WEX Inc. — Q2 2014 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. Unaudited results; financial amounts below are in millions of dollars unless noted. WEX provides fleet and other corporate payment solutions.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $201.6 | $178.3 | $383.6 | $343.7 |
| Operating income | $80.3 | $67.1 | $141.9 | $127.6 |
| Net earnings attributable to WEX | $43.3 | $42.2 | $79.9 | $70.9 |
| Diluted EPS | $1.11 | $1.08 | $2.05 | $1.81 |
- Q2 revenue increased 13.1%; operating income increased 19.7%. Operating margin was approximately 39.8%, versus 37.6%.
- Q2 net earnings attributable to WEX rose 2.7%, while diluted EPS rose to $1.11 from $1.08. Derivative losses weighed on pretax income: the net loss on fuel price derivatives was $7.6 million, versus a gain of $8.6 million a year earlier.
- For the first half, revenue grew 11.6%, operating income 11.2%, and attributable earnings 12.7%. The effective tax rate was 35.8% in Q2, versus 37.5%.
- Fleet Payment Solutions revenue rose 11% in Q2 to $145.8 million. Other Payment Solutions revenue rose 18% to $55.8 million, with segment pretax income increasing to $23.3 million from $12.6 million.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was a use of $173.4 million, compared with $32.4 million provided in the prior-year period. The principal working-capital driver was a $499.3 million increase in receivables; accounts payable increased $181.7 million.
- Investing cash use was $25.1 million; financing provided $155.5 million. Cash declined $42.5 million to $319.0 million.
- At June 30, accounts receivable was $2.206 billion and deposits were $1.251 billion. Approximately 97% of receivables were less than 30 days past due and 99% less than 60 days past due.
- Debt included $277.5 million outstanding under the term loan, $400 million of 4.75% senior notes due 2023, and $30.1 million of other debt. The $700 million revolving facility had no borrowings; management reported compliance with material covenants. Notes had a stated fair value of $386 million.
- Capital expenditures were $22.6 million in the first half; management expected full-year 2014 capital expenditures of approximately $50–$55 million. Management said available funding and cash generation were adequate for at least the next 12 months.
Changes, outlook and notable items
- Fleet growth reflected higher transaction volumes and average expenditure per transaction, more vehicles serviced, and increased finance fees. Other Payment Solutions growth was driven mainly by corporate purchase-card volume, up 36% in Q2 to $4.3 billion.
- Credit-loss provision was $6.8 million in Q2 and $15.9 million for the first half, compared with $4.9 million and $8.7 million, respectively, a year earlier. Fleet credit losses were 9.1 basis points of fuel expenditures in Q2 versus 7.6 basis points; first-half levels were 11.5 versus 7.1 basis points. Management attributed deterioration partly to less restrictive customer approval standards tested from Q3 2013, returned to stricter standards in Q2 2014, and said it did not expect early-stage delinquencies in low-risk accounts to have a significant remainder-of-year impact.
- WEX completed its approximately $532.5 million cash acquisition of Evolution1 on July 16, after quarter-end, funded with cash and the existing credit facility. Management expected approximately $80 million of annual revenue from the healthcare payments business; purchase accounting was incomplete.
- The Esso Card program agreement had been finalized and regulatory approvals obtained; closing was expected in late 2014 or early 2015. WEX anticipated paying about $60 million in Q3 and $300 million at closing. Management expected a credit-facility amendment, subject to final bank approval, to increase facility size by approximately $220 million to $1.2 billion and provide temporary leverage flexibility.
- WEX agreed on July 29 to sell Pacific Pride for $50 million, with an estimated pretax gain of $29 million; transfer was scheduled for July 31. WEX said the business was not material and the sale was not a strategic shift.
- Fuel derivatives are not designated for hedge accounting, so fair-value changes affect earnings. WEX also began partial foreign-exchange hedging in April 2014. Key stated risks include credit losses, fuel-price and currency volatility, acquisitions and integration, regulatory changes, technology and security incidents, litigation, and dependence on key agreements.
Investor verification priorities
- Track credit-loss provisions, delinquencies, charge-offs, and the effects of the tighter underwriting standards.
- Reconcile operating cash flow with receivables growth and monitor receivable funding, deposits, and available liquidity.
- Verify the Evolution1 integration, actual revenue contribution, purchase accounting, and acquisition-related costs.
- Confirm the Esso closing, final cash outlay, financing amendment, and resulting leverage and covenant headroom.
- Assess the volatility and earnings impact of fuel derivatives and foreign-exchange exposures, and confirm completion and proceeds of the Pacific Pride sale.