WEX Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results; dollar amounts below are in millions unless stated otherwise. WEX provides corporate payment solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $354.8 | $291.4 | +21.8% |
| Operating income | $78.4 | $60.8 | +29.0% |
| Operating margin | 22.1% | 20.8% | +1.3 percentage points |
| Net income attributable to WEX shareholders | $48.6 | $29.4 | +65.4% |
| Diluted EPS | $1.12 | $0.68 | +$0.44 |
| Adjusted net income, non-GAAP | $78.7 | $52.9 | +48.8% |
| Cash from operating activities | $85.2 | $(60.9) | +$146.2 |
Revenue growth was broad-based: Fleet Solutions revenue rose 21% to $230.4 million; Travel and Corporate Solutions rose 40% to $66.8 million; Health and Employee Benefit Solutions rose 9% to $57.7 million. Segment adjusted operating income, a non-GAAP measure, increased to $145.8 million from $121.4 million. The filing attributes growth to organic activity, higher fuel prices and transaction volumes, customer growth, and the AOC acquisition in Travel and Corporate Solutions.
Net income also reflected $13.5 million of unrealized interest-rate-swap gains, versus $1.6 million a year earlier. The prior-year period included an $8.4 million foreign-currency gain, compared with $0.4 million in Q1 2018. The effective tax rate declined to 24.0% from 33.3%, primarily following the U.S. corporate tax rate reduction under the 2017 Tax Act.
Cash, debt and liquidity
- Cash and cash equivalents were $373.2 million at March 31, 2018; restricted cash was another $26.7 million.
- Gross debt was $2.47 billion, versus $2.46 billion at December 31, 2017. Net balance-sheet debt was reported as $300.7 million short-term and $2.13 billion long-term. WEX had $1.0 million drawn on its $570 million revolving credit facility and $516.4 million of stated borrowing capacity.
- Operating cash flow was positive $85.2 million, compared with an outflow of $60.9 million in Q1 2017. Investing cash use was $17.1 million, including $14.8 million of property, equipment and software purchases. Financing cash use was $192.6 million, mainly from net repayments under the credit facility and deposit reductions.
- Management said cash generation and available financing sources were expected to cover cash needs for at least the next 12 months. WEX Bank met regulatory requirements to be considered well-capitalized; WEX reported compliance with material debt covenants.
Material changes and unusual items
- WEX adopted revenue standard Topic 606 on January 1, 2018 using the modified retrospective method; 2017 comparatives were not restated. The adoption increased Q1 2018 reported revenue and expenses by approximately $14.9 million from partner payments reclassified to sales and marketing, and reduced each by approximately $5.6 million from network fees presented as a reduction of revenue. These changes affect period-to-period comparability.
- On January 17, 2018, WEX repriced its secured term loans, reducing the applicable Tranche B interest-rate margin by 50 basis points and increasing Tranche B borrowings from $1.182 billion to $1.335 billion. The company recorded $1.1 million of debt-extinguishment loss and $3.0 million of third-party costs.
- Five interest-rate swaps were intended to fix rates on $1.3 billion of variable-rate borrowings. Variable-rate borrowings under the credit agreement totaled $1.7 billion at quarter-end.
- Q1 2018 included $5.7 million of restructuring and other costs. The filing reported total restructuring liabilities of $3.0 million at quarter-end; management expected additional restructuring costs to be immaterial based on current plans.
- WEX recorded a $60.6 million provisional one-time tax benefit related to the 2017 Tax Act in Q4 2017; the estimate was unchanged at March 31, 2018. The company was still evaluating certain tax provisions, including GILTI, and said it did not expect the GILTI impact to be material.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management noted that quarterly results are not necessarily indicative of full-year results. Principal risks identified include economic and fuel-price effects on transaction activity, credit and fraud losses, interest-rate and foreign-exchange movements, competition, acquisition integration and synergy execution, technology and cybersecurity incidents, regulatory changes, leverage, and litigation. WEX said reasonably possible losses from legal proceedings were not material; it reported no material legal proceedings at filing. A European receivables factoring arrangement supports working capital, but capacity may be reduced or withdrawn, which could adversely affect liquidity. Available federal funds lines were reduced from $275 million to $150 million effective April 1, 2018.
Important facts for investors to verify
- Assess underlying growth and margins after separating Topic 606 presentation changes from economic growth.
- Review the quality and cash conversion of earnings, including receivables growth, credit-loss reserves, factoring activity, and restricted cash.
- Track debt, variable-rate exposure, swap fair-value gains, refinancing terms, and covenant headroom.
- Monitor the final tax accounting for the 2017 Tax Act and GILTI, as well as the impact of acquisition-related amortization and costs.
- Confirm the completion and financial contribution of AOC integration and whether segment growth and profitability persist.