WEX Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; unaudited. WEX provides fleet and other corporate payment solutions through its Fleet Payment Solutions and Other Payment Solutions segments. Unless stated otherwise, figures below are in U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $191.5m | $161.0m | $535.2m | $454.2m |
| Operating income | $77.9m | $51.3m | $205.5m | $172.1m |
| Net earnings attributable to WEX | $43.8m | $14.3m | $114.7m | $67.9m |
| Diluted EPS | $1.12 | $0.37 | $2.93 | $1.74 |
| Operating margin | 40.7% | 31.9% | 38.4% | 37.9% |
- Q3 revenue rose 19% year over year; operating income increased 52% and WEX-attributable earnings increased 207%. The Q3 effective tax rate was approximately 37.5%, compared with 59.4% a year earlier.
- Nine-month GAAP net cash used in operating activities was $25.3m, similar to the prior-year outflow. Investing activities used $30.8m; financing activities provided $251.5m. Cash increased $193.5m to $391.2m.
- Management’s non-GAAP “management operating cash” measure showed $194.2m of inflows for the first nine months, principally reflecting its treatment of deposit and borrowed-federal-funds changes. It is not a substitute for GAAP operating cash flow.
- At September 30, total assets were $3.66bn, accounts receivable net of reserves were $1.91bn, and total liabilities were $2.76bn. Customer deposits were $1.16bn.
- Debt included $400m of 4.75% senior notes due 2023 and $288.8m outstanding under the term loan, or about $688.8m combined. The $700m revolving facility had no borrowings. The notes’ reported fair value was $360m versus $400m carrying value.
- Receivables were $1.92bn gross; 96.4% were current or less than 30 days past due and 99.0% were less than 60 days past due. The credit-loss reserve was $9.0m.
Material changes and operating drivers
- Fleet Payment Solutions revenue grew 16% in Q3 to $136.9m; segment operating income rose 6% to $58.4m. Average vehicles serviced increased 10% to 7.56m, and payment-processing transactions grew 16%. Fleet One, acquired in October 2012, contributed to volume, revenue, expenses, and higher average spend per transaction.
- Other Payment Solutions revenue grew 27% to $54.7m; operating income was $19.5m versus a $3.6m loss. Growth reflected higher corporate-card volume and acquisitions including UNIK and CorporatePay. The prior-year quarter included a $16.2m goodwill impairment, contributing to the year-over-year earnings improvement.
- Q3 worldwide corporate charge-card purchase volume rose 24% to $4.0bn. The filing attributes about half of growth in total payment-processing transactions to Fleet One and the remainder to organic growth.
- Q3 companywide net realized and unrealized fuel-derivative losses were $3.6m, compared with $14.0m in Q3 2012. These derivatives are not designated for hedge accounting, so fair-value changes affect earnings.
- Nine-month earnings benefited from a lower effective tax rate than in 2012. The prior-year period included Australian tax-law charges affecting deductions for certain intangible assets; the filing reports a $31.1m tax charge in 2012 and a $9.75m reduction in a related former-shareholder refund payable.
Outlook, risks, and unusual items
- Management expected 2013 capital expenditures of $40m–$45m, including about $15m for data-center consolidation, and stated it believed cash needs could be funded for at least 12 months. The filing does not provide numerical earnings or revenue guidance.
- The board authorized a new share-repurchase program of up to $150m through September 30, 2017; no shares were repurchased in Q3. The company had repurchased $17.9m of treasury shares during the first nine months.
- Key disclosed risks include economic and fleet activity trends, fuel-price volatility, credit losses, cybersecurity and technology disruptions, customer or merchant agreement renewals, acquisition integration, regulation of WEX Bank and financial activities, foreign-exchange movements, interest rates, derivative valuation, litigation, and international expansion risks.
- The $400m senior notes are unsecured and structurally subordinated to liabilities of subsidiaries that do not guarantee them, including WEX Bank. WEX reported compliance with material credit-agreement covenants. Letters of credit totaled $5.2m.
- Management said ordinary-course litigation was not expected to have a material adverse effect; it reported no material legal proceedings as of the filing date. Disclosure controls were assessed as effective, with no material change in internal control reported for the quarter.
Important facts for investors to verify
- How much of revenue, volume growth, and expense growth reflects Fleet One, UNIK, and CorporatePay acquisitions versus organic performance.
- Whether receivables, credit-loss reserves, and deposit funding remain appropriate as transaction volume and receivables grow.
- The effect of the debt structure, interest expense, revolver availability, and note covenants on future liquidity and financial flexibility.
- How fuel-price derivative losses and gains may affect reported earnings, and the sensitivity of diesel derivative valuations to unobservable inputs.
- Whether the stated capital-expenditure range, data-center project costs, and share-repurchase authorization remain consistent with cash generation and business needs.
- The 2012 balance-sheet figures were adjusted for acquisition purchase-price allocation updates and correction of an immaterial deferred-tax classification error; the filing says the correction did not affect income or cash flows.