance the STP acquisition. The Amendment also established an accordion feature for borrowing an additional $500 million in term A, term B or revolver A debt. The Credit Facility 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 our ability to pay dividends and make other restricted payments under certain circumstances and compliance with certain financial ratios. As of
September 30, 2016
, we were in compliance with each of the covenants under the Credit Facility.
The stated maturity dates for our term A loans, revolving loans, and letters of credit under the New Credit Agreement is
November 14, 2019
and
November 14, 2021
for our term loan B. 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 our option of one, two, three or nine months after borrowing, depending on the term of the borrowing on the facility. Borrowings on the foreign swing line of credit are due no later than ten business days after such loan is made.
At
September 30, 2016
, we had $2,435.8 million in borrowings outstanding on term loan A, $245.6 million in borrowings outstanding on term loan B,
$430.0 million
in borrowings outstanding on the domestic revolving A facility, $162.1 million in borrowings outstanding on the foreign revolving A facility and
$5.2 million
in borrowings outstanding on the swing line revolving A facility. Unamortized debt discounts are $7.8 million at
September 30, 2016
. During the
nine
months ended
September 30, 2016
, we made principal payments of $83.3 million on the term loan A, $1.9 million on the term loan B, $645.0 million on the domestic revolving A facility and $188.1 million on the foreign revolving A facility.
Securitization Facility
We are a party to a 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 as of December 1, 2015. We refer to this arrangement as the Securitization Facility. The current purchase limit under the Securitization Facility is
$950 million
. There is a program fee equal to one month LIBOR and the Commercial Paper Rate of
0.66%
plus
0.90%
and
0.43%
plus
0.90%
as of
September 30, 2016
and
December 31, 2015
, respectively. The unused facility fee is payable at a rate of
0.40%
per annum as of
September 30, 2016
and
December 31, 2015
, respectively.
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 the financial covenant requirements related to our Securitization Facility as of
September 30, 2016
.
Other Liabilities
In connection with our acquisition of certain businesses, we owe final payments of $3.9 million, which are payable in the next twelve months.
Stock Repurchase Program
On February 4, 2016, our Board of Directors approved a stock repurchase program under which we may begin purchasing up to an aggregate of $500 million of the Company's common stock over the next 18 months. Any stock repurchases may be made at times and in such amounts as we deem 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 are expected to be funded by available cash flow from the business and working capital. There were 259,145 shares totaling $35.5 million repurchased under the Program during the nine months ended
September 30, 2016
.
Critical accounting policies and estimates
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.
Accounting estimates necessarily require subjective determinations about future events and conditions. During the three months ended
September 30, 2016
, we have not adopted any new critical accounting policies that had a significant impact upon our consolidated financial statements, have not changed any critical accounting policies and have not changed the application of any critical accounting policies from the year ended
December 31, 2015
. For critical accounting policies, refer to the Critical Accounting Estimates in Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
included in our Annual Report on Form 10-K for the year ended
December 31, 2015
and our summary of significant accounting policies in Note 1 of our notes to the unaudited consolidated financial statements in this Form 10-Q.
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.
Adjusted revenues
We have defined the non-GAAP measure adjusted revenues as revenues, net less merchant commissions as reflected in our income statement.
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. We believe that adjusted revenue is an appropriate supplemental measure of financial performance and may be useful to investors to understanding our revenue performance on a consistent basis. Adjusted revenues are not intended to be a substitute for GAAP financial measures and should not be used as such.
Set forth below is a reconciliation of adjusted revenues to the most directly comparable GAAP measure, revenues, net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Revenues, net
|
|
$
|
484,426
|
|
|
$
|
451,493
|
|
|
$
|
1,316,593
|
|
|
$
|
1,272,264
|
|
Merchant commissions
|
|
(28,214
|
)
|
|
(31,726
|
)
|
|
(78,755
|
)
|
|
(80,777
|
)
|
Total adjusted revenues
|
|
$
|
456,212
|
|
|
$
|
419,767
|
|
|
$
|
1,237,838
|
|
|
$
|
1,191,487
|
|
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-based compensation expense related to stock-based compensation awards, (b) amortization of deferred financing costs, discounts and intangible assets, (c) amortization of the premium recognized on the purchase of receivables, (d) our proportionate share of amortization of intangible assets at our equity method investment, and (e) a non-recurring net gain at our equity method investment.
