WEX Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. WEX provides fleet and other corporate payment solutions through Fleet Payment Solutions and Other Payment Solutions. Unless otherwise stated, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $178.3 | $153.1 | $343.7 | $293.2 |
| Operating income | $67.1 | $62.9 | $127.6 | $120.8 |
| Operating margin | 37.6% | 41.1% | 37.1% | 41.2% |
| Income before taxes | $67.3 | $90.7 | $112.5 | $127.5 |
| Net earnings attributable to WEX | $42.2 | $30.3 | $70.9 | $53.6 |
| Diluted EPS | $1.08 | $0.78 | $1.81 | $1.37 |
- Q2 revenue grew 16% year over year; operating income rose 7%, while attributable earnings increased 39%. First-half revenue rose 17%, operating income 6%, and attributable earnings 32%.
- Fleet Payment Solutions Q2 revenue grew 14% to $131.0 million; segment operating income increased 4% to $53.4 million. Other Payment Solutions revenue rose 23% to $47.2 million and operating income rose 18% to $13.6 million.
- Q2 GAAP net margin was 23.7%, versus 19.8% a year earlier. Operating margin declined as operating expenses grew faster than revenue; salary, depreciation and amortization, and technology costs increased, in part due to Fleet One.
- Q2 diluted EPS was $1.08. The company also reported non-GAAP adjusted net income of $41.1 million for Q2, versus $39.1 million; this measure adjusts for items including derivative fair-value changes and acquired-intangible amortization.
Cash flow, balance sheet and debt
- First-half operating cash flow under GAAP was $32.4 million, versus a use of $50.6 million in 2012. WEX’s non-GAAP “management operating cash” was $81.5 million, versus $210.5 million; this measure adjusts for deposit and federal-funds movements.
- First-half investing cash use was $14.1 million; financing cash provided was $86.3 million. Cash and cash equivalents were $299.6 million at June 30, up $101.9 million from year-end 2012.
- At June 30, accounts receivable was $1.832 billion net of reserves; deposits were $987.8 million. Approximately 96.6% of gross receivables were current or less than 30 days past due, and 99.0% were less than 60 days past due.
- Total financing debt was $692.5 million: $292.5 million under the term loan and $400 million of senior notes. WEX reported $694.8 million of unused revolving capacity and said it was in compliance with material debt covenants.
- In January, WEX issued $400 million of 4.75% senior notes due 2023 and refinanced its credit agreement. The notes are unsecured and structurally subordinated to liabilities of non-guarantor subsidiaries, including WEX Bank. WEX Bank deposits are a key funding source for receivables and are subject to regulatory capital requirements.
Changes, outlook and risks
- Fleet One, acquired in October 2012, contributed materially to fleet transaction and revenue growth. Q2 average vehicles serviced rose 10% to 7.4 million; fuel transactions increased 12% to 93.4 million. Corporate charge-card purchase volume grew 13% to $3.2 billion.
- Q2 financing interest expense increased $5.1 million, mainly reflecting the new fixed-rate notes replacing lower-rate variable borrowings. Management expected financing interest expense for the remainder of 2013 to exceed comparable 2012 periods.
- WEX estimated that an eight-month, 10-basis-point reduction in the domestic MasterCard interchange rate beginning July 29, 2013, could reduce remaining-2013 earnings by $2.7 million.
- Management expected 2013 capital expenditures of $40–$45 million, including about $15 million for data-center consolidation, and believed available resources could fund cash needs for at least 12 months. No full-year revenue or earnings guidance is provided in the filing.
- Fuel-price derivatives are not designated for hedge accounting, so fair-value changes affect earnings. Q2 derivative gains were $8.6 million, down from $20.8 million; management said realized derivative losses are generally offset by higher payment-processing revenue. Future fuel prices and derivative valuations remain uncertain.
- Foreign-currency translation reduced Q2 comprehensive income by $46.4 million and contributed to lower accumulated other comprehensive income. International expansion, currency movements, economic conditions, credit losses, technology and cybersecurity events, regulation, key agreements, and acquisition integration are identified risks.
- Q2 earnings comparisons are affected by a $31.1 million Australian tax-law charge recorded in Q2 2012 and a $9.75 million tax-refund-related gain in 2012. Lower prior-year-comparable tax expense helped lift 2013 earnings despite lower pretax income. Management said ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported growth reflects Fleet One and other acquisitions versus underlying organic growth, and whether acquired operations meet expected performance.
- Whether receivables, credit-loss reserves and deposit funding remain sound as transaction volumes and balances grow.
- The impact of the 2013 debt refinancing on interest expense, covenant headroom and liquidity, including the structural subordination of the notes.
- Actual earnings impact of the interchange-rate reduction and the sensitivity of reported results to fuel-price derivatives and foreign exchange.
- Whether capital spending, data-center consolidation and international expansion remain within management’s stated expectations.