WEX Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. WEX provides corporate payment solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $370.9 million | $303.9 million | $725.7 million | $595.2 million |
| Operating income | $102.9 million | $47.6 million | $181.3 million | $108.3 million |
| Net income attributable to WEX shareholders | $39.3 million | $17.1 million | $87.9 million | $46.5 million |
| Diluted EPS | $0.90 | $0.40 | $2.02 | $1.08 |
| Operating margin | 27.7% | 15.7% | 25.0% | 18.2% |
- Q2 revenue increased 22% year over year; operating income more than doubled. First-half revenue grew 22% and operating income 67%.
- For the first half, cash used in operating activities was $77.9 million, versus $91.8 million used a year earlier. Investing activities used $37.4 million, including $34.6 million of capital expenditures. Financing activities used $68.2 million, compared with $161.4 million provided in the prior-year period.
- At June 30, cash and cash equivalents were $310.8 million, restricted cash $25.0 million, and gross debt $2.54 billion. Current assets were $3.67 billion and current liabilities $2.55 billion. Borrowing capacity under the revolving credit facility was $516.3 million, subject to covenants.
- Gross debt increased from $2.46 billion at year-end 2017. WEX reported $1.74 billion of term loans, $400 million of 4.75% notes due 2023, and no revolving-credit borrowings. The 2016 Credit Agreement’s weighted-average effective rate was 4.4%; $1.3 billion of variable-rate borrowings was covered by swaps.
Segments and material comparisons
- Fleet Solutions: Q2 revenue rose 21% to $241.5 million. Segment adjusted operating income was $113.7 million versus $91.0 million. Vehicles serviced increased 8% to about 11.8 million; fuel transactions rose 7%. Higher fuel prices and organic volume growth contributed to revenue gains. Credit-loss expense fell to $11.0 million from $15.1 million, with losses at 11.2 basis points of fuel expenditures versus 20.5 basis points.
- Travel and Corporate Solutions: Q2 revenue rose 38% to $75.8 million, including AOC-related account servicing revenue; segment adjusted operating income increased to $34.4 million from $21.5 million. Purchase volume grew 16% to $8.93 billion.
- Health and Employee Benefit Solutions: Q2 revenue rose 10% to $53.6 million; segment adjusted operating income increased to $13.3 million from $12.2 million. Average U.S. SaaS accounts grew 20% to about 10.7 million.
Outlook, accounting, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said cash generation and available financing were expected to fund cash needs for at least the next 12 months.
- WEX adopted Topic 606 on January 1, 2018 using the modified retrospective method; prior-year comparisons were not restated. For Q2, adoption increased reported revenue and expenses by approximately $11.9 million, with only a $0.1 million increase in operating income. For the first half, revenue and expenses each increased by about $21.2 million, with a $0.2 million operating-income increase. This limits direct comparability of reported revenue growth.
- The 2017 Tax Act reduced the U.S. federal corporate tax rate; the effective tax rate was 26.1% in Q2 versus 39.0% a year earlier. Estimates related to the transition tax and other tax provisions remained subject to further analysis.
- Foreign-currency losses were $26.7 million in Q2 and $26.3 million in the first half, compared with gains in the comparable 2017 periods. First-half unrealized gains on financial instruments were $16.2 million, principally reflecting interest-rate swaps.
- Operating cash flow remained negative, primarily because receivables grew with higher fuel prices and transaction volumes. WEX noted that receivables and payables can materially affect working-capital needs. Factoring capacity may be reduced or withdrawn, potentially affecting liquidity.
- Other risks identified include fuel-price and interest-rate changes, foreign-exchange exposure, credit and fraud losses, acquisitions and integration, technology and cybersecurity, regulatory requirements, leverage, and key agreements. WEX reported compliance with material debt covenants, a well-capitalized WEX Bank, and no material legal proceedings or reasonably possible material litigation losses.
Most important facts for investors to verify
- How much reported revenue growth reflects underlying volume and pricing versus Topic 606 presentation changes and acquisitions.
- Whether receivables growth, negative operating cash flow, and funding needs remain manageable as fuel prices and volumes change.
- Whether lower Fleet Solutions credit losses persist and how fraud, delinquencies, and charge-offs develop.
- Debt levels, interest-rate exposure, swap coverage, covenant headroom, and access to deposits, securitization and factoring facilities.
- How foreign-exchange movements and outstanding tax estimates affect future earnings and cash flow.