WEX Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. WEX provides corporate payment solutions across Fleet, Travel and Corporate, and Health and Employee Benefit businesses. Amounts below are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $205.9 million | $202.3 million | +1.8% |
| Operating income | $41.1 million | $48.2 million | -14.7% |
| Operating margin | 20.0% | 23.8% | -3.8 percentage points |
| Net income attributable to WEX | $23.1 million | $22.3 million | +3.3% |
| Diluted EPS | $0.59 | $0.57 | +3.5% |
| Cash from operating activities | $86.4 million | $171.6 million | -49.7% |
Income before tax was $36.4 million, versus $34.5 million; the effective tax rate was 36.2%, versus 42.0%. Financing interest expense rose to $21.6 million from $12.1 million, including $10.5 million in EFS acquisition financing commitment fees. A $16.1 million foreign currency gain compared with a $4.4 million loss a year earlier contributed to the higher pretax and net income.
Segments and operating trends
- Fleet Solutions: Revenue declined 6% to $121.1 million and operating income fell 36% to $15.7 million. Lower fuel prices reduced payment processing revenue; average U.S. fuel price per gallon fell 23%. Payment processing transactions rose 9%, partly reflecting a large customer moving from unfunded to funded processing. Fleet credit losses were $4.0 million, or 9.3 basis points of fuel expenditures, versus 6.8 basis points.
- Travel and Corporate Solutions: Revenue increased 5% to $45.1 million; purchase volume rose 18% to $4.9 billion. Pretax income increased to $23.0 million from $15.4 million, including a favorable foreign currency swing.
- Health and Employee Benefit Solutions: Revenue increased 29% to $39.7 million, reflecting organic growth and the Benaissance acquisition. Operating income increased 37% to $5.7 million, while pretax income declined 70% to $0.4 million, mainly due to higher financing interest expense.
Management’s non-GAAP adjusted pretax income before non-controlling interests declined to $59.1 million from $71.0 million. Adjusted net income attributable to WEX was $37.6 million, versus $46.2 million; these non-GAAP measures exclude specified items and are not substitutes for GAAP results.
Cash, liquidity and debt
- Cash and cash equivalents were $515.3 million at March 31, up from $280.0 million at year-end. Operating cash flow was $86.4 million; investing cash outflow was $20.8 million and financing cash inflow was $166.1 million. The increase in deposits contributed $170.6 million to financing cash flow.
- Total assets were $4.14 billion and total liabilities were $3.01 billion. Accounts receivable was $1.57 billion, with a $12.2 million credit-loss reserve; about 90% of receivables were current and 98% were less than 60 days past due.
- At quarter-end, borrowings included $219.1 million drawn on the $700 million revolving facility, $451.9 million of term loans, $395.0 million net notes, $75.1 million securitized debt and $50.6 million of other debt. WEX also reported $1.04 billion in deposits, which are a funding source and a balance-sheet liability. The company reported compliance with material debt covenants.
- Management said available cash, financing facilities and other funding sources were adequate for operating and financing needs, and expected to fund cash needs for at least the next 12 months. No quantified earnings or revenue guidance was provided.
Material developments, outlook and risks
- Pending EFS acquisition: The proposed consideration is $1.1 billion cash plus 4.012 million WEX shares, approximately 9.4% of post-issuance shares. Financing commitments total $2.125 billion. The FTC issued a second request for information, extending the antitrust review; closing is subject to customary conditions. Certain termination scenarios could require fees of $45 million or $70 million.
- After Q1, WEX was no longer hedged for fuel-price changes. Management said it would continue to monitor fuel markets and foreign exchange exposure. The company recorded a $5.7 million realized gain on fuel derivatives in Q1.
- Restructuring charges were $1.6 million, versus $8.6 million in Q1 2015; the $8.5 million remaining liability was expected to be paid through 2016 and into 2017.
- Management identified economic conditions, fuel prices, foreign exchange, credit losses, acquisition integration and execution, cybersecurity, regulation, leverage, and litigation among relevant risks. The filing added tax-rate, tax-law and tax-examination exposure as a risk. Ordinary-course litigation was not expected by management to have a material adverse effect.
Investor facts to verify
- Progress and final terms of the EFS acquisition, FTC review, financing, potential share dilution and any termination-fee exposure.
- Whether Fleet credit-loss rates and receivable aging worsen, given the increase in loss basis points and lower share of current receivables.
- Cash-flow sustainability and the effect of deposit movements, receivables and payables on quarterly cash generation.
- Post-acquisition leverage, financing costs and covenant headroom, including the effect of ongoing ticking fees.
- Exposure to fuel-price and foreign-exchange movements while fuel hedges are absent or limited.