WEX Inc. — Q1 2015 Form 10-Q
Period: Three months ended March 31, 2015; unaudited. Comparisons are with Q1 2014 unless stated otherwise. Figures are in U.S. dollars; financial statement amounts below are in millions unless noted.
Business context and key financial results
WEX provides fleet and other corporate payment solutions. Its Fleet Payment Solutions segment includes the European fleet business acquired from ExxonMobil in December 2014; Other Payment Solutions includes Evolution1, acquired in July 2014.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $202.3 | $182.1 | +11.1% |
| Operating income | $48.2 | $61.5 | -21.6% |
| Operating margin | 23.9% | 33.8% | -9.9 percentage points |
| Net income attributable to WEX | $22.3 | $36.5 | -38.9% |
| Diluted EPS | $0.57 | $0.93 | -38.7% |
| Net cash from operating activities | $171.6 | $(77.8) | Improved $249.4 |
Net income attributable to WEX margin was approximately 11.0%, versus 20.1% a year earlier. Interest expense on financing was $12.1 million, up from $7.4 million; the quarter also included a $4.4 million net foreign-currency loss and a $2.7 million net gain on fuel derivatives.
Material changes and segment performance
- Fleet Payment Solutions revenue fell 5% to $128.5 million and segment income before taxes fell 57% to $17.8 million. Lower fuel prices reduced payment-processing revenue: average domestic fuel price declined 29%, while average expenditure per payment-processing transaction fell 24%. Vehicle count serviced rose 19% to about 9.3 million, primarily reflecting the European fleet business.
- Other Payment Solutions revenue rose 58% to $73.8 million, primarily due to Evolution1 and higher virtual-card activity. Segment income before taxes increased 5% to $16.8 million; higher operating costs, foreign-currency losses and acquisition-related financing interest tempered revenue growth. Purchase volume increased 37% to $5.0 billion.
- Consolidated operating expenses rose 28%, including $8.6 million of restructuring expense and higher personnel, amortization and acquisition-related costs. A $1.2 million gain on the sale of rapid! PayCard partly offset expenses.
- Management reported adjusted net income of $42.9 million versus $41.6 million. This is a non-GAAP measure and is not a substitute for GAAP results; the filing reconciles it to attributable net earnings.
Financial position, liquidity and cash flow
- Cash and cash equivalents were $511.0 million at March 31, compared with $284.8 million at year-end. Operating cash flow was $171.6 million; investing cash flow was $4.7 million and financing cash flow was $51.2 million. The operating cash-flow improvement reflected working-capital movements, including accounts payable and receivables.
- Total assets were $4.253 billion and total liabilities were $3.189 billion. Accounts receivable, net, was $1.805 billion; approximately 95% was current and 98% was less than 60 days past due. The allowance for credit losses was $11.5 million.
- Balance-sheet borrowings included $815.9 million under revolving and term-loan facilities, $400.0 million of notes and $51.2 million of other debt. The revolver was $700 million, with $336.5 million drawn at quarter-end. The term loan was $479.4 million; the notes bear 4.75% interest and mature in 2023. Management stated it was in compliance with material debt covenants.
- Deposits were $1.134 billion, up from $979.6 million at year-end. Deposits fund receivables and are subject to regulatory capital requirements. Management said available funding and cash resources were adequate for expected needs and that it could fund cash needs for at least the next 12 months.
- Capital expenditures were $12.1 million in Q1; management expected full-year 2015 capital expenditures of approximately $65–$70 million. WEX repurchased $22.0 million of shares during the quarter.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management said future GAAP tax rates should be within the range of historical rates, while noting rates may vary with jurisdictional earnings mix and other factors.
- Management warned that persistently low fuel prices could pressure future revenue and earnings. The company had suspended new fuel-derivative purchases in Q4 2014 and continued to assess the program; derivatives are not designated for hedge accounting, so fair-value changes affect reported earnings.
- Foreign-exchange movements, especially in the Australian dollar, euro and British pound, contributed to Q1 losses. WEX expanded its partial currency-hedging program but retained unhedged exposure.
- The company recorded $8.6 million of workforce-related restructuring costs as part of a global efficiency and operating review; payments were expected during the remainder of 2015 and 2016. The quarter also included acquisition-related amortization, currency translation losses, and the rapid! PayCard divestiture gain.
- On April 28, 2015, WEX entered a one-year Australian receivables securitization facility for up to AUD 125 million (approximately USD 100 million), subject to terms and additional contributions, at a variable interest rate.
- Other disclosed risks include acquisition integration and execution, credit losses, fuel-price volatility, technology and cybersecurity, regulatory changes, interest rates, litigation and foreign-currency exposure. WEX reported no material legal proceedings and said ordinary-course claims were not expected to have a material adverse effect.
Important facts for investors to verify
- How much of revenue growth and segment performance reflects acquisitions versus underlying organic activity, particularly Evolution1 and the European fleet portfolio.
- Whether lower fuel prices continue to reduce fleet payment-processing revenue, and how derivative settlements and the suspended purchasing program affect earnings and cash flow.
- Whether restructuring delivers expected efficiency benefits and what additional integration, amortization or other acquisition costs may arise.
- Trends in credit quality, receivable aging, reserves and the new revolving-credit offering to small-fleet customers.
- Debt, deposit funding, covenant headroom and the cost and availability of the new Australian securitization facility.
- The effects of currency movements, partial hedging, and the company’s exposure to unhedged foreign balances.