WEX Inc. 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2014. Unaudited; comparisons are with the corresponding 2013 periods. WEX provides fleet, corporate purchasing, and payment-processing solutions through its Fleet Payment Solutions and Other Payment Solutions segments. Figures below are in U.S. dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $222.1 million | $191.5 million | $605.8 million | $535.2 million |
| Operating income | $102.5 million | $77.9 million | $244.4 million | $205.5 million |
| Income before tax | $98.5 million | $70.0 million | $222.3 million | $182.5 million |
| Net earnings attributable to WEX | $74.4 million | $43.8 million | $154.3 million | $114.7 million |
| Diluted EPS | $1.91 | $1.12 | $3.96 | $2.93 |
| Net cash from operating activities | Not separately provided | Not separately provided | $(2.6) million | $(25.3) million |
- Q3 revenue rose 16%; Fleet Payment Solutions revenue increased 6% to $144.5 million, while Other Payment Solutions revenue increased 42% to $77.6 million. Nine-month revenue increased 13%.
- Q3 operating income included a $27.2 million pretax gain on the Pacific Pride sale. Excluding that gain, Q3 operating income was approximately $75.4 million; reported operating margin was approximately 46%, but was materially boosted by the gain.
- Management-reported adjusted net income, a non-GAAP measure, was $60.7 million for Q3 versus $52.0 million, and $156.4 million for nine months versus $134.2 million. The company excludes specified items; this measure is not a substitute for GAAP results.
- Q3 effective tax rate was 25.1%, versus 37.5%. A tax review reduced Q3 tax expense by approximately $11.3 million for prior-year tax-return changes and a further $1.7 million for the year-to-date provision.
Cash, liquidity, and debt
- At September 30, cash and cash equivalents were $576.7 million, compared with $361.5 million at December 31, 2013. Accounts receivable were $2.034 billion, up from $1.712 billion.
- Nine-month cash flows were $(2.6) million from operations, $(586.8) million from investing, and $801.7 million from financing. Investing outflows included $591.8 million for acquisitions and investments, principally Evolution1; financing inflows reflected increased borrowings and deposits.
- Balance-sheet borrowings comprised $683.8 million of revolving and term-loan debt, $400.0 million of notes, and $54.7 million of other debt. The $400 million notes bear 4.75% interest and mature in 2023. Total deposits were $1.469 billion.
- The August 2014 credit agreement provides a $500 million term-loan facility and a $700 million secured revolver, both maturing or terminating January 2018. At quarter-end, term loans were $493.1 million and revolver borrowings were $190.7 million. Management said it expected available resources and financing sources to meet needs and expected compliance with material covenants.
- WEX reported approximately $39.4 million of capital additions during the first nine months and estimated 2014 capital expenditures of $50–$55 million. It repurchased $19.8 million of shares during the nine months; no shares were repurchased in Q3.
Material changes and unusual items
- WEX acquired Evolution1, a healthcare payments and technology provider, on July 16 for approximately $532.2 million in cash. It contributed $16.5 million of revenue and a $2.1 million net loss from acquisition through quarter-end. Preliminary purchase accounting recorded $298.9 million of goodwill; valuations were not finalized. Acquisition costs were $6.1 million.
- WEX sold Pacific Pride on July 29 for approximately $48.2 million, recording a $27.2 million pretax gain. The company said the business was not material and the divestiture was not a strategic shift; a multiyear agreement preserves WEX card acceptance at Pacific Pride locations.
- The planned acquisition of ExxonMobil’s European Esso commercial fuel-card program remained pending. WEX paid an approximately $80 million advance, 25% funded by its minority shareholder, and anticipated paying approximately $300 million more at closing. The transaction was expected to close in late 2014 or early 2015.
- Payment-solutions purchase volume increased 39% to $5.5 billion in Q3, primarily from virtual-card growth and Evolution1. Average vehicles serviced rose 6% to approximately 8.0 million; fleet payment-processing transactions rose 5% to 80.4 million.
- Q3 credit-loss provision increased to $7.3 million from $5.0 million; fleet credit losses were 10.4 basis points of fuel expenditures versus 7.6 basis points. For the first nine months, provision was $23.2 million versus $13.7 million. Management attributed the increase partly to bankruptcies and earlier testing of less restrictive credit standards; stricter standards resumed in Q2. It did not expect early delinquencies among low-risk accounts to have a significant Q4 impact.
- Q3 earnings included a $14.8 million net gain on fuel-price derivatives and a $7.6 million foreign-currency transaction loss. Derivatives are not designated for hedge accounting, so fair-value changes affect reported earnings. WEX began partial foreign-exchange hedging in April.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided in the filing. Management expected the Esso transaction to close in late 2014 or early 2015 and estimated 2014 capital expenditures at $50–$55 million.
- Key stated risks include acquisition closing and integration, credit losses, fuel-price and foreign-exchange volatility, interest rates, technology and data-security breaches, regulatory changes, key contract renewals, and litigation. WEX noted that partial currency hedging leaves residual exposure.
- Management said ordinary-course litigation was not expected to materially adversely affect financial position, results, or cash flows; the filing reports no material legal proceedings as of its filing date.
- Management stated disclosure controls were effective as of September 30, 2014, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when the Esso acquisition closed, its final consideration and financing, and subsequent integration results.
- Evolution1’s finalized purchase-price allocation, ongoing profitability, and contribution to Other Payment Solutions.
- Underlying operating performance apart from the $27.2 million Pacific Pride gain, alongside the company’s non-GAAP adjustments.
- Credit-loss trends, receivable quality, and the effects of WEX’s credit standards; receivables were $2.034 billion, with 96% current and 99% less than 60 days past due.
- Debt, deposit funding, covenant headroom, and cash generation, given the acquisition-related investment outflows and increased borrowings.
- Exposure to fuel-derivative valuation changes, foreign currencies, and the unusually favorable Q3 tax adjustment.