WEX Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. WEX provides corporate payment solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. Results include the EFS acquisition, completed July 1, 2016, so year-over-year comparisons reflect both acquisition effects and organic performance.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $291.4 million | $205.9 million | +41% |
| Operating income | $60.8 million | $41.1 million | +48% |
| Operating margin | 20.8% | 20.0% | +0.8 percentage points |
| Net earnings attributable to shareholders | $29.4 million | $23.1 million | +27% |
| Diluted EPS | $0.68 | $0.59 | +15% |
| Adjusted net income (non-GAAP) | $52.9 million | $38.1 million | +39% |
| Cash from operating activities | $(59.2) million | $86.4 million | Declined $145.6 million |
| Capital expenditures | $21.7 million | $20.5 million | +6% |
Revenue growth was broad-based but led by Fleet Solutions, up 58% to $190.8 million. Travel and Corporate Solutions increased 6% to $47.7 million; Health and Employee Benefit Solutions increased 33% to $52.8 million. Adjusted net income is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
Cash, liquidity, and debt
- Cash and cash equivalents were $204.0 million at quarter-end, versus $190.9 million at December 31, 2016. Cash increased $13.1 million during the quarter, supported by financing cash flow of $90.9 million.
- Operating cash flow was negative primarily because accounts receivable grew by $194.9 million, reflecting higher transaction volumes and fuel prices. Deposits declined by $78.4 million.
- Accounts receivable were $2.25 billion, net of a $23.6 million credit-loss reserve. Approximately 95% of trade receivables were current; the allowance increased from $20.1 million at year-end.
- Revolver borrowings were $203.3 million against a $470 million facility, leaving approximately $267 million available, subject to covenants. Term loans were $1.63 billion; notes outstanding were $395.7 million. Securitized debt was $92.7 million and other debt was $107.7 million. These reported debt balances total approximately $2.39 billion, excluding deposits.
- The weighted-average effective rate on the 2016 Credit Agreement was 4.4%. WEX reported compliance with material debt covenants. It stated that available resources and financing sources were adequate for cash needs over at least the next 12 months.
Material changes and management commentary
- Fleet fuel transactions rose 24% to 123.9 million. Average vehicles serviced increased 11% to 10.6 million, and average expenditure per payment-processing transaction rose 42% to $68.90. Management attributed growth to EFS, organic activity, and higher fuel prices.
- Travel and Corporate purchase volume grew 35% to $6.6 billion, driven by organic travel growth and EFS. Health and Employee Benefit purchase volume increased 23% to $1.3 billion, primarily from new customer signings.
- Credit-loss provision increased to $12.2 million from $3.9 million. Fleet credit losses rose to 17.8 basis points of fuel expenditures from 9.3 basis points; management cited higher fraud, slight receivables deterioration, higher fuel prices, and EFS.
- Foreign-currency remeasurement produced an $8.4 million gain, compared with a $16.1 million gain in the prior-year quarter. The effective tax rate fell to 33.3% from 36.2%, partly due to $1.6 million of excess tax benefits from share-based payments recognized under newly adopted accounting guidance.
- Interest-rate swaps cover a portion of $800 million of variable-rate borrowings. WEX was no longer hedged against fuel-price changes after settling its fuel derivatives in Q1 2016.
Outlook, risks, and unusual items
- The filing provides no specific revenue, earnings, or cash-flow guidance. Management said Q1 results are not necessarily indicative of full-year results.
- Management expects to incur a further $450,000 of EFS integration restructuring costs; existing restructuring liabilities are expected to be paid through 2018, with the 2016 and acquisition-integration initiatives expected to be paid through 2017.
- A material weakness in internal control over financial reporting, concerning user-access and program-change-management controls, remained unremediated at March 31, 2017. Management was implementing remediation and targeted completion by the 2017 Form 10-K; disclosure controls and procedures were assessed as ineffective.
- Risks highlighted include acquisition integration and synergy realization, credit losses and fraud, technology or cybersecurity failures, foreign-exchange and interest-rate movements, fuel-price exposure, regulation, and increased leverage. WEX identified a putative TCPA class action; management estimated the reasonably possible loss was not material and intended to defend the case.
- WEX began selling certain European and Brazilian receivables through factoring arrangements during Q1. It sold approximately $53 million and $8 million, respectively, and recorded losses of about $0.2 million and $0.4 million. Factoring capacity may be reduced or eliminated, which could affect liquidity.
- WEX adopted ASU 2016-09 in Q1. It expects to adopt revenue-recognition standard Topic 606 on January 1, 2018, using the modified retrospective method; its assessment of some revenue streams was ongoing.
Key facts for investors to verify
- How much of reported growth and segment performance is attributable to EFS versus organic growth, and how acquisition-related adjustments affect non-GAAP results.
- Whether the higher credit-loss rate, fraud incidence, and receivables reserve are temporary or signal continued deterioration.
- Whether operating cash flow recovers as receivables and deposits fluctuate, and how factoring and other funding sources support liquidity.
- Progress and testing of remediation for the material weakness in financial-reporting controls.
- Debt, interest-rate exposure, covenant headroom, and the effects of unhedged fuel-price and foreign-currency movements.
- Final EFS purchase accounting and Topic 606 adoption impacts; the filing states that some acquisition valuations and revenue assessments remained under review.