WEX Inc. 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited results; amounts below are in millions unless stated otherwise. WEX provides fleet and other corporate payment solutions.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $226.1 | $222.1 | $642.0 | $605.8 |
| Operating income | $67.7 | $102.5 | $178.9 | $244.4 |
| Net income attributable to shareholders | $32.2 | $74.4 | $81.0 | $154.3 |
| Diluted EPS | $0.83 | $1.91 | $2.08 | $3.96 |
| Adjusted net income attributable to WEX (non-GAAP) | $49.9 | $66.2 | $144.4 | $160.3 |
Revenue increased 1.8% in Q3 and 6.0% year to date. Operating margin was about 30.0% in Q3 versus 46.2% a year earlier; year-to-date margin was 27.9% versus 40.3%. The prior-year periods included a $27.2 million Pacific Pride divestiture gain, which materially affects operating-income comparisons. Lower fuel prices also reduced fleet payment revenue and average expenditure per transaction. GAAP net income was further affected by taxes, currency and derivative movements, acquisition-related amortization, and a $9.4 million accretion related to UNIK’s former non-controlling interest. Q3 effective tax rate was 42.4%, compared with 25.1% in Q3 2014; the prior period benefited from tax-review adjustments.
Business trends and cash flow
- Other Payment Solutions revenue rose 10% in Q3 and 32% year to date, supported by virtual card and healthcare activity, including Evolution1. Purchase volume rose 18% in Q3 to $6.5 billion.
- Fleet Payment Solutions revenue fell 3% in Q3 and 5% year to date. Q3 payment-processing transactions increased 11%, and vehicles serviced increased 22% to approximately 9.7 million, partly reflecting the European fleet acquisition. Lower fuel prices reduced average expenditure per payment transaction by 24%.
- Operating cash flow was $247.6 million for the first nine months, compared with cash used of $2.6 million in 2014. Investing used $29.6 million, versus $586.8 million, which included prior-year acquisition spending. Financing provided $37.7 million versus $801.7 million.
- Cash and equivalents were $533.6 million at September 30, 2015, up from $284.8 million at year-end 2014. Accounts receivable were $1.79 billion; approximately 90% was less than 30 days past due and 98% less than 60 days past due.
Debt, liquidity and capital
At September 30, WEX reported $243.6 million drawn on its $700 million revolving facility, $465.6 million on its term loan, $400 million of 4.75% notes due 2023, and $78.3 million of securitized debt. It also had $50.3 million of other debt. The revolver and term loan mature or terminate in January 2018; the securitization facility is a one-year arrangement secured by Australian receivables, with proceeds restricted to facility payments. The company reported no borrowings on its $260 million federal funds lines. Management said available funding and cash generation should meet needs for at least the next 12 months and reported compliance with material debt covenants.
Outlook, material events and risks
- No full-year revenue or earnings guidance is provided in the supplied filing text. Management estimated 2015 capital expenditures of approximately $65–$70 million and said future GAAP tax rates should be within the range of historical rates, while noting that tax rates may fluctuate.
- Fuel-price hedges covered about 40% of anticipated U.S. fuel-related earnings exposure in Q4 2015 and 20% in Q1 2016; no hedges extended beyond Q1 2016. Management warned that sustained low fuel prices could negatively affect future revenue and earnings. Derivatives are not designated for hedge accounting, so fair-value changes affect reported earnings.
- On August 31, WEX acquired the remaining 49% of UNIK for $46.0 million. It recorded $8.5 million of restructuring costs in the first nine months, expected to be paid in the remainder of 2015 and 2016.
- The FDIC proposed a $2.25 million civil penalty and approximately $31 million of restitution relating to Higher One’s NOW-account marketing and fee disclosures. WEX recorded the penalty liability and a $31 million restitution liability with a corresponding indemnification asset from Higher One. Resolution and collectability remain uncertain; the Bank was reviewing its options.
- After quarter-end, WEX agreed to acquire EFS for $1.1 billion cash plus 4.012 million shares, subject to closing conditions. It arranged commitments for $2.125 billion of secured credit facilities to finance the transaction. Termination fees may be $45 million or $70 million in specified circumstances; the acquisition could increase debt and reduce financial flexibility. WEX also agreed to acquire Benaissance for $80 million, subject to approvals and customary conditions.
- Foreign-currency movements and translation remain risks; accumulated other comprehensive loss was $109.0 million, largely reflecting currency translation. WEX’s foreign-currency hedging approach changed during the quarter.
Key facts for investors to verify
- How much of the decline in GAAP earnings reflects recurring operating performance versus the prior-year divestiture gain, tax differences, derivatives, acquisition amortization and UNIK-related accretion.
- The final FDIC restitution and penalty amounts, and whether Higher One can fulfill its indemnification obligations.
- EFS closing, final financing terms, dilution from the share issuance, integration costs and any termination-fee exposure; also the status and cost of the Benaissance acquisition.
- Fleet revenue and earnings sensitivity to fuel prices, hedge coverage after Q1 2016, and foreign-exchange exposure.
- Credit quality, receivable aging, funding needs and compliance with debt covenants as acquisitions and securitized borrowing affect the balance sheet.