WEX Inc. 2016 Form 10-K Summary
Business context and reporting period
WEX provides corporate payment solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. This 10-K covers the fiscal year ended December 31, 2016; it also reports fourth-quarter results. Fleet represented approximately 63% of annual revenue, Travel and Corporate 21%, and Health and Employee Benefits 16%.
WEX acquired Electronic Funds Source (EFS) on July 1, 2016, for approximately $1.44 billion in cash and stock, expanding its over-the-road fleet and corporate payments businesses. The company surpassed $1 billion in annual revenue.
Financial and operating metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $1,018.5 million | $854.6 million |
| Operating income | $195.1 million | $228.8 million |
| Operating margin | 19.2% | 26.8% |
| Net earnings attributable to shareholders | $60.6 million | $101.9 million |
| Diluted earnings per share | $1.48 | $2.62 |
| Operating cash flow | $(151.1) million | $445.1 million |
| Capital expenditures | $61.8 million | $63.5 million |
Revenue increased 19%, while operating income declined 15% and shareholder earnings declined 41%. The 2016 effective tax rate was 34.0%, versus 40.7% in 2015. Management’s non-GAAP adjusted net income was $189.2 million, compared with $191.1 million; this measure excludes, among other items, acquisition costs, stock compensation, restructuring, currency remeasurement and certain derivative effects.
Fourth-quarter 2016 revenue was $290.8 million, operating income $47.8 million, shareholder earnings $5.3 million, and diluted EPS $0.12. In fourth-quarter 2015, those figures were $212.6 million, $49.9 million, $20.9 million, and $0.54, respectively.
Segment revenue grew 17% in Fleet to $642.1 million, 10% in Travel and Corporate to $215.2 million, and 44% in Health and Employee Benefits to $161.2 million. Fleet processed 386 million payment transactions, up 13%; average expenditure per payment transaction fell 8% to $59.19, reflecting lower fuel prices. Fleet credit-loss expense rose to $27.3 million from $20.8 million, and losses increased to 11.9 basis points of fuel expenditures from 9.4.
Debt, liquidity and cash flow
At year-end, cash and cash equivalents were $190.9 million, total assets $6.00 billion, and total liabilities $4.49 billion. WEX reported $1.60 billion of term loans under its 2016 Credit Agreement and $395.5 million of notes, net of issuance costs; it also had $125.8 million of other debt and $84.3 million of securitized debt. WEX Bank deposits were $1.12 billion. The $470 million revolving facility was undrawn, subject to covenants; the company reported compliance with material covenants.
Operating cash flow was negative, principally reflecting a $436.1 million cash use from accounts receivable changes, net of acquired receivables. Investing cash outflow was $1.16 billion, including acquisitions and investment of $1.09 billion, largely related to EFS. Financing activities provided $1.22 billion. Management said liquidity was adequate for at least the next 12 months.
Changes, outlook, risks and unusual items
- Revenue growth reflected EFS and organic growth, while lower fuel prices weighed on fleet payment-processing revenue. EFS-related borrowing materially increased financing costs: financing interest expense rose to $113.4 million from $46.2 million.
- WEX recorded $148.8 million of acquisition- and divestiture-related items in its adjusted-net-income reconciliation, $30.0 million of expensed ticking fees tied to EFS financing, and a $15.5 million one-time vendor settlement in Travel and Corporate Solutions. EFS-related acquired-intangible amortization also contributed to higher expenses; Fleet included $10.1 million of accelerated amortization on existing technology.
- WEX had no fuel-price derivatives after the first quarter of 2016. Management estimated that about 18% of total revenue was tied to fuel-provider fees based on fuel purchase prices; a one-cent decline in average domestic fuel prices was estimated to reduce 2016 revenue by about $1.2 million. Interest-rate swaps fixed a portion of the variable-rate exposure on $800 million of borrowings, effective beginning in 2017.
- Management’s stated priorities were continued growth, technology leadership and operational excellence. The filing provides no specific numerical revenue or earnings guidance. Management expected future GAAP tax rates, excluding discrete items, to be within its historical range.
- Key risks include fuel-price and foreign-exchange volatility, higher credit losses, acquisition integration and realization of synergies, competition and fee pressure, brokered-deposit funding dependence, leverage and variable-rate debt, and extensive financial, privacy and healthcare regulation. A European online travel agency customer entered bankruptcy in 2016, contributing to higher Travel credit-loss provisions.
- A putative nationwide TCPA class action alleged unauthorized fax advertisements; WEX denied liability and stated its estimated reasonably possible loss contingency was not material. No goodwill impairment was recorded for 2016.
Control qualification: The financial-statement auditor issued an unqualified opinion on the consolidated financial statements, but an adverse opinion on internal control over financial reporting. WEX identified a material weakness in user-access and program-change controls for certain IT systems; management was pursuing remediation and targeted completion by issuance of the 2017 financial statements. EFS was excluded from the 2016 control assessment under the applicable acquisition guidance.
Most important facts for investors to verify
- Whether EFS integration, synergies and acquisition-related costs develop as anticipated, and how debt service affects earnings and cash generation.
- Whether receivables growth and credit-loss trends stabilize; 93% of year-end trade receivables were current, and one customer represented 11% of the balance.
- Exposure to fuel-price declines after fuel hedges ended, and the extent to which the $800 million interest-rate swap coverage limits borrowing-cost sensitivity.
- Progress in remediating the material weakness and whether subsequent filings report effective internal controls.
- Funding and covenant headroom, including reliance on WEX Bank deposits and the $470 million undrawn revolver.
- Potential effects of competitive pricing, the travel customer bankruptcy, regulatory changes, and the disclosed minimum fuel-purchase commitments.