WEX Inc. — Q2 2016 Form 10-Q
Business context and period. WEX provides corporate payment solutions across Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. This unaudited report covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods. The July 1, 2016 EFS acquisition occurred after quarter-end.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Change |
|---|---|---|---|
| Total revenue | $233.9 million | $213.7 million | +9.5% |
| Operating income | $51.6 million | $62.9 million | -17.9% |
| Net income attributable to WEX | $12.6 million | $26.5 million | -52.6% |
| Diluted EPS | $0.32 | $0.68 | Down 52.9% |
| Effective tax rate | 27.3% | 38.4% | Lower, partly due to discrete items |
- Q2 operating margin was approximately 22.1%, versus 29.5% a year earlier; net margin attributable to WEX was approximately 5.4%, versus 12.4%.
- For the first six months, revenue was $439.9 million, up 5.8%; operating income was $92.8 million, down 16.6%; and net earnings attributable to WEX were $35.7 million, down 27.0%. Diluted EPS was $0.92 versus $1.26.
- Q2 segment revenue: Fleet Solutions $144.0 million (+6%); Travel and Corporate Solutions $53.3 million (+11%); Health and Employee Benefit Solutions $36.6 million (+22%). Fleet adjusted pre-tax income before non-controlling interests fell to $38.0 million from $49.5 million; Travel and Corporate rose to $23.2 million from $21.7 million; Health and Employee Benefit Solutions was $5.2 million versus $4.7 million.
- Management’s non-GAAP adjusted net income was $42.1 million in Q2 versus $48.3 million; six-month adjusted net income was $79.7 million versus $94.5 million. These measures exclude specified items and are not substitutes for GAAP results.
Cash flow, liquidity and debt
- Six-month operating cash flow was negative $56.8 million, versus positive $53.0 million in 2015. Accounts receivable growth used $383.8 million of cash; management attributed the increase primarily to fuel volume and prices. Investing cash outflow was $41.2 million, including $35.7 million of capital additions. Financing provided $128.6 million.
- Cash and equivalents were $317.8 million at June 30, versus $280.0 million at year-end 2015. Accounts receivable was $1.887 billion, up from $1.509 billion. Approximately 92% of receivables were current and 98% were less than 60 days past due.
- At June 30, before the EFS financing, reported debt included $727.6 million of revolving/term borrowings net of issuance costs, $395.2 million of notes, $73.3 million of securitized debt and $62.1 million of other debt. These amounts exclude customer deposits, a separate funding source.
- WEX stated that cash generation and available financing were adequate for operating, investing and financing needs for at least the next 12 months. WEX Bank was classified as well capitalized; its June 30 regulatory ratios exceeded the stated well-capitalized thresholds.
Material changes, outlook and risks
- EFS acquisition and leverage: On July 1, WEX completed its acquisition of EFS for approximately $1.456 billion: $1.1 billion cash and 4.012 million shares. EFS reported approximately $135 million of 2015 revenue. WEX expects the deal to be GAAP-dilutive over the next 12 months. The new credit agreement had $1.875 billion initially borrowed, including $1.655 billion of term loans and $220 million drawn on the revolver; total facility capacity is $2.125 billion. The filing does not provide post-acquisition quarter-end debt or leverage results.
- Q2 financing interest expense rose to $30.4 million from $11.9 million, including $19.5 million in EFS financing commitment ticking fees. Six-month ticking fees were $30.0 million.
- Fleet payment-processing revenue was pressured by lower fuel prices and foreign exchange, while transaction volume grew. Fleet average expenditure per payment-processing transaction fell 19% to $55.61. Late-fee revenue rose 72% to $25.9 million, largely following rate increases; the weighted-average late-fee rate increased to 5.0% from 2.6%.
- Fleet credit-loss expense increased to $5.3 million from $3.1 million in Q2; credit losses were 10.2 basis points of fuel expenditures versus 5.3 basis points. Management cited lower spend volume and higher losses as factors to monitor.
- Travel and Corporate purchase volume rose 14% to $5.6 billion, primarily from organic growth in the travel product. Health and Employee Benefit revenue growth reflected organic growth and Benaissance, acquired in November 2015; associated personnel and amortization expenses also increased.
- WEX had no fuel-price derivatives after settling its remaining positions on March 31, 2016, leaving it unhedged for fuel-price changes thereafter. Currency exposure also remains; Q2 foreign currency loss was $4.8 million overall, including a $5.7 million loss in Travel and Corporate Solutions.
- Restructuring charges were $3.5 million in Q2 and $5.1 million for the first half. Management expected an additional $3.0 million for the 2015 initiative and $0.9 million for the 2016 initiative, with payments extending through 2017 and 2018, respectively.
- Management said future GAAP tax rates should be within its historical range, while noting rates may vary with jurisdictional earnings mix. No specific revenue or earnings guidance was provided.
- The company reported no material legal proceedings expected to adversely affect financial position, results or cash flows. It identified outsourcing certain general IT controls and processes to CSC as a material change in internal control over financial reporting; management reported disclosure controls effective at June 30.
Important facts for investors to verify
- Post-EFS acquisition debt, interest costs, leverage, covenant headroom and integration performance in subsequent filings.
- Whether EFS delivers expected strategic benefits and how its stated near-term GAAP dilution compares with actual results.
- Fleet credit-loss trends, receivable aging, charge-offs and the sustainability and customer impact of higher late-fee rates.
- Operating cash flow and receivables growth, including the extent to which working-capital needs remain elevated.
- Revenue and earnings sensitivity to fuel prices, foreign exchange, and the absence of fuel-price hedges.
- Restructuring spending and savings, Benaissance contribution, and the effectiveness of controls following the CSC transition.