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 stock 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 stock 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, we have excluded amortization expense from adjusted net income. 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 t o be a substitute for GAAP financial measures and should not be used as such.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2016
²
|
|
|
|
2015
|
|
2016
²
|
|
2015
|
|
Net income
|
|
$
|
129,618
|
|
|
|
|
$
|
116,770
|
|
|
$
|
356,961
|
|
|
$
|
309,601
|
|
|
Net income per diluted share
|
|
1.36
|
|
|
|
|
1.24
|
|
|
3.75
|
|
|
3.29
|
|
|
Stock based compensation
|
|
17,405
|
|
|
|
|
13,887
|
|
|
50,025
|
|
|
44,387
|
|
|
Amortization of intangible assets
|
|
46,341
|
|
|
|
|
39,869
|
|
|
112,455
|
|
|
120,055
|
|
|
Amortization of premium on receivables
|
|
1,348
|
|
|
|
|
812
|
|
|
3,687
|
|
|
2,439
|
|
|
Amortization of deferred financing costs and discounts
|
|
1,917
|
|
|
|
|
1,778
|
|
|
5,568
|
|
|
5,295
|
|
|
Amortization of intangibles at equity method investment
|
|
2,406
|
|
|
|
|
3,032
|
|
|
7,533
|
|
|
8,404
|
|
|
Non-recurring net gain at equity method investment
|
|
—
|
|
|
|
|
—
|
|
|
(10,845
|
)
|
|
—
|
|
|
Total pre-tax adjustments
|
|
69,417
|
|
|
|
|
59,378
|
|
|
168,423
|
|
|
180,580
|
|
|
Income tax impact of pre-tax adjustments at the effective tax rate
*
|
|
(15,726
|
)
|
|
|
|
(18,579
|
)
|
1
|
(46,705
|
)
|
|
(57,758
|
)
|
1
|
Adjusted net income
|
|
$
|
183,310
|
|
|
|
|
$
|
157,570
|
|
|
$
|
478,679
|
|
|
$
|
432,424
|
|
|
Adjusted net income per diluted share
|
|
$
|
1.92
|
|
|
|
|
$
|
1.67
|
|
|
$
|
5.03
|
|
|
$
|
4.60
|
|
|
Diluted shares
|
|
95,307
|
|
|
|
|
94,157
|
|
|
95,204
|
|
|
94,069
|
|
|
1
Effective tax rate utilized excludes the impact of a one time tax benefit recognized during the three months ended September 30, 2015 of approximately $7.9 million.
2
Reflects the impact of the Company's adoption of Accounting Standards Update 2016-09, "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting", to simplify several aspects of the accounting for the stock-based compensation, including the income tax consequences.
*
Excludes the results of our equity method investment on our effective tax rate, as results from our equity method investment are reported within the Consolidated Income Statements on a post-tax basis and no tax-over-book outside basis differences related to our equity method investment reversed during 2016.
Special Cautionary Notice Regarding Forward-Looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws. Statements that are not historical facts, including statements about our 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, such as delays or failures associated with implementation; fuel price and spread volatility; changes in credit risk of customers and associated losses; the actions of regulators relating to payment cards or investigations; failure to maintain or renew key business relationships; failure to maintain competitive offerings; failure to maintain or renew sources of financing; failure to complete, or delays in completing, anticipated new partnership arrangements or acquisitions and the failure to successfully integrate or otherwise achieve anticipated benefits from such partnerships or acquired businesses; failure to successfully expand business internationally; other risks related to our international operations, including the potential impact to our business as a result of the United Kingdom's recent referendum to leave the European Union; the impact of foreign exchange rates on operations, revenue and income; the effects of general economic conditions on fueling patterns and the commercial activity of fleets, as well as the other risks and uncertainties identified under the caption “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2015
. These factors could cause our actual results and experience to differ materially from any forward-looking statement. 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.