WEX Inc. — FY 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019; it is not a standalone fourth-quarter filing. WEX provides payment and software solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $1,723.7 million | $1,492.6 million | Up 15% |
| Operating income | $385.8 million | $380.6 million | Up 1% |
| Operating margin | 22.4% | 25.5% | Down 3.1 percentage points |
| Net income attributable to shareholders | $99.0 million | $168.3 million | Down 41% |
| Diluted earnings per share | $2.26 | $3.86 | Down 41% |
| Cash provided by operating activities | $663.2 million | $400.2 million | Up $262.9 million |
| Cash used for investing activities | $990.6 million | $254.2 million | Higher primarily from acquisitions |
Revenue growth reflected contributions across all three segments and acquired businesses. Fleet Solutions revenue rose 6% to $1,038.4 million; Travel and Corporate Solutions rose 21% to $367.8 million; and Health and Employee Benefit Solutions rose 48% to $317.5 million. Segment adjusted operating income, a non-GAAP measure, increased to $734.6 million from $640.0 million.
Profit attributable to shareholders fell despite higher revenue and slightly higher operating income. Financing interest expense increased to $134.7 million from $105.0 million; WEX also recorded a $34.7 million unrealized loss on financial instruments, versus a $2.6 million gain in 2018. A $57.3 million accretion of the redeemable non-controlling interest in the U.S. Health business reduced earnings attributable to shareholders. The effective tax rate was 28.3%, compared with 28.9%.
Balance sheet, debt and liquidity
- At year-end, cash and cash equivalents were $810.9 million; restricted cash was $170.4 million and was not available for general operations. Total assets were $8.30 billion and total liabilities were $6.21 billion.
- Gross debt was $2.97 billion, up from $2.38 billion at year-end 2018. This included $2.38 billion of term loans and $400 million of 4.75% senior notes. The term loans had a 4.0% weighted-average effective rate. WEX reported no year-end borrowings on its $820 million revolving facility and $768.7 million of remaining capacity, subject to covenants.
- WEX Bank deposits totaled $1.45 billion. The company reported $2.66 billion of net accounts receivable; 96% of trade receivables were 29 days or less past due. The credit-loss provision was $65.7 million, versus $66.5 million in 2018.
- Management said available cash-generating capacity and funding sources were expected to meet cash needs for at least the next 12 months. Operating cash flow benefited in part from higher accounts payable and lower accounts receivable associated with a factoring arrangement; it should not be read as solely reflecting earnings growth.
Material changes and unusual items
- WEX acquired Noventis, Discovery Benefits, Pavestone Capital and Go Fuel Card in 2019; reported acquisition cash outflows were $882.4 million. It also converted the Chevron fleet portfolio to its platform during the year.
- Fleet payment-processing transactions increased 10% to 505.3 million, while average U.S. fuel prices fell 5%. Lower fuel prices and foreign exchange reduced Fleet Solutions payment-processing revenue, partly offset by volume growth and acquisitions.
- Fourth-quarter 2019 revenue was $440.0 million, operating income $103.9 million, and shareholder-attributable net income $54.4 million. The quarter included an immaterial prior-period adjustment that reduced revenue and sales and marketing expense by $14.3 million.
- In January 2020, WEX agreed to acquire eNett and Optal for approximately $1.3 billion in cash plus about 2.0 million WEX shares, subject to customary closing conditions, including regulatory approvals. The filing describes the transaction as pending, not completed. A February 2020 credit-agreement amendment would revise leverage covenant limits if the acquisition closes.
Outlook, commentary and risks
The filing provides no specific forward revenue or earnings guidance. Management described growth across segments, continued investment in cloud technology and data capabilities, and acquisition-led expansion as priorities. It cited successful migration of its North American fleet platform to a private cloud and expected technology investments to improve scalability, product development and costs.
Key risks include fuel-price sensitivity (management estimated that each one-cent decline in average domestic fuel prices could reduce 2020 revenue by approximately $1.6 million), credit and fraud losses, competitive pressure on fees and margins, foreign exchange and interest-rate exposure, reliance on brokered deposits and strategic relationships, and substantial indebtedness. The company reported $9.5 billion of unused customer credit commitments, many of which it does not expect to be drawn, and minimum-volume fuel purchase penalties of up to $49.6 million if no qualifying purchases were made through 2024.
WEX was cooperating with an SEC investigation related to its Brazil subsidiary and prior financial-statement revisions; the outcome was not predictable. Management said material weaknesses identified in 2018 had been remediated by year-end 2019, while acquired businesses representing 8.9% of consolidated revenue were excluded from the internal-control assessment. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The filing reported no material legal proceedings or reasonably possible legal loss contingency.
Important facts for investors to verify
- How much of 2019 revenue and cash-flow growth came from acquisitions, customer migrations and receivables factoring, versus organic and recurring growth.
- The drivers of weaker shareholder-attributable earnings, including the $57.3 million non-controlling-interest accretion and non-cash derivative losses, and the recurring versus non-recurring nature of these items.
- Debt and covenant headroom, refinancing needs, and the financing and leverage impact if the pending eNett and Optal acquisition closes.
- Progress and any developments in the SEC investigation, internal-control remediation, and control integration at acquired businesses.
- Exposure to fuel-price declines, credit deterioration, deposit funding costs, interest rates and margin competition.