WEX Inc. quarterly report, Q3 FY2012

Full document

WEX Inc. (WEX) — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted. WEX provides fleet, corporate card, payroll card and other payment solutions. Its reportable segments are Fleet Payment Solutions and Other Payment Solutions.

Financial performance and position

  • Third-quarter revenue: $161.0 million, up 6% from $151.9 million a year earlier. Fleet revenue increased 1% to $117.9 million; Other Payment Solutions revenue rose 24% to $43.1 million.
  • Third-quarter earnings: Operating income was $51.3 million, down from $65.2 million; operating margin was approximately 31.9%, versus 43.0%. Net income attributable to WEX was $14.3 million, compared with $48.1 million; diluted EPS was $0.37 versus $1.23. The decline reflected a $14.0 million loss on fuel-price derivatives, a $16.2 million goodwill impairment, and higher taxes, among other items.
  • Nine-month results: Revenue was $454.2 million, up 10%; operating income was $172.1 million, essentially flat with $172.6 million. Net income attributable to WEX fell to $67.9 million from $100.8 million, and diluted EPS declined to $1.74 from $2.59. The nine-month period included a $16.2 million goodwill impairment and substantial Australian tax charges.
  • Adjusted results: Management-reported adjusted net income was $42.0 million for Q3, up from $38.7 million, and $116.7 million for the first nine months, up from $103.4 million. This non-GAAP measure excludes specified items, including derivative fair-value changes, acquired-intangible amortization and impairment charges.
  • Cash flow: GAAP operating cash flow was a use of $25.3 million for the first nine months, versus a use of $74.5 million in 2011. Management’s non-GAAP “management operating cash” was positive $480.3 million, largely reflecting a $512.5 million increase in deposits. Investing cash use was $47.0 million; financing provided $481.4 million. Cash rose to $435.3 million from $25.8 million at year-end 2011.
  • Liquidity and debt: At September 30, cash was $435.3 million, total assets $3.06 billion, and total liabilities $2.26 billion. Revolver and term-loan borrowings totaled $300 million—approximately $115 million on the revolving facility and $185 million on the term loan—with $585.2 million of revolver capacity unused. WEX Bank also had approximately $353 million of available Federal Reserve Discount Window borrowing capacity and no borrowings there. Deposits totaled $1.21 billion, including $678.8 million of non-interest-bearing Higher One NOW deposits.
  • Credit and operating indicators: Fleet credit-loss provision was $5.4 million in Q3, down 36%; losses were 11.1 basis points of fuel expenditures versus 18.1 basis points. Average vehicles serviced rose 6% to about 6.9 million, while fleet transactions increased 1% to 85.7 million. Corporate card purchase volume rose 32% to $3.2 billion.

Material changes and unusual items

  • WEX acquired 51% of Brazil-based UNIK in August for approximately $22.8 million, with contingent consideration and put/call provisions. UNIK’s purchase accounting remains preliminary; its noncontrolling interest was reported as redeemable.
  • WEX acquired U.K.-based CorporatePay in May for approximately $27.8 million, net of cash. Both acquisitions expanded Other Payment Solutions.
  • Pricing pressure in Australia’s prepaid gift-card business led to a $16.2 million estimated goodwill impairment. The valuation was preliminary, with any adjustment expected to be finalized in Q4 2012.
  • Australian tax legislation produced a $31.1 million tax charge in Q2 and an approximately $2.4 million charge in Q3; the Q3 legislation also raises the expected Australian effective tax rate in future periods. The nine-month results included a $9.75 million benefit from eliminating a tax-refund obligation to a former shareholder.
  • Fuel-price derivative results were volatile and are not hedge-accounted: Q3 recognized a $14.0 million net loss, versus a $14.0 million gain in Q3 2011. WEX reduced its North American fuel-exposure hedging target from 80% to 60%.
  • Subsequent event: On October 4, WEX completed its $369 million cash acquisition of FleetOne, financed through its existing credit facility. WEX expected approximately $100 million in present value of tax benefits; purchase accounting was not yet complete. This transaction is not reflected in September 30 debt and cash balances.

Outlook, risks and contingencies

The filing provides no specific earnings or revenue guidance. Management said it expected to meet cash needs for the next 12 months and anticipated Higher One NOW deposits to decline based on historical patterns and scheduled maturities. It expected to continue purchasing fuel derivatives, with the reduced 60% hedge target. Management cautioned that interim results are not necessarily indicative of full-year results.

Key stated risks include economic and fleet-fueling trends, fuel-price and interest-rate volatility, credit losses, foreign exchange, acquisition integration and international expansion, key agreement renewals, technology and cybersecurity incidents, regulatory changes affecting WEX Bank, impairment estimates and litigation. Management said ordinary-course litigation was not expected to have a material adverse effect; no material legal proceedings were reported. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.

Most important facts for investors to verify

  • How the FleetOne purchase is funded and affects debt, liquidity, covenant headroom, earnings and the expected tax benefits.
  • Whether the Australian goodwill impairment estimate changes and whether prepaid gift-card pricing pressure persists.
  • The durability and cost profile of Higher One deposits, including the effect of their anticipated decline on cash and funding needs.
  • Underlying earnings trends apart from volatile fuel-derivative marks, impairment and discrete tax items; reconcile management’s adjusted net income to GAAP net income.
  • Acquisition integration and performance milestones for UNIK and CorporatePay, including contingent consideration and UNIK’s redeemable noncontrolling interest.