WEX Inc. — Q2 2019 Form 10-Q
Business context and period. WEX provides corporate payment solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. This unaudited quarterly report covers the three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $441.8 million | $370.8 million | $823.7 million | $724.8 million |
| Operating income | $94.7 million | $100.4 million | $163.7 million | $184.3 million |
| Operating margin | 21.4% | 27.1% | 19.9% | 25.4% |
| Net income attributable to shareholders | $13.8 million | $38.4 million | $29.9 million | $90.4 million |
| Diluted EPS attributable to shareholders | $0.32 | $0.88 | $0.69 | $2.08 |
| Operating cash flow | — | $79.4 million | $(66.7) million |
- Q2 revenue increased 19% year over year, while operating income decreased 6%. Revenue growth reflected acquired businesses and higher payment volumes; higher expenses, including acquisition-related amortization and costs, contributed to lower operating margin.
- Q2 segment revenue growth was 11% in Fleet Solutions, 21% in Travel and Corporate Solutions, and 55% in Health and Employee Benefit Solutions. The Health segment’s growth primarily reflected the Discovery Benefits acquisition and existing business growth.
- Shareholder-attributable net income and EPS were also affected by a $17.7 million accretion adjustment for the redeemable non-controlling interest in the U.S. Health business. Q2 GAAP net income before that attribution adjustment was $31.9 million. Adjusted net income attributable to shareholders, a non-GAAP measure, was $99.6 million versus $90.0 million in Q2 2018; it is not a substitute for GAAP results.
- Six-month operating cash flow improved by $146.1 million year over year, mainly because accounts payable increased more than receivables, including in connection with a receivables factoring arrangement. Investing cash outflow was $624.9 million, including $571.6 million for acquisitions. Financing cash inflow was $892.3 million, largely reflecting borrowing and deposit growth.
Financial position, liquidity and debt
- At June 30, 2019, cash and cash equivalents were $768.4 million and restricted cash was $131.8 million. Accounts receivable were $3.20 billion. Total current assets were $4.31 billion versus current liabilities of $3.04 billion.
- Gross debt was $2.98 billion, up from $2.38 billion at December 31, 2018; net long-term debt was $2.76 billion and net short-term debt was $173.6 million. The company reported $719.5 million of remaining revolver capacity, subject to covenant compliance.
- Debt increased in connection with acquisitions, including Discovery Benefits and Noventis. WEX amended its credit agreement, including extending Tranche B maturity to May 2026; the revolver and Tranche A loans mature in July 2023. The company reported compliance with material debt covenants.
- WEX Bank deposits totaled $1.59 billion, compared with $1.27 billion at year-end. The filing states management believes cash generation and available sources will fund cash needs for at least the next 12 months. WEX Bank was rated “well capitalized” under the FDIC framework.
Material changes, outlook and risks
- In 2019, WEX acquired Discovery Benefits for $525.6 million, Noventis for $338.7 million, and Pavestone Capital for $28.0 million. Purchase accounting for the business acquisitions remained preliminary. On July 1, after quarter-end, WEX acquired Go Fuel Card for €235.0 million (approximately $266.0 million); the company expected the deal to strengthen its European position and reduce sensitivity to retail fuel prices.
- Q2 included a $21.5 million net unrealized loss on financial instruments, compared with a $2.7 million gain a year earlier, primarily reflecting movements in the interest-rate yield curve. The quarter also recorded a $6.7 million foreign currency gain, versus a $26.7 million loss in Q2 2018. Financing interest expense rose to $35.6 million from $25.5 million, primarily due to higher debt and interest rates.
- The Q2 effective tax rate rose to 28.0% from 24.2%; the filing attributes the increase mainly to jurisdictional earnings mix, higher unrecognized tax benefits, and lower tax benefits from stock-based compensation.
- Management noted increased credit-loss provisions in Fleet Solutions, reflecting slightly higher delinquencies and new customer wins. Fuel-related credit losses were 13.9 basis points of fuel expenditures in Q2 versus 11.2 basis points a year earlier. Lower fuel prices and foreign-exchange movements were additional factors affecting Fleet results.
- The company identified material weaknesses in internal control over financial reporting, including deficiencies at its Brazilian subsidiary and insufficient corporate monitoring of certain subsidiaries. Remediation was ongoing and was not yet considered complete; management targeted completion by the time it issued its December 31, 2019 financial statements, but gave no assurance of success. Prior-period financial statements had been revised for errors management considered immaterial.
- Management reported no material legal proceedings or reasonably possible legal loss contingencies. The filing highlights risks involving economic conditions, fuel prices, interest and foreign-exchange rates, credit losses, acquisitions and integration, technology and cybersecurity, regulation, leverage, and remediation of control weaknesses. No specific earnings guidance was provided.
Key facts for investors to verify
- How much of revenue and segment growth is organic versus attributable to acquisitions, customer conversions, and contract changes.
- Whether acquired businesses deliver expected growth and synergies, and how final purchase accounting affects goodwill, intangible amortization, and future earnings.
- Trends in credit losses, delinquencies, late-fee revenue, and the adequacy of receivable reserves.
- Debt levels, borrowing costs, covenant headroom, deposit funding costs, and remaining revolver availability.
- Whether internal-control remediation is completed and tested effectively, particularly for Brazilian subsidiary controls and corporate oversight.
- The effect of non-cash derivative valuation changes and the redeemable non-controlling interest accretion on reported GAAP earnings and EPS.