WEX Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2017. Unaudited results are compared with the corresponding 2016 periods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
WEX provides corporate payment solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. Results include EFS, acquired in July 2016. The filing also reports the October 18, 2017 acquisition of AOC Solutions and 3Delta Systems for a net purchase price of $112.5 million.
Financial highlights
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $324.0 | $287.8 | $919.2 | $727.6 |
| Operating income | $63.7 | $54.6 | $172.1 | $147.3 |
| Net earnings attributable to WEX shareholders | $34.0 | $19.7 | $80.5 | $55.4 |
| Diluted earnings per share | $0.79 | $0.46 | $1.87 | $1.38 |
| Adjusted net income, non-GAAP | $61.5 | $53.4 | $168.6 | $134.0 |
Q3 revenue increased 12.6% year over year; operating income increased 16.8%, and shareholder earnings increased 72.5%. Approximate GAAP operating margin was 19.7%, versus 19.0% a year earlier. Earnings benefited from a $14.6 million foreign-currency gain (versus $5.9 million) and lower financing interest expense ($25.8 million versus $35.1 million); the year-over-year tax rate rose to 35.4% from 24.0%.
For the first nine months, revenue rose 26.3% and shareholder earnings rose 45.3%. Growth reflects both business expansion and EFS; the filing does not quantify organic contribution to consolidated growth. The nine-month period included a $16.2 million noncash impairment charge related to technology insourcing and $10.2 million of restructuring and other costs.
Segments and operating performance
- Fleet Solutions: Q3 revenue rose 15% to $212.1 million. Vehicles serviced increased 6% to 11.0 million; fuel transactions increased 4% to 132.0 million. Credit-loss expense rose to $19.3 million from $5.7 million, mainly due to fuel-pump skimming fraud, a customer bankruptcy, and slower payments in hurricane-affected regions. Credit losses were 23.5 basis points of fuel expenditures, versus 8.6 basis points.
- Travel and Corporate Solutions: Q3 revenue declined 4% to $61.0 million, despite 21% growth in purchase volume to $8.7 billion. A lower net interchange rate, following a large customer contract renegotiation, reduced payment-processing revenue.
- Health and Employee Benefit Solutions: Q3 revenue increased 28% to $50.9 million, with operating income of $3.4 million versus $2.1 million. Growth was driven by customer and platform expansion and increased Brazilian cardholder interest revenue.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $251.1 million at September 30, 2017, up from $190.9 million at December 31, 2016. Total assets were $6.54 billion; accounts receivable were $2.60 billion, net of a $32.7 million allowance.
- Nine-month operating cash flow was negative $45.7 million, improving from negative $80.9 million. Higher receivables, partly reflecting fuel prices and volume, remained a significant cash use. Investing cash outflow was $56.0 million, primarily capital additions; the comparable 2016 period included the EFS acquisition. Financing cash inflow was $177.1 million.
- At quarter-end, revolving facilities and term loans, net, were $1.73 billion; notes outstanding, net, were $396.1 million; other debt was $166.3 million; securitized debt was $122.5 million; and borrowed federal funds were $28.5 million. Revolver borrowings were $149.4 million against $470 million of capacity, with approximately $320 million available, subject to covenants. A further $100 million of revolving capacity was added after quarter-end.
- WEX reported compliance with material credit-agreement and note covenants. The company stated that available cash, operations and financing sources should meet cash needs for at least 12 months. WEX Bank’s disclosed capital ratios exceeded the stated “well capitalized” minimums.
Outlook, risks and unusual items
- Management expected fuel fraud incidents to decline slightly in size and frequency in Q4 compared with Q3, following transaction limits and new real-time detection technology; losses nevertheless remained above historical trends.
- The July 2017 credit-facility repricing was expected to reduce annualized financing interest by approximately $11 million versus the prior 10-K disclosure. Management also cited an expected Q4 improvement in fraud trends; the filing provides no formal earnings or revenue guidance.
- A material weakness in internal control over financial reporting, previously identified at year-end 2016, remained unremediated at September 30. It involved user access and program-change controls. Management was implementing remediation, targeting completion by the 2017 annual report; controls require operating and testing over time before the weakness can be considered remediated.
- Other key risks include credit losses and fraud, foreign exchange and interest-rate movements, fuel-price fluctuations, acquisition integration and leverage, technology and cybersecurity risks, regulatory changes, and litigation. The company had suspended fuel-price hedging and was not hedged against fuel-price changes.
- A TCPA fax-advertising class action settlement was preliminarily approved; management said the expected amount was not material. Other ordinary-course litigation was also assessed as not material.
- WEX adopted share-based compensation accounting changes in 2017 and planned to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method. Management estimated about 25% of 2016 revenue was outside the standard’s scope and about 70% would remain substantially unchanged.
Most important facts to verify
- Whether elevated Fleet Solutions fraud and credit losses continued to decline after Q3, and the effect on receivables and reserves.
- Progress and effectiveness testing of remediation for the material weakness in financial-reporting controls.
- Debt levels, covenant headroom, available revolver capacity, and the realized savings from the July repricing.
- How much reported growth reflects organic performance versus EFS and other acquisitions, and the integration costs and benefits of the AOC acquisition.
- The actual effects of Topic 606 adoption and any changes in revenue, commission-cost accounting, or disclosures.