WEX Inc. — FY 2012 Form 10-K
Business context and reporting period. WEX, formerly Wright Express Corporation, provides fleet and corporate payment solutions through Fleet Payment Solutions and Other Payment Solutions. The filing covers the year ended December 31, 2012; it also reports fourth-quarter results. Fleet represented approximately 76% of annual revenue. WEX acquired CorporatePay, a 51% controlling interest in Brazil-based UNIK, and Fleet One during 2012, expanding its international and over-the-road businesses.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $623.2 million | $553.1 million |
| Operating income | $221.6 million | $233.3 million |
| Operating margin | 35.6% | 42.2% |
| Net earnings attributable to WEX | $96.9 million | $133.6 million |
| Diluted EPS | $2.48 | $3.43 |
| GAAP operating cash flow | $71.8 million | $51.2 million |
- Fleet revenue rose 8% to $470.6 million; Other Payment Solutions revenue rose 31% to $152.6 million. Corporate purchase card volume increased 32% to $10.3 billion.
- Fourth-quarter revenue was $169.0 million versus $139.8 million a year earlier; net income was $29.1 million versus $32.8 million, and diluted EPS was $0.74 versus $0.84.
- Year-end assets were $3.11 billion, including $197.7 million cash, $1.56 billion net accounts receivable, and $844.3 million goodwill. Deposits were $890.3 million and borrowed federal funds were $48.4 million. Credit-agreement borrowings were $621.0 million, up from $295.3 million.
- Management’s non-GAAP “management operating cash” was $307.0 million, versus $162.4 million in 2011; it includes changes in deposits and borrowed federal funds and is not a substitute for GAAP operating cash flow.
- Receivables were approximately 96% current and 99% less than 60 days past due. WEX reported $4.7 billion of customer credit commitments, many of which it did not expect to be drawn.
Material changes, outlook and risks
- Revenue grew 13%, but operating income fell 5% and WEX-attributable earnings fell 27%. Higher operating costs, acquisition-related amortization and impairments, and an elevated tax burden contributed. The consolidated effective tax rate was 53.1%, including Australian tax-law charges; management expected it to return to historical levels in 2013.
- WEX recorded $17.5 million of goodwill impairment, principally for Australian prepaid operations, and an $8.9 million write-off of internally developed over-the-road software after choosing Fleet One’s platform. Other Payment Solutions operating income declined 39%, with a $16.2 million Australian prepaid goodwill impairment among the unusual items.
- Fleet One contributed about $14.2 million revenue and $1.4 million net earnings in the period after acquisition. Management expected fleet payment-processing revenue to increase in 2013 if fuel prices did not fall significantly, citing a full year of Fleet One operations. Expected 2013 capital expenditures were $35–$42 million. The filing provides no formal full-year earnings guidance.
- In January 2013, WEX amended its credit agreement and issued $400 million of 4.750% senior notes due 2023. Proceeds were used to repay revolving borrowings and for fees and general corporate purposes; the notes offering reduced the revolver commitment from $800 million to $700 million. Management said it believed liquidity was adequate for at least 12 months.
- Fuel-price exposure is material: management estimated about 43% of 2012 revenue was tied to fuel-provider fees based on fuel purchase prices. Derivatives target roughly 60% of U.S. fuel-price-related earnings exposure, but do not qualify for hedge accounting, so gains and losses affect reported earnings and can add volatility.
- Key risks include credit and fraud losses, fuel-price and interest-rate movements, dependence on deposits and WEX Bank’s regulatory status, competition and margin pressure, major customer/strategic relationships (top five accounted for about 24% of 2012 revenue), international integration and foreign exchange, cybersecurity, and regulatory changes. WEX reported no material legal proceedings. The auditor gave unqualified opinions on the financial statements and internal controls; controls at the three 2012 acquisitions were excluded from the assessment.
Important facts for investors to verify
- Separate organic growth from the partial-year contribution and integration costs of Fleet One, CorporatePay and UNIK.
- Reconcile the decline in GAAP earnings with the company’s adjusted-net-income presentation, tax charges, impairment/write-off items and derivative losses.
- Review the maturity, covenants and actual post-refinancing balances of the credit facilities and notes, including the effect of WEX Bank deposits and liquidity needs.
- Test the sensitivity of revenue and earnings to fuel prices, interest rates, credit losses and interchange pricing, and assess derivative coverage and counterparty exposure.
- Monitor whether 2013 tax rates normalized as expected, whether acquisition synergies and growth materialized, and whether goodwill valuations—particularly for international and prepaid businesses—remained supportable.