WEX Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are with December 31, 2012. Amounts below are in millions unless stated otherwise. WEX provides fleet and other corporate payment solutions.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $165.4 | $140.1 | +18.0% |
| Operating income | $60.5 | $58.0 | +4.4% |
| Operating margin | 36.6% | 41.4% | Lower |
| Net income attributable to WEX | $28.7 | $23.2 | +23.5% |
| Diluted EPS | $0.73 | $0.59 | +23.7% |
| GAAP operating cash flow | $28.6 | $(38.2) | Improved |
- Fleet Payment Solutions revenue rose 15% to $126.0 million; Other Payment Solutions revenue rose 27% to $39.3 million. Growth reflected acquisitions, particularly Fleet One, as well as higher transaction activity and corporate card volume.
- Total operating expenses rose 27.6% to $104.8 million, outpacing revenue growth; salary and personnel costs and depreciation and amortization increased substantially. The provision for credit losses fell to $3.8 million from $5.0 million.
- Net realized and unrealized fuel-derivative losses were $7.8 million, compared with $18.8 million a year earlier. Financing interest expense increased to $7.3 million from $2.3 million, including a $1.0 million deferred-loan-cost write-off.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $349.7 million; accounts receivable, net of reserves, were $1.781 billion; and total assets were $3.480 billion.
- Financing debt was $696.3 million: $296.3 million under the term loan and $400 million of senior notes. WEX reported no revolving-credit borrowings and $700 million of available revolving capacity. The notes bear 4.75% interest and mature in 2023; the term loan bears LIBOR plus 175 basis points.
- Deposits were $1.026 billion, used by WEX Bank to help fund receivables. Management reported approximately $140 million of federal-funds lines available with no outstanding balance, and stated it believed cash needs could be funded for at least 12 months.
- Cash increased $152.1 million during the quarter. GAAP operating cash flow was $28.6 million, while management’s non-GAAP “management operating cash” measure showed $115.4 million of inflows; the latter includes changes in deposits and borrowed federal funds. Investing activities used $5.1 million.
- WEX repurchased 240,300 shares for $17.9 million. Management said it expected financing interest expense for the rest of 2013 to exceed comparable prior-year periods.
Material changes, outlook and risks
- WEX refinanced and amended its credit agreement in January 2013 and issued $400 million of 4.75% senior notes, primarily to repay revolving-credit borrowings and for general corporate purposes. The notes are unsecured and structurally subordinated to liabilities of non-guarantor subsidiaries, including WEX Bank.
- Fleet One, acquired in October 2012, materially affected year-over-year growth. Average vehicles serviced rose 12% to 7.5 million; fuel transactions increased 11% to 87.6 million, or 4% excluding Fleet One. Corporate charge-card purchase volume increased 20% to $2.6 billion.
- Fuel derivatives do not qualify for hedge accounting, so fair-value changes affect reported earnings. The quarter-end derivative liability was $7.6 million. WEX said derivative losses are offset in part by higher payment-processing revenue when fuel prices rise and expected to continue the program.
- A merchant interchange settlement was preliminarily approved in November 2012. WEX anticipated a 10-basis-point reduction in the domestic MasterCard credit-card interchange rate for eight months, expected to begin in the second half of 2013.
- Management identified risks including economic and fleet activity, fuel-price and interest-rate volatility, credit losses, foreign exchange, technology and cybersecurity, acquisition integration, key agreements, regulation, and litigation. It reported ordinary-course litigation was not expected to have a material adverse effect; disclosure controls were effective at quarter-end.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management cautioned that quarterly results are not necessarily indicative of full-year results.
Investor verification priorities
- Separate organic growth from the contribution of Fleet One and other acquisitions; review integration costs and remaining purchase-price allocation estimates.
- Track operating-expense growth and margins against revenue, and assess how much of earnings improvement depends on derivative valuation changes and related offsets.
- Review receivables, delinquency trends, credit-loss reserves, and WEX Bank’s deposit funding, including regulatory capital requirements.
- Assess debt service, covenants, interest-rate exposure, and the restrictions and structural subordination affecting the 2023 notes.
- Verify the timing and financial effect of the anticipated interchange-rate reduction and monitor fuel-price derivatives and settlement exposure.
- Distinguish GAAP operating cash flow from management operating cash, which incorporates deposit and federal-funds movements.