WEX Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This annual filing includes fourth-quarter results but is not a standalone Q4 filing. WEX provides corporate payment solutions through Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue | $1,250.5 million | $1,018.5 million | +23% |
| Operating income | $239.3 million | $195.1 million | +23% |
| Operating margin | 19.1% | 19.2% | Roughly flat |
| Net earnings attributable to shareholders | $160.3 million | $60.6 million | +164% |
| Diluted EPS | $3.72 | $1.48 | +151% |
| Operating cash flow | $132.9 million | $(151.1) million | Turned positive |
The 2017 effective tax rate was 10.9%, versus 34.0% in 2016. Earnings included a provisional $60.6 million tax benefit from the 2017 Tax Act; the benefit was primarily from remeasuring deferred taxes and reducing the tax receivable agreement liability, partly offset by transition tax. Adjusted net income, a non-GAAP measure, was $233.0 million versus $189.2 million.
Cash and cash equivalents were $508.1 million at year-end. Net accounts receivable was $2.528 billion. The company reported $1.707 billion of revolving-facility and term-loan borrowings, $396.3 million of notes (net), $194.7 million of other debt, and $126.9 million of securitized debt. Deposits were $1.294 billion. The revolving facility had $406 million available, subject to covenants. Management said available funding sources and cash generation should cover needs for at least the next 12 months.
Business trends and changes versus prior year
- Fleet Solutions generated $823.0 million of revenue, up 28%, and $143.6 million of GAAP operating income, up 49%. Payment-processing transactions rose 11%; average expenditure per transaction increased 19%, partly reflecting higher fuel prices. Segment adjusted operating income increased to $297.3 million from $215.4 million.
- Travel and Corporate Solutions revenue grew 4% to $224.0 million, while operating income fell 8% to $78.0 million. Purchase volume rose 27% to $30.3 billion, but a 29% decline in the net interchange rate—primarily following a large-partner contract renegotiation—reduced payment-processing revenue.
- Health and Employee Benefit Solutions revenue increased 26% to $203.5 million and operating income increased 25% to $17.7 million. Average SaaS accounts rose 28% to 9,213.
- Reported earnings improved from 2016, when results included $30.0 million of acquisition-related ticking fees. In 2017, foreign currency remeasurement produced a $29.9 million gain versus a $7.7 million loss in 2016.
- Operating cash flow recovered from 2016, but receivables used $542.0 million of cash in 2017, partly offset by higher accounts payable. Investing cash outflow was $163.5 million, including the AOC acquisition and capital investment; financing cash inflow was $359.4 million.
Outlook, commentary, risks and unusual items
- Management highlighted organic growth opportunities across all three segments, technology leadership, and operational efficiency. The filing provides no specific numerical revenue or earnings guidance.
- Credit-loss provision rose to $61.1 million from $33.3 million, primarily because of magnetic-stripe skimming fraud. Fleet credit losses were 17.2 basis points of fuel expenditures, versus 11.1 basis points in 2016. Management reported that monthly fraud losses declined during the second half of 2017 and expected a slight further decline in size and frequency in 2018; this is an expectation, not a guarantee.
- 2017 included $44.2 million of non-cash impairment and asset write-offs tied to technology insourcing and platform consolidation, partly offset in operating expenses by a $21.0 million gain on the Telapoint divestiture. WEX acquired AOC for approximately $129.8 million in October.
- Key exposures include fuel-price sensitivity (the company had no fuel-price hedge after Q1 2016), customer credit and fraud, interchange-rate pressure, foreign exchange, cyber and technology risks, regulation, and competition. The filing estimates that each one-cent decrease in average domestic fuel prices would reduce 2017 revenue by about $1.2 million.
- Debt and funding are material risks: variable-rate borrowings expose WEX to higher interest costs, while WEX Bank relies on brokered deposits. Interest-rate swaps were intended to fix rates on $1.3 billion of variable borrowings. Debt covenants, refinancing needs, and restrictions on dividends may limit financial flexibility.
- The January 2018 credit-agreement amendment repriced tranche B loans and increased their principal balance; it is a subsequent event, not a 2017 year-end balance-sheet change. WEX reported covenant compliance at year-end. WEX Bank was categorized as well capitalized.
- A TCPA class action settlement received final court approval in January 2018; the company said the amount was not material. Management and the auditor reported effective internal control over financial reporting at year-end; a 2016 IT-controls material weakness was reported remediated in 2017.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the $60.6 million tax benefit, foreign-exchange gains, and other excluded or unusual items.
- Whether fraud losses continue to decline, and whether the elevated credit-loss provision and receivables growth remain manageable.
- Whether Travel and Corporate Solutions can offset lower net interchange rates through volume growth and other revenue.
- Current debt, interest-rate exposure, covenant headroom, deposit funding stability, and the effects of the January 2018 refinancing amendment.
- Fuel-price sensitivity and the potential effect of changing fuel prices, customer purchasing patterns, and the absence of fuel hedges.