WEX Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; the filing was signed March 18, 2019. This is an annual report, not a standalone fourth-quarter filing. WEX provides payment processing and related services through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $1.493 billion | $1.249 billion |
| Operating income | $380.6 million | $233.4 million |
| Operating margin | 25.5% | 18.7% |
| Net income attributable to shareholders | $168.3 million | $160.1 million |
| Diluted EPS | $3.86 | $3.71 |
| Operating cash flow | $400.2 million | $135.4 million |
- Revenue grew 20% as reported. Growth reflected higher volumes, fuel prices, acquisitions, and a revenue-recognition presentation change; adoption of Topic 606 increased 2018 revenue by $42.4 million and operating income by only $0.2 million.
- Net income growth was modest despite higher operating income. A $38.8 million foreign-currency loss (versus a $31.5 million gain in 2017) and a higher effective tax rate of 28.9% (versus 8.9%) weighed on results. The 2017 tax rate benefited from a $60.6 million one-time Tax Act benefit.
- Non-GAAP adjusted net income was $362.3 million, up from $235.3 million; this measure excludes significant items, including acquired-intangible amortization, stock compensation, currency remeasurement, and impairments, and is not a substitute for GAAP results.
- Cash and cash equivalents were $541.5 million; total assets were $6.77 billion and total liabilities $4.97 billion. Gross debt was $2.38 billion, including $1.75 billion of term loans and $400 million of 4.75% senior notes. The $720 million revolving facility had no borrowings and $666.5 million of remaining capacity, subject to covenants.
- WEX Bank had $1.27 billion of deposits. Management stated available cash generation and funding sources should cover cash needs for at least 12 months. Operating cash flow improved partly because receivables grew less rapidly and collateral was returned.
- Trade receivables were $2.58 billion; 95% of balances were no more than 29 days past due. The credit-loss provision was $66.5 million, while Fleet Solutions credit-loss expense declined to $54.5 million.
Segments and fourth-quarter results
- Fleet Solutions revenue was $975.1 million, up 18%; segment adjusted operating income was $459.6 million versus $369.9 million. Fuel spend increased 22%, transactions 7%, and average domestic fuel prices 18%.
- Travel and Corporate Solutions revenue was $303.3 million, up 35%; segment adjusted operating income was $135.4 million versus $96.7 million. Purchase volume rose 14%, with growth in travel and corporate payments and a contribution from the AOC acquisition.
- Health and Employee Benefit Solutions revenue was $214.2 million, up 6%; segment adjusted operating income declined to $44.9 million from $46.8 million. U.S. SaaS accounts rose 20% to an average 11.0 million. Brazilian securitization accounting changes affected revenue mix.
- In the fourth quarter, revenue was $381.2 million versus $331.6 million, operating income $93.8 million versus $73.5 million, and shareholder-attributable net income $21.3 million versus $87.2 million. The 2017 quarter included the substantial one-time Tax Act benefit; quarterly diluted EPS was $0.49 versus $2.02.
Outlook, developments, and key risks
- The filing provides no specific 2019 revenue or earnings guidance. Management highlighted organic growth, technology investment, cloud migration, and operational efficiency as strategic priorities.
- After year-end, WEX completed the $310 million Noventis acquisition on January 24, 2019 and the approximately $425 million Discovery Benefits acquisition on March 5, 2019. It also acquired Chevron’s customer portfolio for approximately $223.4 million; platform conversion began in 2019. These transactions add integration demands and borrowing needs.
- Fuel prices are a material sensitivity: management estimated that each one-cent decline in average domestic fuel prices below actual levels would reduce 2019 revenue by approximately $1.2 million. WEX was not hedged against fuel-price changes at year-end.
- Other notable exposures include variable-rate debt and brokered-deposit funding, foreign-exchange volatility, customer credit and fraud losses, competition and fee pressure, regulatory changes, cybersecurity, and dependence on strategic partner agreements. Approximately 25% of revenue was estimated to come from fuel-provider fees tied to fuel purchase prices.
- A $3.2 million goodwill impairment was recorded for the Brazil fleet reporting unit following a significant customer loss; no goodwill remained in that reporting unit. The company also recorded $2.4 million of software impairment.
- Management identified immaterial prior-period errors, primarily in Brazilian receivables and payables, and revised prior financial statements. The financial-statement audit opinion was unqualified, but management and the auditor concluded internal control over financial reporting was ineffective due to material weaknesses in Brazil subsidiary controls and corporate monitoring of smaller subsidiaries. Remediation was underway, with completion targeted by the 2019 year-end reporting, but not assured.
- No material legal proceedings or reasonably possible legal loss contingencies were reported. WEX reported compliance with material debt covenants at December 31, 2018.
Investor verification priorities
- Track remediation and independent testing of the material weaknesses, and assess whether future filings require further revisions.
- Reconcile reported revenue growth with the Topic 606 reclassification and separate organic growth from acquisition and fuel-price effects.
- Review leverage, covenant headroom, interest-rate exposure, deposit stability, and funding for post-year-end acquisitions.
- Monitor customer retention and integration of the Chevron, Noventis, and Discovery Benefits businesses, including realized synergies and costs.
- Assess fuel-price, foreign-exchange, credit-loss, and fraud sensitivities; determine whether receivables factoring and securitization remain sustainable funding sources.
- Consider the quality of reported earnings alongside the large gap between GAAP net income and adjusted net income, including recurring acquisition-related amortization and other excluded costs.