WEX Inc. 2015 Form 10-K Summary
Business context and reporting period
WEX provides corporate payment solutions across fleet, travel and corporate payments, and health and employee benefits. This filing covers the fiscal year ended December 31, 2015. Beginning in the fourth quarter, WEX reported three segments and recast prior-year segment information to match. Fleet Solutions accounted for approximately 63% of revenue, Travel and Corporate Solutions 23%, and Health and Employee Benefit Solutions 14%.
Financial performance and liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $854.6 million | $817.6 million | +4.5% |
| Operating income | $228.8 million | $306.2 million | -25.3% |
| Operating margin | 26.8% | 37.5% | -10.7 percentage points |
| Net earnings attributable to shareholders | $101.9 million | $202.2 million | -49.6% |
| Diluted EPS | $2.62 | $5.18 | -49.4% |
| Operating cash flow | $445.1 million | $296.4 million | +50.2% |
| Capital expenditures | $63.5 million | $58.1 million | +$5.4 million |
Cash and cash equivalents were $280.0 million at year-end. WEX had $669.8 million outstanding under its revolving credit and term-loan facilities, with $480.4 million of facility availability, and $400 million of 4.75% senior notes due 2023. It also reported $82.0 million of securitized debt, $870.5 million in deposits, and $50.0 million of other debt. Deposits primarily fund WEX Bank’s payment operations and are not equivalent to unrestricted corporate cash. Management stated that available resources were adequate for operating, investing, and financing needs and that it could fund cash needs for at least the next 12 months.
Material changes versus the prior period
- Revenue rose, but reported operating income and shareholder earnings fell sharply. The comparison was affected by fuel-price derivative gains of $5.8 million in 2015 versus $46.2 million in 2014, and a $27.5 million Pacific Pride sale gain in 2014. WEX also recorded $9.0 million of restructuring charges in 2015.
- Lower fuel prices weighed on Fleet Solutions payment-processing revenue: segment revenue declined 4% to $539.0 million, despite payment-processing transactions increasing 10% to 343.0 million. Domestic average fuel prices fell 28% to $2.55 per gallon.
- Travel and Corporate Solutions revenue increased 7% to $195.4 million; purchase volume grew 14% to $19.4 billion. Health and Employee Benefit Solutions revenue rose 66% to $120.3 million, primarily reflecting the 2014 Evolution1 acquisition.
- Adjusted net income, a non-GAAP measure, was $189.1 million versus $204.6 million. WEX reported a 40.7% effective tax rate, up from 33.7%, citing valuation allowances and nondeductible acquisition-related expenses, among other items.
- Operating cash flow increased partly because accounts receivable declined as fuel prices fell. Investing cash outflow was $126.7 million, compared with $904.0 million in 2014, when WEX funded major acquisitions.
Outlook, risks, contingencies, and unusual items
- EFS acquisition: WEX agreed to acquire EFS for $1.1 billion in cash and approximately 4.01 million WEX shares. At year-end the deal remained pending, with FTC review extended by a second request. Financing commitments totaled $2.125 billion; completion, integration, added leverage, and potential termination fees of $45 million or $70 million were material uncertainties.
- Fuel exposure: Management estimated that about 25% of company revenue depended on fees tied to fuel purchase prices; each one-cent decline in average domestic fuel prices was estimated to reduce annual revenue by about $1.1 million. WEX suspended new fuel-derivative purchases in late 2014; remaining coverage applied to approximately 20% of anticipated U.S. exposure through the first quarter of 2016. The company expected to be unhedged thereafter.
- Funding and interest rates: A portion of borrowings carried variable rates, while WEX Bank relied on brokered deposits, including a $309.0 million NOW-account program balance associated with a single partner. Deposit access, rising rates, credit-facility refinancing, and compliance with debt covenants could affect liquidity and earnings.
- Credit and receivables: Approximately 86% of $1.6 billion in trade receivables was current; one customer represented 11% of the balance. Fleet credit losses were 9.4 basis points of customer spend, down from 11.7 basis points in 2014. Economic weakness, fraud, or deterioration in customer credit could increase losses.
- Regulatory matter: WEX Bank paid a $1.75 million civil penalty under an FDIC consent agreement concerning Higher One account marketing and fee disclosures. Higher One deposited approximately $31 million for student restitution, removing the stated restitution-payment contingency for the Bank, subject to distribution of the funds.
- Other risks include currency movements, competition and margin pressure, cyber and service interruptions, acquisition integration, regulatory changes, and possible impairment of goodwill or intangible assets. WEX reported no impairment charge in its 2015 annual testing.
- Management’s stated priorities were growth in core verticals, organizational efficiencies and scaling, and expansion of global offerings. The filing provides no specific 2016 revenue or earnings guidance. WEX said it expected future GAAP tax rates, excluding discrete items, to be within its historical range.
Most important facts for investors to verify
- Whether and when the EFS acquisition closed, the final financing and share issuance, and subsequent leverage and covenant headroom.
- How reported earnings compare with adjusted net income, including the effects of derivatives, restructuring, acquisition costs, amortization, and the prior-year divestiture gain.
- Revenue and earnings sensitivity to fuel prices after the remaining hedge coverage expired, and progress in growing non-fleet businesses.
- WEX Bank’s deposit concentration and funding costs, variable-rate debt exposure, and the quality and concentration of receivables.
- Whether restructuring produces the expected savings and whether the FDIC restitution plan and other regulatory requirements are fully resolved.