WEX Inc. — Q2 2015 Form 10-Q
Business context and period. This unaudited report covers the quarter and six months ended June 30, 2015. WEX provides corporate payment solutions through Fleet Payment Solutions and Other Payment Solutions. Comparisons below are with the corresponding 2014 periods; dollar amounts are in millions unless noted.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $213.7 | $201.6 | $415.9 | $383.6 |
| Operating income | $62.9 | $80.3 | $111.2 | $141.9 |
| Operating margin | 29.5% | 39.8% | 26.7% | 37.0% |
| Net income attributable to WEX | $26.5 | $43.3 | $48.8 | $79.9 |
| Diluted EPS | $0.68 | $1.11 | $1.26 | $2.05 |
| Operating cash flow | Not separately presented for the quarter | $53.0 | $(173.4) |
- Q2 revenue rose 6%, while operating income fell 22% and WEX-attributable earnings fell 39%. For the first half, revenue increased 8%, while operating income declined 22% and attributable earnings declined 39%.
- Q2 Fleet Payment Solutions revenue decreased 7% to $135.5; Other Payment Solutions revenue increased 40% to $78.1. Segment adjusted pre-tax income before non-controlling interests was $49.5 for Fleet and $26.4 for Other, versus $57.6 and $24.7, respectively, a year earlier.
- At June 30, cash and cash equivalents were $184.3, versus $284.8 at year-end 2014. Total assets were $4.18 billion and total liabilities $3.08 billion. Accounts receivable were $1.97 billion, including $104.3 million of restricted securitized receivables.
- Cash from operations of $53.0 million was offset by $10.2 million of investing outflows and $139.0 million of financing outflows; cash decreased $100.4 million in the first half. Operating cash flow comparisons are materially affected by working-capital movements.
- Debt included $720.970 million under the revolving facility and term loan, $400 million of notes, $89.2 million of securitized debt, $50.5 million of borrowed federal funds and $51.4 million of other debt. Management separately described $1.1 billion outstanding under the credit agreement and notes. Revolver borrowings were $248.5 million against a $700 million facility; term-loan borrowings were $472.5 million.
- WEX reported compliance with material debt covenants and said available cash and financing sources were adequate for operating, investing and financing needs, and expected to fund cash needs for at least 12 months.
Material changes and management commentary
- Fleet payment-processing revenue was pressured by lower fuel prices: average U.S. fuel price per gallon fell 27% in Q2, while average expenditure per fleet payment-processing transaction declined 22%. Payment-processing transactions nevertheless increased 11%, and average vehicles serviced rose 24%, primarily reflecting the December 2014 European fleet acquisition.
- Other Payment Solutions growth reflected the Evolution1 acquisition and higher virtual-card volume. Purchase volume reached $5.7 billion in Q2, up 31%. Acquisition-related personnel, service, technology and amortization costs rose; segment operating income increased 7%, but income before taxes declined 12%, including new financing costs.
- Credit-loss provision declined to $4.0 million in Q2 from $6.8 million, and to $7.9 million for the first half from $15.9 million. Management attributed the reduction mainly to lower receivables associated with lower fuel prices; fleet credit losses were 5.3 basis points of fuel expenditures in Q2 versus 9.1 basis points.
- First-half results included $8.6 million of restructuring charges for employee termination benefits under a global operating review. These costs were expected to be paid during the remainder of 2015 and 2016. A $1.2 million pre-tax gain was recorded on the sale of rapid! PayCard.
- Fuel-derivative and foreign-exchange movements affected reported earnings. Q2 included a $6.0 million net realized and unrealized fuel-derivative loss and a $2.2 million net foreign-currency loss. The company does not apply hedge accounting to these instruments.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided in the supplied filing text. Management estimated 2015 capital expenditures of approximately $65–$70 million.
- Fuel-price hedges covered about 60% of anticipated U.S. fuel-related earnings exposure for Q3 2015, declining to 40% for Q4 2015 and 20% for Q1 2016; no hedges were in place beyond Q1 2016. Management cautioned that persistently low fuel prices could negatively affect future revenue and earnings.
- The partial foreign-currency hedging program was planned to end in August 2015. Management cited exposure to currency movements, including the Australian dollar, euro and British pound.
- Key stated risks include economic and fueling trends, fuel-price and foreign-exchange volatility, credit losses, acquisition integration and expansion, technology or cybersecurity incidents, key agreements, regulatory changes, interest rates, debt, and litigation. Management said ordinary-course litigation was not expected to have a material adverse effect; no material legal proceedings were reported.
- The Australian receivables securitization facility entered in April 2015 is a one-year arrangement; proceeds collected on securitized receivables are restricted to repayment and are not available for general corporate purposes. Management also noted deposits are subject to regulatory capital requirements.
Most important facts for investors to verify
- Whether revenue growth from acquisitions and Other Payment Solutions can offset fuel-price pressure and weaker Fleet segment revenue and profitability.
- How much of the reported earnings decline reflects recurring operating performance versus acquisition amortization, financing costs, restructuring, derivatives and foreign exchange.
- Whether the improvement in credit-loss metrics persists, particularly as receivables and customer payment patterns change.
- Debt repayment, revolver availability, covenant headroom and the liquidity effects of restricted securitized receivables and deposit funding.
- Actual restructuring cash costs, capital expenditures, and the effect of ending the foreign-currency hedging program and limited forward fuel-hedge coverage.